How an Advisor Made A Client’s Neglected Estate Plan Whole Again

Editor’s Note: This article is part of the Financial Advisor series “How I Solved It.”

Estate planning is essential to every wealthy family. The goal of a good estate plan, in part, is to transfer the wealth and business of a family to heirs with as little taxation as possible.

Ivan Hernandez, managing director of Omnia Family Wealth in Aventura, Fla., was faced with a client couple whose estate planning was in neglect and falling short of their goals when he entered their lives. He worked to correct the issues and revise as much of the plan as possible to avoid a big tax bite after reporting lapses occurred due to staffing changes in the family’s business.

Hernandez started out in the financial industry in the mid-1990s at a fixed-income shop, but soon transitioned to a more holistic approach to financial planning. He co-founded Omnia Family Wealth in 2015 with the idea that he wanted to look at clients’ whole financial picture and life goals, not just the investments and returns.

Omnia serves high-net-worth families, most with between $20 million to $75 million in assets. These folks have “complex financial situations with a lot of land mines that require experience to navigate and long-term continuity for the heirs,” Hernandez said. “These families need specific types of planning that are coordinated with the overall family dynamics.”

In the case of the family that needed strategic estate planning, a husband and wife owned a family business on the West Coast with hundreds of employees and a valuation of about $150 million. When Hernandez first came on the scene the couple was in their 60s and had plans for their two adult children to ultimately take over the family business. At that point the couple started a small relationship with Omnia Family Wealth and had a much larger relationship with a separate trust company. Eventually, all of the family holdings were transferred to Omnia to help coordinate the family’s vision.

“As I always do, I asked for their tax filings and estate planning documents, even though they said their estate plans were set,” Hernandez explained. “When I do this, I often find some requirements that are not being complied with, or some things that could be done in a more advantageous way for the client. The estate planning documents show me what the family has done. Only deep conversations and understanding will reveal what the family is truly trying to accomplish and what may be possible.”

The couple had sold part of the business to their two adult children years before the family’s engagement with Omnia. It was set it up so the children would pay their parents for the shares of the company out of the dividends they received. But a problem arose after the retirement of the person within the company who had helped maintain the trust agreement, and the children unknowingly did not make payments for over a year.

“As often happens, the parents were busy running the business and did not know some of the requirements were not being met,” Hernandez said. “When we discovered the failures we immediately sought collaboration with their tax counsel to make up the missing payments with interest and help create a formal structure and accountability within the business for who was responsible for making sure all payments were made and other requirements adhered to.”

The final fix was to make sure the children did not take possession of the assets into their own taxable estate as the initial structure would have allowed them to do. That little detail could have cost the family about 40% in estate tax on about $30 million to this couple’s heirs, Hernandez said.

There is currently an exemption from estate taxes of approximately $23 million for a married couple, but estate taxes for amounts above the exemption average about a 40%.

After years of collaboration between Omnia and estate planning attorneys and tax counsel, the family was able to transfer the majority of the business to the children. A grantor retained annuity trust, or GRAT, was set up to distribute only the growth of the assets to the children after a certain amount of time. A GRAT is an irrevocable gifting trust that allows a grantor to pass a significant amount of appreciated wealth to the next generation with little or no gift taxes.

Then the unthinkable happened and the husband passed away, leaving his widow to handle the finances.

She initially was confused by some of the payments that were being made and some of the structures that had been established, said Hernandez, adding that he delved into the details with her so she could make informed decisions. He described this as an ongoing process.

“I think in this case it was just a situation where both members of the couple were busy running the business and did not pay attention to all of the necessary details,” Hernandez said. He noted that he has had other women clients in similar situations. Some become more deeply involved and others are content sharing the responsibilities with the professional advisors surrounding the family.

“Another part of the initial problem in this case was that the CPA and the estate planning attorney came in, did their jobs and left. We are fortunate to form deep relationships with the families we work with, and, because we are not paid by the hour, they feel free to come to us with questions at any time.”