Sooner or later, every business—whether guided by a well-thought-out plan or forced by circumstances—must replace its leader. “Succession planning” (SP) is the name of this game.

Done right, SP allows new management to lead the business without missing a beat. Done wrong (faulty planning) or an unexpected occurrence (usually the death or disability of the leader) typically creates a nightmare, because of uncertainty for the operation of the business and expensive tax consequences.

Over the years, the following fact has created the most challenging SP problems: The more stockholders, the tougher it was to solve the SP problems. I must admit, in the beginning, we fumbled the SP ball more than once.

But maybe practice does make perfect. Experience allowed us to develop a flexible system to handle the SP problems no matter how many shareholders are involved. The system, which has three steps, creates foolproof results—every time—whether there is only one stockholder or dozens.

Following is an example of how the system works… using the real-life facts concerning a column reader (Joe) who asked us to solve his SP problems.

Example: Joe owns 10% of Success Co. He is one of 10 shareholders, each owning 10% of Success Co. I nicknamed them the “Big Ten.” All are the children of four brothers who started the business years ago. Each of the Big Ten works for Success Co., is healthy and has one or more of their own kids.

It should be noted that Joe and his fellow shareholders have one common goal in this SP area: create a succession plan that satisfies the needs and wants of Success Co. and each

shareholder. Everyone, including the many professional advisors the Big Ten consulted, is stumped.

Step #1 of the system divides the Big Ten into three separate categories, based upon the likelihood of their kids working for Success Co. (a requirement for becoming a shareholder). Here are the categories:

(a)        Three (of the Big Ten) have kids that already work for Success Co.

(b)        Three know for sure that none of their kids will ever work for  Success Co.

(c)        It’s a we-don’t-know-for-sure issue for the remaining four.

Now, all you family owned or closely held businesses that are considering SP… Listen up. The problem is the same (or similar) whether you have only one shareholder or multiple shareholders.

Following is the three-step plan.

Step #1. The simple secret that solves SP problems.

Here’s our secret: Each shareholder—for the purpose of SP—is treated as owning 100% of his/her shares of the company. This gives all shareholders the freedom to do what they want with the stock each owns, as long as it does not interfere with the company or the other shareholders.

So, Step #1 simply identifies which of the above three categories each stockholder fits into.

For example, Joe’s son (Sam) already works for Success Co. (fits perfectly into category (a) above). Joe can sell (probably using an IDT, described later), gift, leave his stock to Sam when he goes to heaven… or some combination. The significant point: Joe is not forced by the buy/sell agreement to sell his stock to Success Co. or his fellow stockholders.

Step #2. Draft a buy/sell agreement

Of course, all shareholders are a party to the buy/sell agreement, which is drawn to accommodate the wants and needs of Success Co. and each of the 10 shareholders. Rarely, a special clause must be inserted in the buy/sell to accommodate or solve an unusual problem.

The buy/sell is insurance funded.

What happens when a (b) shareholder (no kids in business) becomes an (a) shareholder (one of his kids joins the Success Co. work force)?.The new (a) shareholder is now automatically covered by the (a) provisions of the buy/sell. The same concept allows (c) shareholders to change their category as required by circumstances.

Step #3. If required, create a special plan for certain shareholders

Almost always, the buy/sell covers everything necessary to complete the SP for all. On occasion a separate agreement is drawn to cover an unusual situation.

The intentionally defective trust (IDT)

An IDT can be used to transfer the stock of a single owner or a multiple owner (like Joe… one of the Big Ten). Let’s approach the how-to of an IDT from the standpoint of a single owner (the most common use).

So, this time Joe owns 100% of Success Co. First we recapitalize Success Co… means creating voting stock (say 100 shares) and nonvoting stock (say 10,000 shares).

Next, Joe sells only the nonvoting shares to the IDT at its fair market value (say $7 million). (Joe keeps the voting shares and control of Success Co.) He receives a $7 million note from the IDT, which is paid off using the future cash flow of Success Co.

What are the results of an IDT?… Really a tax miracle: The entire transaction is tax-free. No capital gains tax for Joe. Even the interest he receives, as part of the note payments, are tax free. A final WOW!: Success Co. is out of his estate.

What about Sam?…  He’s the beneficiary of the IDT and will receive the nonvoting stock after Joe’s note is paid. He has no liability… never pays a penny for the stock… everything is tax free.


I know, I know!… You still have a question about your specific succession problems. Remember, it would take a large book to cover every possible succession situation. However, in practice, the right buy/sell agreement coupled with an IDT solves almost every succession problem.

Still got a question… call me (Irv) at 847-674-5295. Or email me at

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When closely help with business owners call me for help with their business successions plan they typically have two goals:

- Get their business out their estate (particularly when it is growing in value) in a tax effective manner

- keep control for long as they live

it is a rare that the business owner finds an advisor who knows how to accomplish both goals.

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When people of means contact me to help do their estate plans (or review their existing plans), they typically have two goals concerning their estate tax:

- Reduce their potential estate tax liability

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