Case # 3:      Company Exit Strategy

A couple, residing in New Jersey, started a children’s clothing company 30 years ago. They now are both age 65 and are interested in retiring. Two of their four children are currently involved in the business.

The company is now valued at approximately $5 million. The company is producing a substantial profit each year and holds approximately $800,000 in reserves. Since these reserves are well in excess of the $250,000 permitted amount for accumulated earnings tax purposes, it is necessary each year to justify the retention of the larger sum.

They engage a trust planner from New Jersey to structure their exit strategy and retirement plan.  They recapitalize the company into 1,000 voting shares and 20,000 non-voting shares of common stock. They then create a two-life charitable remainder trust. This trust will pay 6% to them for their lifetimes.

The $800,000 in liquid assets plus accumulated profits over the next five years will be sufficient to cover the anticipated $2.5 million target of their retirement.

Each year, there will be an appraisal to determine the number of shares that equal the $500,000 contribution they will be making to an equity index annuity.