When Estate Planning Goes Awry
Jim Guzy’s a smart guy. He was Intel’s longest running director and thanks to Intel holdings built up a sizable fortune.
And, he had smart estate planning lawyers who established a Family Limited Partnership (FLP.) to hold his Intel stock (called Arbor) to save estate taxes at his death. This is a common estate planning strategy used to do “tax magic” and make assets look smaller than there are for estate tax purposes using “valuation discounts”.
When done right, it’s an effective strategy and can save a family hundreds of thousands or even millions of dollars in taxes.
When done wrong, a Family Limited Partnership can be a disaster. In past years, Family Limited Partnerships have been overturned by the IRS when they are not operated and maintained properly.
What happened to the Guzy family is far worse. The FLP set up by Guzy has become the center of a huge family feud that started with Guzy suing his wife for investing in one of their son’s business ventures using FLP assets and has devolved into multiple cross lawsuits by 3 of the children against their parents and a family deeply divided.
Before setting up any kind of an estate or tax plan, it’s critical to understand the underlying family relationships that are involved and not let the tax tail wag the family dog.
Guzy’s plan required him to gift small amounts of the Arbor FLP to his kids (that’s how the tax magic is created) and they decided they wanted their share before he died.
While it may look like pure greed on the part of the kids, all is probably not as it seems. From reading between the lines, it looks like one of the sons was forced to sue his parents for his share by a bankruptcy judge after he filed for bankruptcy. (See Guzy v. Guzy and Guzy v. the Arbor Co.).
This is one of the perils of giving away assets to a child before they are ready. And, why we never give assets outright and always use irrevocable trusts designed to prevent just this sort of thing from happening.
Even with that though, sometimes you just have to say no to fancy estate tax planning, putting the family dynamics ahead of the tax savings.
I recently had a client in my office and we were planning on establishing irrevocable trusts for the benefit of his Wife, but after talking through some of the issues (like the fact that it was irrevocable), he’s decided to wait until we can work through some deep-seated financial/emotional issues that can either destroy their marriage or bring them closer together and put them on the same team. Sure, we could save him a bunch on estate taxes, but if it ruins his life while he’s living, I haven’t done my job. It’s too bad the Guzy’s lawyers didn’t think about this before putting in place a fancy estate tax plan that has torn the Guzy family to pieces.
I am trying to understand the thought process here? If the mom backed the son, why wouldn’t the dad? You would think that he would be supportive of his children’s passions like it sounds like the mother was doing for the 3 children. Also, why couldn’t he just pay off the bankrupt debt & move on?
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