Instead, he concentrated on what was then the best estate-planning scheme around, the estate freeze. It was a way for entrepreneurs to have their cake and eat it too: to continue building, running, and profiting from their businesses even while they passed along the pro forma ownership of their companies to the kids at large tax savings. The key was a stock-recapitalization plan that transferred nonvoting common stock to Bares's children, while he kept the preferred stock.
The Tax Reform Act of 1986 wiped out many of the tax benefits connected with doing estate freezes -- but luckily for Bares, not retroactively. Today's company owners, though, have to make do with some second-best alternatives, first and foremost the so-called GRIT (grantor retained income trust). It's another way of minimizing taxes while passing along stock to the second generation. In a nutshell, GRITs work like this: a business owner transfers shares in his or her company to an irrevocable trust, set up for a maximum of 10 years. The gift is then taxed at a maximum rate of 55%, which at first glance sounds just as terrible as the estate tax rate. But here's the advantage. The GRIT gift is first discounted to only 38.5% of its face value, so the tax on a $10-million gift would be only $2.12 million, compared with $5.5 million if it passed at the owner's death.
During the lifetime of the GRIT, the owner can receive income from its shares in the form of dividends. (Owners who have never declared dividends before must set up a formal structure -- a simple matter for accountants -- since funds transferred to a GRIT must produce income.) Afterward those shares pass on to children free of all estate and gift taxes -- no matter how big the business has grown. There are just a couple of problems. If the grantor dies during the 10-year term, the trust is voided and the assets revert to the estate. The heirs get a credit for the gift tax paid, but they have to make up the balance. Also, most people are only comfortable putting up to 49% of their company's stock into a GRIT, since they don't want to give up control of the business. For business owners too young -- or uncomfortable with the logistics -- to consider GRITs, the best alternative is insurance and lots of it. Buy enough to pay off whatever estate taxes are expected, above the $1.2-million exemption permitted to each married couple ($600,000 for singles).
During the second stage of Jack Bares's plan, his oldest child cashed in some of her holdings from the partnership to finance the start-up of her tool company. And he set himself the goal of reviewing his "interim" estate plan in five years.
All right, so he was a little late. But Bares had been a busy man, building a business that now employed 200 people and rang up twice the sales of nine years earlier, when the estate freeze had taken place. His attitudes about estate planning had finally changed as well. "I knew I had the dollars taken care of. But I realized that I had these four adult children and a wife to think about. I wanted to make sure that the business was ready for them to take over, regardless of what they wanted to do with it."
Inevitably, every business owner's priorities at this stage will be different, as different as their final estate plans. Bares figured that he had two loose ends to tie up: first, informing his children about the family business and finances; then, setting up a formal structure that would pave the way for management succession. And he has stopped adding to his life-insurance coverage. "I've been told that there's very little we'll have to worry about in estate taxes," he confides.
Bares's final estate plan? He promoted one of his vice-presidents to the president's spot and is in the midst of a search for three outside businesspeople to appoint to his board. Their role will be either to ensure a smooth succession to new family management or, if none of his children wants to stay involved, to sell the company. He also has formalized an arrangement whereby if only one of his children wants to stay in the company, he or she must buy out the other family members at market cost.
But all this doesn't mean Bares plans to stop working 60-hour weeks -- far from it. With a new president in place and plans to appoint an outside board before year end, he can concentrate, as he says, on the larger issues that interest him, such as Japanese production methods, Cleveland's economic revival, and various schemes to keep Milbar growing.
WHAT TO LOOK FOR
Estate-planning guidelines
There's more to savvy estate planning than writing a will, although that, admittedly, is a fine place to start. As you make plans to pass your business and estate on to heirs:
* Stay informed. Experts predict further crackdowns on estate-tax breaks for small-business owners and investors. If you know which developments are likely, you can take measures to protect family holdings and sometimes slip in under grandfather clauses.
* Look for special tax breaks. Occasionally windows of opportunity open, as with the Gallo Exemption, which permits business owners and others to gift up to $2 million to each grandchild, tax free, before January 1, 1990.
* Keep priorities straight. "Tax-minimizing schemes work only if they also fit in with the long-term interests of the business and the family," says Leon Danco, founder and chief executive officer of the Center for Family Business, in Cleveland.
* Involve family members. Bares accomplishes this by writing an occasional newsletter for his wife and children, reporting on everything from the specifics of his estate plan to his thoughts on the philosophy of management succession, and even the effect of Black Monday on the family's investment portfolio.
* Review the estate plan regularly. "Kids grow up, laws change, your health changes, the business grows -- there are a thousand reasons to take a fresh look at your plan every few years or so," advises Bares.
