The couple was in their 60s when Ivan Hernandez first came into their lives. Their plan was to have their children take over their business, but things had gone wrong. A staffer had left their company. The reporting had lapsed. The trust documents were incomplete. As a result, the family’s estate plan was in trouble and they were facing a big tax bite.
Hernandez is the managing director of Omnia Family Wealth in Aventura, Fla. He started out in the financial services industry in the mid-1990s at a fixed-income shop, but he wanted to pursue a more holistic financial planning approach, looking at clients’ whole financial picture and life goals. He co-founded Omnia in 2015 with that idea in mind, something beyond people’s investments and portfolio returns.
His firm serves high-net-worth families, most with between $20 million and $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 says. “These families need specific types of planning that are coordinated with the overall family dynamics.”
The family with the estate planning problem was a husband and wife with a family business on the West Coast. It employed hundreds of people and boasted a valuation of about $150 million. The couple at first had only a small relationship with Omnia. Its larger relationship was with a separate trust company.
Years before they had engaged Omnia, the couple had already sold part of their business to their two adult children as part of their estate plan. It was set up so the children would pay their parents for the shares of the company out of the dividends they received.
After the family engaged him, Hernandez says, “As I always do, I asked for their tax filings and estate planning documents, even though they said their estate plans were set. 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.”
A problem had indeed arisen. Somebody at the couple’s company had retired—the person who was maintaining the trust agreement. The kids’ payments to the parents for their shares in the company weren’t made for more than a year. The parents were too busy running the business to notice.
“When we discovered the failures,” says Hernandez, “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 within their own taxable estates, which the initial trust structure would have allowed them to do. That little detail could have cost the family about 40% in estate taxes after $30 million passed to the heirs. (The 40% kicks in after a $23 million exemption for married couples.)
After years of collaboration between Omnia and estate planning attorneys and tax counsel, the family was able to transfer most 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 was initially confused by some of the payments being made and some of the structures that had been established, Hernandez says, 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,” he says. He’s had other female clients in similar situations. Some become more deeply involved and others are content sharing the responsibilities with the family’s professional advisors.
“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,” Hernandez says. “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.”
Along the way, the family transferred all their holdings to Omnia to help coordinate their vision.