Recently, David Fritz and Pat Marget were panelists at the Wisconsin Bankers and Illinois Bankers Association’s Family-Owned and Closely-Held Bank Strategic Retreat held in Madison, Wisconsin.
The discussions with the banks that identify as closely-held and/or family-owned focused on the challenges of transferring ownership to the next generation if proper estate planning and succession planning has not taken place. The overall consensus was that it takes a combination of solutions, strategies, and vehicles (including the use of properly structured trusts and life insurance) to accomplish a successful transition and create proper liquidity for the family owning the asset.
Key discussions based on banker’s concerns included:
- “We consider our Bank to be a very illiquid asset. If a family member died, they would have to sell the bank to raise the cash to deal with the estate taxes due.”
- Another banker offered that they are working diligently to get the stock out of the estate while maintaining their lifestyles and control of the Bank. They may be forced to transfer the stock to heirs due to the estate tax liability placed on the family.
The main themes from the conference included the following:
- The bank is an illiquid asset
- The ownership needs help with liquidity planning
- Proper wealth and estate planning must start as soon as possible
Members of the EBN team spoke about the many uses of life insurance that complement the movement and transfer of stock from one generation to the next. The insurance can be held at the holding company level to provide liquidity exactly when needed upon the death of a major shareholder, the insurance can be funded by the bank and owned by an Irrevocable Life Insurance Trust, or Bank Owned Life Insurance (BOLI) can assist in creating liquidity for the bank to redeem stock as needed.
There is not one straight solution in helping with the transfer of closely-held banks to the next generation while providing liquidity that is needed for a proper transfer. It is important to seek the assistance of proper legal counsel, as well as accounting and insurance expertise to maximize the effectiveness of an overall strategy.