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Recently, I visited a successful family business in North Carolina, owned by a semi-retired 64-year-old (Joe) and run by his son, Sam, a 36-year-old.

Joe called me. He wanted a second tax opinion for a business transfer plan and an estate plan put in place by Joe almost two years ago. First, the facts:

Joe owns 98% of two corporations: a profitable S corporation (Success Co.), which operates a string of stores, and a C corporation (a tax-paying corporation, called R/E Co.), which owns real estate leased to Success Co. The real estate has an income tax basis of $1 million but a current fair market value of about $6 million. Sam owns the remaining 2% of the stock of both corporations. Each of the corporations is the owner and beneficiary of a separate $1 million insurance policy on Joe's life.

Four more little details: (1) Joe's second wife, Mary, is 45 years old, and they have a premarital agreement that gives Mary the income from one-half of the value of Joe's assets at this death for as long as Mary lives. But get this: none of the stock of Success Co. can be used to provide Mary her income. (2) An artificially low price in a buy/sell agreement would force Joe's estate to sell his stock in Success Co. back to Success Co. and the same for R/E Co. (Result: Sam would then own 100% of both corporations.) (3) Joe has two other grown children who are not in the business. (4) Joe is not insurable.

The diagnosis: (1) the $1 million in life insurance payable to R/E Co. would kick up an unnecessary alternative minimum tax; (2) The full $2 million of insurance would be included in Joe's estate because he controls both corporations, but the $2 million (less the alternative minimum tax of about $150,000) would belong to the corporations, not Joe's estate; (3) There are not enough liquid assets to satisfy the obligation to Mary. Worse yet, if the obligation to Mary is met, there would be zero dollars (outside of the corporation's) to pay an estimated $3.5 million estate tax liability. Simply put, the estate would be broke.