difficult conversations: it’s tough to talk about wealth transfer, but it’s vital.
by anthony glomski
the personal cfo
many accomplished entrepreneurs are looking beyond their own financial needs. they want to ensure that their heirs, parents, children and grandchildren are well taken care of in accordance with their wishes – with minimal difficulty and cost.
more: enhance wealth by mitigating taxes | your client’s instincts are wrong | preserving wealth is a different mindset | three approaches to investment consulting | cashing out: your business clients’ five big issues
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according to vanguard, more than half of affluent americans say they are highly concerned about their kids’ (and grandkids’) financial situations. and yet, too many successful entrepreneurs have outdated estate plans or charitable giving plans that are not in sync with their current life circumstances and needs.
remember, estate planning is not a one-time event; it’s something that you and your clients must review every three to five years. many people do not enjoy reviewing their estate plans, but because life never stops changing, successful people need to keep getting regular checkups of their estate planning situation, just like they need to see a trusted doctor, dentist and auto mechanic consistently. this can prevent huge problems from occurring down the road.
wealth transfer is focused on structuring your client’s assets effectively for their eventual transfer to others. it’s also where you help clients facilitate the most tax-efficient ways to pass their assets – including business assets, company stock and other owners’ equity – to succeeding generations in their family. it’s also a way to transfer assets tax-efficiently to other people and causes they care about, in a way that satisfies their wishes and desires.
as we went to press, the federal estate tax rate was 40 percent. beyond a certain dollar amount, this hefty rate can apply to everything on your client’s personal balance sheet. this includes assets they may not have even considered, such as artwork, vacation homes, rental properties, collectibles and ownership of privately held businesses.
to address wealth transfer issues, you must ask your client important questions about things they may not have considered before (or would prefer to ignore). for instance:
- how do you want your assets to be distributed when you are no longer here?
- how and when should your heirs receive an inheritance?
- how can your liquidity needs be met if your estate is illiquid?
- if you have a privately held company, how will your family pay the tax bill?
- if you have acquired a substantial art collection, could the current value be exposed to estate tax and trigger an unwanted liquidation?
after obtaining the answers to these questions, your next steps together could include:
- determining your client’s wealth transfer preferences
- identifying any special situations that your client faces (e.g., a special-needs child)
- examining your client’s business succession issues
- considering a range of trusts, insurance policies or partnerships that ensure effective transfer
strategies you can use to help clients achieve their wealth transfer goals range from basic estate planning (such as credit-shelter trusts and traditional life insurance) to more sophisticated techniques (such as self-canceling installment notes, remainder purchase marital trusts and generation-skipping trusts with life insurance).
consider, for example, the topic of wills and trusts. a will is a legal document that clearly explains how a person wants his or her estate to distribute their assets after death. by contrast, a trust is a pool of assets (investments, cash, property, etc.) that are held for the benefit of a third party – the beneficiary. a trustee is appointed to oversee the management of the trust. if you help your client create the trust during their lifetime, then that legal vehicle is known as a “living trust,” and initially, your client is the one who fulfills the roles of both trustee and beneficiary. when creating the trust, your team helps your client establish how they want the trust to distribute their assets after they die.
while wills and trusts can accomplish similar estate planning objectives, a trust is generally more flexible than a will and it allows your client to exert greater control over the distribution of their assets. suppose your client wants to leave a large sum of money to their son, daughter or close relative who is a minor. unlike a will, a trust can establish how and when the child will receive the money after your client passes away. your team can also help your client set up a trust to fulfill specific objectives, such as paying for a child’s education. a properly structured trust can also help your client’s heirs avoid certain estate taxes and stay out of probate court. that said, trusts generally cost more than wills to set up and are usually more complex. it’s also important to follow through on funding a trust and re-titling assets owned by the trust. if you don’t, many of the potential benefits of a trust won’t be realized.
there are a variety of trusts you can set up. while having a living trust can be great, it’s possible that you may need to continue with some further advanced planning that is more sophisticated. generally, we find most entrepreneurs have created a living trust but are surprised to find out it doesn’t accomplish what they want.
real world example
a successful couple (call them bill and barb) built a great business together from scratch. when we asked bill and barb who was important to them, they immediately mentioned their children – whom we’ll call amy and andy. when we probed bill and barb for details, they said they didn’t want to spoil their children by giving them a windfall of cash. at the same time, they wanted to ensure that their kids would never to have to worry about money. as warren buffett loves to say,
“give children enough to do anything, but not enough to do nothing.”
bill and barb told us that their daughter amy, a social worker, and son andy, an artist, have been financially responsible and self-supporting. they didn’t foresee any issues with the kids, but they admitted they were slightly concerned about the influence that some of their children’s wealthy friends might have on them – young people who “treat an inheritance like a lottery ticket,” they lamented.
this was uncharted territory for bill and barb. on the tax side, we immediately identified a big problem: if they ever sold their $50 million family business without proper planning in advance, it could trigger a $15 million tax bill. as a solution, we looked to transfer the couple’s interest in the business to their children via a trust – a very flexible vehicle. bill and barb continued to maintain full control of the business and the income it generated.
there are sophisticated estate planning techniques that may allow you to transfer your business interests to your kids on a discounted basis, thereby allowing you to get much more of your money to your children and shield more of it from the government. a strategy (known as freezing the value of a business) allowed bill and barb to reduce by millions of dollars the estate taxes their kids would have to pay in the future.
the other challenge bill and barb faced was accounting for their children’s values. the flexibility in the trust allowed all types of “governors” and restrictions to be put in place to protect amy and andy from things like divorce or from making large, irresponsible money decisions. at the same time, the trust incentivized the children to pursue their art and their charitable causes. this strategy gave bill and barb time to contemplate and discuss their concerns further. we also brought in a financial therapist who had substantial experience in the area of family business succession to help facilitate deeper conversations.
fortunately for bill and barb, andy and amy were “good” kids. some parents are not so lucky.
(note: legislation is constantly changing in this area, especially in this time of social and economic uncertainty. the key is to take action and to assemble a coordinated team of experts if you haven’t done so already.)
there is still more you can do. according to forbes, the heirs of walmart founder sam walton have a net worth of approximately $150 billion. through proper planning, walton’s family avoided tens of billions of dollars in estate taxes. one of their strategies was the use of certain trusts, such as the “jackie o” trust (named for jacqueline kennedy onassis). essentially a jackie o trust is charitable in nature and can help to minimize gift and estate taxes – or eliminate them entirely in some cases. several well-known families, including an nfl team owner, a prominent hedge fund manager and other high-net-worth families, have used “jackie o” trusts to protect their assets from estate taxes.
notice how all of these areas work together. for example, strategies to maximize charitable intent can sometimes be coordinated with estate planning strategies that are designed to maximize the amount of money given to children down the road. this makes good sense. after all, the various parts of your client’s financial life don’t operate in a vacuum – and they shouldn’t be managed independently.
life is not a picture; it’s a movie
as mentioned earlier, unlike many americans, most successful entrepreneurs i know do, in fact, have wills and estate plans in place. but i’ve found those documents are often outdated and don’t really spell out what the entrepreneur wants them to do and needs them to cover. as the old saying goes, “life is not a picture; it’s a movie.” that means life circumstances constantly change; they don’t stay fixed for long.
most entrepreneurs have a lot more assets to protect and a lot more responsibilities and worries to consider than when they first obtained their estate plan. their legal situation was probably different, and their first legal advisor may no longer be able to deliver the broad set of solutions they require.
as a personal cfo, here are eight key questions to ask your client at this stage of your relationship:
- when did you last look at your estate plan?
- tell me what your estate plan really does.
- what was done to mitigate your estate taxes?
- what was done to protect those assets?
- what was done in terms of pre-sale planning to mitigate taxes on the sales of your business?
- tell me what you want this to look like when you aren’t here.
- how confident are you in your spouse’s or child’s ability to manage this wealth?
- what concerns would you have with your child or spouse suddenly coming into this wealth? what are the steps you’ve taken to mitigate these concerns?
even if you have an in-house estate planning department at your firm, it might not have the expertise needed to handle the needs of your successful business owner clients.
you’ll need to go out and interview different estate attorneys to find the right fit for your client. over time, you’ll discover that top attorneys are very specialized and accustomed to working with business owners who are in transition – owners who have a lot of moving parts. after meeting with prospective attorneys for your client, the right ones will have you walking away from the meeting saying to yourself, “wow. this individual is a consummate professional with expertise in working with business owners and exit planning. many of these concepts have never been offered to (or executed by) my business owner client in the past!”
if you don’t come away from an attorney meeting with that feeling, it’s time to move on to the next candidate. proceed with caution, however. some attorneys will have “brilliant ideas” that are not bright-line transactions. you want to help your clients – not blow them up. if the concepts a prospective attorney presents to you aren’t generally accepted by larger well-known firms, you need to continue your search.