more than five out of six entrepreneurs don’t.
by anthony glomski
the ideal investment plan can be hugely important to helping your clients meet their goals. the right investment strategies set your clients up very well to preserve their money.
more: control the level of risk | clients who don’t listen | how to outline your client’s big picture | how to implement collaborative wealth management | five challenges of liquidating a business
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but when it comes to your client’s long-term financial health and well-being, investments are only part of the picture. to ensure that every part of their financial life is firing on all cylinders and working in a smooth, coordinated manner, you need to go beyond just the world of stocks, bonds and even complex alternative investments.
let’s start with tax mitigation. this is the process of lowering your client’s tax bill by using strategies to maximize the tax efficiency of their current assets and cash flow, taking into account their growth and wealth preservation needs. some of the most common objectives of wealth enhancement include maximizing one’s assets to realize financial goals and minimizing the exposure of those assets to unnecessary taxes.
like most successful people, entrepreneurs don’t just need to make money; they need to keep it, save it and invest it. so, it’s no surprise that minimizing taxes is a big concern for successful entrepreneurs. yet research shows that more than five out of six entrepreneurs (85 percent) do not do any tax planning in advance of a liquidity event. mitigating income taxes, estate taxes and capital gains taxes is a focal point for accomplished entrepreneurs and their families.
the ultimate goal of wealth enhancement, of course, is to help clients keep more of their money in their own pocket and to give less to the government. accomplishing these goals can involve any number of approaches. you (and the team of professionals you enlist) might review a client’s past tax returns and balance sheet to perform a current-year tax assessment. that way you can develop scenario planning for various strategies that your client may be contemplating as they approach an exit. you might examine the effectiveness of their cash management procedures, or analyze the viability or use of several types of trusts and other structures and other tax-advantaged vehicles. (hint: a deep knowledge of what your client might want to do for their family and for causes they care about will begin to open a myriad of opportunities. but you have to ask.)
many of our firm’s clients have gone through this analysis with our team of specialists, and sometimes a few simple steps can help lessen what uncle sam receives and can maximize what our clients get to keep before (and after) a liquidity event.
real world example
let’s use the hypothetical example of fred and frieda, a successful couple who acquired a sizable portfolio – assets they won’t need to tap for several years. unfortunately, the portfolio was being eroded by federal, state and local taxes, so we created a “tax wrapper” that allowed the assets of fred and frieda’s portfolio to grow tax-deferred. in the future, this money could be accessed tax-free by way of a loan. with proper planning, the appreciation can avoid gift and estate tax.
in the past, tax wrappers and other sophisticated strategies would have been available only to the super rich (loosely defined as those with a net worth of $500 million or more). thanks to advancements in technology and scale, many of these advanced tax mitigation strategies can be utilized by entrepreneurs who have a significant net income or liquidity event. this is especially helpful, as these entrepreneurs tend to be in the highest tax bracket.
the solution developed for fred and frieda may not be appropriate for all of your clients, of course. it depends on each one’s unique situation. the key is not to take anything for granted and to assemble a knowledgeable team of experts who can work on your client’s behalf – and work well with each other.
here are some very important questions to ask your clients (answer yes or no only):
| question | yes | no |
| 1. are you doing all that you can to ensure that your client’s portfolio is being managed in the most tax efficient way possible? | ||
| 2. your business owner clients may have multiple advisors in tow. do you know who is performing the oversight for all the portfolios on a net basis? | ||
| 3. have you discussed the utilization of different trusts that can be helpful for mitigating taxes on portfolios and sales of businesses? |
if you answered “no” to one or more of the questions above, then you should know your clients may be missing some planning opportunities. for example, some types of clients (typically with investable assets of at least $5 million) may benefit from a customized structure that can potentially eliminate taxes on their portfolio and make those funds accessible during their lifetime, tax-free. contact me if you’d like more information about that structure.
when we start working with business owners, we often discover that they haven’t given their retirement savings a great deal of thought. they may have a plain vanilla 401(k), or a very standard off-the-shelf defined benefit plan (dbp). however, there are more robust retirement plans that your successful business owner clients can use to derive massive tax savings. if the fact pattern is correct and it makes sense for your client, these plans can defer and save income tax. but they can also be utilized for estate tax planning.
these are just a few of the tools available to your business owner clients. what it comes down to is tailoring a solution that makes most sense for your client and his or her family’s unique situation. this is not about finding a product or an off-the-shelf solution to sell them. it’s about getting to know your client and understanding what’s most important to your client and their family and what makes most sense for them.