If there is one theme that I see in working with entrepreneur clients, it is their struggle to manage their business while properly structuring their business and financial plans. When I use the term "Wealth Plan," I am not just referring to how you invest your money. As a wealth manager, what I mean by "Wealth Plan" is the integration of the business structure, income taxes, retirement plans, personal investments, insurance and estate planning.
Without proper integration of these components, you might be paying much more in taxes than necessary. You might be subjecting your family to financial risk in the case of a death or taking on too much investment risk. Following is a list of top planning ideas to be addressed in preparing your Wealth Plan:
- Consider your business structure. If you are still in the formation stages, should your business be an LLC, S Corporation, partnership or C corporation? If your company is already formed, should it be converted to a different type of entity? In addition to liability protection, entity structure affects many issues such income taxes, administrative operations and ultimately the tax consequences of the future liquidation or sale of the business.
- Minimize your taxes. Consider your business and personal taxes together. This goes hand in hand with your business structure. Use accounting methods and tax elections for the business to minimize income taxes. The tax picture for business owners can become quite complicated. In most cases, a good CPA is required to make sure that all tax compliance issues are taken care of timely and accurately and all available deductions are being claimed. Consider techniques to defer income and accelerate deductions for both the business and personal taxes.
- Fully utilize retirement plans. Most successful businesses have excess cash flow. Consider utilizing defined benefit, profit sharing, SEP-IRA, or 401(k) plans in order to minimize current income taxes and provide retirement assets for the owner and employees. In addition, many business owners, especially doctors are concerned about asset protection. In most cases, retirement plan assets will be protected from creditors.
- Investment Allocation. Monitor your asset allocation. Entrepreneurs already take a lot of risk in starting up and funding a business. Taking on additional undue risk in many instances doesn't make sense. This issue should be considered in developing a well diversified investment portfolio. The time horizon and future retirement of the entrepreneur must be considered to ensure a steady source of income once the entrepreneur retires or sells the business. A well diversified portfolio will contain asset classes and investments that don't move in lock step with the stock market. Thus, creating a less volatile and more stable investment portfolio. The goal is to minimize risk and maximize return.
- Life insurance. Most people don't like to talk about it, but life insurance is very important. Especially to a hard working successful entrepreneur with a family and business to support. Life insurance is often what allows the business to survive the death of an owner. If there are multiple owners, the life insurance proceeds can be used to buy out surviving family members which provides them the needed liquidity to pay estate taxes and future financial support.
- Operating and Buy-sell Agreements. If you are co-owner, Operating Agreements and Buy-Sell Agreements put the agreement in writing so there are no misunderstandings. A Buy-Sell Agreement is important when one owner dies or wants to sell out. The Agreement specifies how the business shall be transitioned to the remaining owners.
- Estate Planning. While the estate tax lapsed at the beginning of 2010, most planners believe it will come back in some shape or form. Depending upon what Congress does or doesn't do with the current state of the law, we will either have the estate tax system back as it was in 2001 or we will have a new system. With the uncertainty of the law and the complexity, estate planning is a must for individuals with large estates. Successful business owners should have wills, revocable trusts, living wills and healthcare powers of attorney at a minimum. These documents will not only provide proper planning upon death but will also save estates taxes. For large estates, advanced estate planning should be considered to utilize strategies which shift wealth to younger generations and setup a structure for wealth succession.
- Asset Protection Planning.
Asset protection involves planning for the unforeseen event well in advance of it developing. Let's face it, in today's litigious society; it doesn't take an egregious act to have a lawsuit filed against you or your business. Business owners should take action to not only adequately insure themselves, but also to structure their affairs to minimize the potential damages of claims. This process can easily be integrated with the typical estate plan.
- Charitable Planning. Proper charitable planning can allow business owners to decrease current income taxes and future estate taxes. There are many different ways to accomplish charitable objectives. By using private foundations, charitable trusts, donor advised funds or direct gifts, donors can accomplish their charitable objectives during life and at death.
- Integration. This is the hardest part. I see many people address the separate pieces of their Wealth Plan above but rarely do I see a plan that ties it all together. Without integrating the various parts of the plan, a well formed plan can fail because of the piece that wasn't considered important. Consider the business owner that sells his/her business at the top of the market and reinvests the money in risky investments or the doctor who spends years building a significant medical practice and nest egg only to be hit with a frivolous lawsuit. This is why it pays to work with advisors who can assist with not just parts of the plan but who can work together to make sure the plan is integrated and cohesive.
One of my favorite quotes is, "Most people don't plan to fail, they fail to plan.
©Vestpointe Wealth Management, LLC (February, 2010)