Wealth Planning for Business Owners

May 2019 | Article

Business owners do not have the luxury of walking away from a job when their pension payout is maximized, or their 401k balance is large enough. Retirement for a business owner, however that is defined, must be cajoled and finessed out of a web of decisions he or she makes in the years or decades preceding their eventual separation from ownership and management.

Transitioning away from your business can be an intimidating scenario, but it’s also one that offers some unique opportunity. Developing some key strategies early in the process and keeping an eye on the big picture will help you take advantage of these opportunities and create a solid wealth plan for your future.

Create a Picture of Your Situation
Today’s complexity in compensation structures and incentive options is already enough to create confusion for those planning their retirement. Business owners tackle these complexities in addition to specific tax and legal rules around entity structures, asset types, retirement account options, liquidation strategies and much more. It’s vital to have a clear plan in place to maneuver through these complexities. Step one to understanding this complexity is assembling all your information in a single location. Thankfully there is already a place where all your income sources are gathered—your tax return. Your tax return offers a starting point to assemble all the details of a plan for your assets. Those numbers can help build accurate balance sheets and profit and loss statements, which then can be used for modeling strategies to transition from work to retirement to legacy.

With your tax return as the starting point, it is now possible to create a wealth plan. A wealth plan will allow you to see how the choices you make today will affect your financial future.

Assemble a Team
Almost all wealth plans will eventually require expertise from professionals outside the scope of your own experience. These professionals will often need to work with one another to garner the best outcome. Some key professionals you may see in your planning are:

  • Income tax planner and preparer. Helps enact tax-reduction strategies.
  • Business valuation and transactions. Strategies often require transferring or selling portions of the business to reduce taxes or add legal protection. Business valuation professionals are needed to provide support to the tax preparation team. Business transaction professionals may also help connect the owner to the private equity needed to receive top dollar for assets.
  • Wealth transition tax professionals. Assembling the teams necessary to transfer assets to the next generation is critical to the enduring legacy of a business owner. Understanding how the strategies interact with those of the legal, business, and tax team members impacts the strategies used to protect against an unexpected event or ensuring a lifestyle through longevity.
  • Legal. This could be an estate planning attorney, business entity formation expert, or something more specific such as litigation or a real estate transaction specialist.
  • Wealth planner. A jack of all trades for a business owner—they know enough about each area to know that they can’t be an expert in each. The wealth planner’s role is about issue spotting and knowing when to engage the other professionals, explaining what to expect from those professionals, and understanding how each professional’s role interacts with another’s.

Build a Diverse Portfolio
Time is a precious commodity for business owners, but the risks of ignoring traditional financial planning areas such as investment management, insurance and saving strategies are simply too great.

Business owners may lack the large investment portfolios they desire for two simple reasons. First, the business itself is often seen as a retirement asset that is generating a good rate of return, tempting owners to put much of their excess cash flow back into their business. Secondly, if a business owner does have an investment account, there are significant tax incentives to do so within the business through defined benefit or defined contribution plans.

However, there are many costs and benefits of investing in diversified securities, especially when you have access to a variety of savings options not available to wage earners.

Understand the Importance of Life Insurance
Business owners know they have a significant need for life insurance but calculating that need and understanding the uses of that insurance create complexity. Life insurance for a business owner isn’t just about covering lost wages for surviving family members, it’s about calculating a value for the business, determining how surviving loved ones can successfully take over or transfer the business, and how to make sure the business survives. Life insurance cash values may become an asset of the business that can be used during your life to finance a buy-out or other needs. Lastly, the ownership of the policies and how they interact with legal documents becomes just as important as the cost of coverage and amount maintained.

Reach Out to a Wealth Planner
Every business is unique, and finding all the tools and professionals needed to guide you through the changing phases of your business and life can be complex. A wealth planner can provide guidance and help you through the business, personal, and emotional transitions you’ll need to face. They can assemble the team that will best fit your vision and ensure action items are taken care of. Every wealth planning relationship is as different as the business it involves. The key is creating strategies that fit your goals, not someone else’s.

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