I NEED TO GET ROLLING ON SOME ESTATE PLANNING. WHAT SHOULD I DO?
A client in Texas was contemplating the potential for a significant liquidity event with his business in a few years. He and his wife owned a large ranch in addition to their home in Dallas. Over the years, they had developed relationships with investment advisors, bankers and insurance agents, and had made some attempts at estate planning. They have three children and are very charitable. They didn’t like the thought that a substantial portion of what they had worked for would one day go to the government to pay estate taxes.
During one meeting this client said, “I need to get rolling on some estate planning. What should I do?”
We had already organized their balance sheet, which made it easy to see the structure of the entities that had been created already. Since they didn’t feel like their existing estate attorney was on top of their situation, we introduced them to a Dallas-based estate attorney who we thought might be a better fit. During their first meeting with the new attorney, he reviewed their existing estate plan and identified several opportunities for improvement.
An easy one was recognizing that several whole life insurance policies that had been acquired over time could be owned by an insurance trust with their children as beneficiaries, which removed the death benefit from their taxable estate. We reviewed the life policies against competitive options and ultimately suggested they keep the existing policies, but had them restructured to reduce the premiums.
The client was able to get rolling on their estate planning while increasing their cash flow thanks to the reduced premiums. They were able to transfer a significant amount of the stock in their business to the next generation, reducing the future estate tax liability.
SHOULD I SET UP A FAMILY OFFICE?
A Los Angeles-based client sold his business to a private equity firm, although he rolled a portion of his equity back into the business and continued as CEO. A prolific investor in the public markets as well as in alternative assets such as real estate, private equity, hedge funds and loans, he had developed a substantial balance sheet even before the sale of his business. He had relationships with a variety of investment firms and a sharp tax accountant, but kept track of all his financial decisions and transactions himself. The complexity was beginning to overwhelm him.
During one of our first meetings, he asked, “Should I set up a family office?”
That was certainly a path he could have pursued; having a family office may have solved some of the issues he was facing. But the more he learned about it, the more he found that the costs and management requirements of a fully staffed family office would not be a prudent investment for him.
Instead, we went to work to organize his balance sheet, providing comprehensive oversight as well as performance monitoring. At our suggestion, he hired a bookkeeper to keep track of all of the investment paperwork and pay the bills.
Given the volume of venture investments that were being presented to him, we suggested he take a more institutional approach, so he hired an analyst to help vet and keep track of new opportunities. As his balance sheet continued to grow, transferring assets to his children became a greater concern. Working with his tax accountant, we helped him engage an estate attorney to join his team. With our help in organizing his balance sheet and coordinating his team, he found what he was looking for without having to set up a full family office.
SHOULD I DO ANYTHING DIFFERENTLY WITH MY INVESTMENT PORTFOLIO?
A Naples, Florida-based client had sold his business and retired before he turned 50. His accountant, who had helped him sell the business, put together an investment portfolio with a local money manager. The client had become frustrated with the results and when his accountant, who was his most trusted advisor, decided to retire, he was ready for a change.
The primary question on his mind was “Should I do anything differently with my investment portfolio?”
The investment portfolio had to support the lifestyle that he and his wife had gravitated towards following the sale of the business. He wanted to spend his time with his family and on the golf course, which was his passion. He didn’t want to have to worry about his investments.
First, we constructed a long-term cash flow model, which suggested that there would be risks to their lifestyle in the event of a significant market downturn. Then we evaluated the investment portfolio and found that it was concentrated in individual stocks and municipal bonds, which did not make sense for their situation. They needed a more diversified approach designed to capture the appropriate return for the risk they were willing to accept.
While we often leave existing money managers in place, this was a case in which the client could save on fees by moving his portfolio to the core financial strategy that we directly manage for clients. Given that the portfolio contained sizable unrealized gains, rather than just liquidating everything and starting over, we suggested that the equities in the portfolio be slowly restructured. As the individual municipal bonds matured, they would be replaced with more liquid and diversified institutional municipal bond funds.
The result was a lower-risk portfolio that is better positioned to weather the ups and downs of the markets going forward, and better support the cash flow needed for their desired lifestyle. With this frustration behind him, the client was free to focus on his family and his golf game!
HOW WILL A NEW BOAT AFFECT MY CASH FLOW?
A long-time Miami-based client had a significant liquidity event with the sale of his business. This wasn’t his first liquidity event, as he had recapitalized the business several years earlier and used the cash to establish a nice portfolio of public and private investments outside of the business. He has relationships with several investment firms and a team of professional advisors, which includes his corporate attorney, estate attorney and tax accountant. Following the initial liquidity event, we brought the team together to offer a holistic view of his personal balance sheet.
He meets with his team quarterly to review his balance sheet, investments, cash flow and other planning opportunities with the objectives of monitoring risk and returns and minimizing his family’s tax exposure. Well in advance of selling his business, he implemented a sound estate planning strategy transferring significant ownership of his business to trusts benefiting his children. After completing the business sale, he adopted a strategy to handle his charitable objectives. With his children and charitable goals taken care of, he wanted to enjoy life.
During one of the following quarterly meetings he asked, “How will a new boat affect my cash flow?”
The boat that he had in mind would be big enough to take his family on trips around the world. A boat like that incurs large annual operating costs. We provided him a roadmap to get to where he wanted to go, including an updated cash flow model that showed him that he could afford the lifestyle he wanted. His other advisors weighed in on the best way to protect the family from liability by structuring the entity that would own the boat and making sure that it was adequately insured.
This client worked hard to create wealth by successfully building his business and is now enjoying life while building lasting memories for his family. He takes comfort knowing his balance sheet can support this major upgrade to his lifestyle and that his team of advisors is on top of the details.
DO YOU THINK MY CHILDREN WILL WANT MY RARE BOOK COLLECTION?
A Chicago-based client had a passion for collecting rare books. He and his wife, both in their 70s at the time, had built a new house specially designed with a spectacular two-story library to showcase his collection.
As we toured his new library, during one of our quarterly meetings, he stopped and asked, “Do you think my children will want my book collection?”
He had always assumed that they would. Since we did planning for his children, we knew that was not the case, but we couldn’t tell him that given that it was shared with us in confidence. Instead, we suggested that he should openly discuss the collection with his children.
It was not an easy discussion; the kids didn’t want to hurt his feelings. But they also did not share his passion for collecting rare books – the books only meant something to them because they knew how much their father loved them. Perhaps his grandchildren would develop an interest as they grew older. The uncertainty of what would happen to his collection after he was gone bothered him, which he shared with us in a follow-up meeting.
We had gained some insights into these situations over the years, since we have many clients who have accumulated valuable collections. We suggested that the client consider leaving his rare book collection to a nearby university that might have an interest in it. His estate would receive a tax benefit, and his collection would be well taken care of.
It worked out well; at his passing, the university received a prized collection that is now housed in a special reading room named for the client. His estate benefited from the tax deduction, and his children and grandchildren can visit his “permanent library” whenever they want.
WHAT IS OUR BIGGEST RISK?
In one of our first meetings with an Atlanta-based couple, after we finished reviewing their balance sheet, they asked, “What is our biggest risk?”
They had been very successful in building substantial wealth and wanted to know how they could protect themselves. They had several very sound assets, which included their business, a diversified investment portfolio, three houses and very little debt.
They had four teenage children and would need to do some work to manage the impact of estate taxes, but that was not their biggest risk. They felt a strong responsibility to their children, and the generations to come, to ensure their wealth was a blessing and not a curse. We understood, that to them, their biggest risk was the potential that their wealth could ruin their children.
We suggested that they start slowly with their estate planning allowing it to evolve as their children matured. In the meantime, we would help by meeting with their children to provide education on personal finances, the financial markets and financial responsibility.
We also suggested they set up a family foundation as a vehicle for their children to gain exposure to philanthropy and as a method to instill their family values, while at the same time showing them how much of an impact they can create with the wealth they have been blessed with.
They wanted their family to continue to be tight knit by sharing experiences, being active, and growing together. They had a lake house with boats and jet skis, and a farmhouse with tractors and ATVs. We believed that these activities were personal liabilities and considered them to be their next biggest risk. This insight resonated with them as they had a family friend lose everything over a lawsuit from a jet ski accident.
As part of our process and with their “ok”, we had their situation reviewed by nationally recognized third-party property and casualty insurance agents with the experience and expertise our clients require. New coverage with a large umbrella policy provided them with protection from their next biggest risk.