By Mark Borderlove
Throughout a career, you’re lucky if upon retirement you have consistently “filled your buckets” and have allocated dollars to the most beneficial areas of your life. If this happens and maybe some luck occurs, you should have a long, worry-free retirement.
What if you are fortunate and blessed enough to sell your business and come into life-changing money? Suddenly, you go from high net worth to ultra-high net worth. A client recently had this event happen and their net worth went up over five times his starting point.
The business was started nearly 20 years ago as a labor of love. He grew it slowly and made smart decisions every step of the way. There were a lot of blood, sweat and tears, but when it came time to cash out, knowing his kids did not want to be involved, he meticulously went about the sales process and took care of business. He received 20 percent as a down payment and the balance would be paid out over the next 5 years. He will stay on and be paid a salary for that period to aid the transition.
“Cory” is 55, happily married, and has 3 adult children. He had significant liquidity prior to this event roughly in the $5 - $6 million range. With the down payment from the sale of his business, he suddenly has more liquidity. Here are some of the steps that should take place:
He has done all the appropriate planning over the years addressing trusts, wills, durable and medical powers of attorney. He needed someone new to help him take a fresh look at the previous trust and the goals and objectives that were outlined 25 years ago. One area that may need to be adjusted is his individual trust. The spousal exemption upon death of assets is more easily transferrable in a joint trust. Since his assets have increased exponentially, this planning issue needs to be addressed.
Beneficiaries and Inheriting
A review of beneficiaries would be appropriate as well. Take late actor Heath Ledger's situation for example. His original estate plan provided for his siblings to receive his assets upon death. At his death, however, he had a daughter and the plan had not been updated. Fortunately for the daughter, the family gave all the money to her.
Wealth Transfer and Gifting
Cory also needs to drill into the gift exemption for wealth transfer. The law currently allows for $11 million transfer per person, $22 million per couple. That number is on the table for review under the Biden administration, but for the moment it’s $11 million per person. I have seen in estate planning for wealthy couples that typically attorneys advise working around the exemption number by staggering distributions to children as they reach the ages of 30, 35 and 40. One of Cory’s objectives with his wealth is to gift some of the funds now to his adult children to help them financially as they get started in their lives.
Life Insurance and Estate Taxes
The next item for discussion is additional life insurance to pay for the estate taxes. A cost-effective policy would be a second-to-die policy that pays out upon the second death of covered individuals. The death benefit would in theory offset the estate tax and preserve much of the estate for inheritance. It would be funded through an ILIT (irrevocable life insurance trust). For purposes of simple math, if an estate, on paper, is worth $40 million and the exemption is $22 million, there would be a taxable estate of $18 million. If preservation of the estate is important, it would be advisable to purchase the life insurance plan. The premiums could grow tax-deferred and at some point, the cash value would hopefully be able to fund the premiums.
Estate Planning and Asset Titling
A big issue that occurs in estate planning is the improper titling of assets. If the trust is changed, it should be submitted to the brokerage and the changes should be made accordingly. It happens all the time— the accounts are not titled according to the deceased’s wishes and the family must deal with getting the assets out of the estate through probate. The famous case related to this issue is the Michael Jackson fiasco where he created a trust but never funded it. His children and his mother lived off an allowance while the issue and several claims went through probate. I always recommend funding the trust as soon as possible after it’s created so it can be checked off the to-do list.
Cory will take some time off and figure out his next move. He needs to generate roughly $300,000 per year of income. We figured that his diversified real estate holdings will generate roughly $100,000 per year, so his equity holdings then need to generate roughly $200,000. We will continue to build out his holdings of stocks that pay healthy, stable, growing dividends of 2.5 to 3.0 percent. This should provide him with sufficient income for the time being as his buyout is being paid. Also, while he has sufficient liquidity, it’s not enough for wild spending. Luckily, he’s not inclined or wired that way.
Cory has consistently filled his buckets over the years. He was off to a great start with his disciplined approach to investing. His good fortune in selling his business will jumpstart his retirement planning and once the assets are allocated and his buyout is complete, he should be in a great position to enjoy his retirement.
About the author: Mark Bordelove
Mark Bordelove became a licensed financial advisor in 2000 and co-founded Bordelove Foster Wealth Management in 2009. A devoted husband and father, Mark has also completed two Ironman competitions
Mark Bordelove is a Financial Advisor with, and securities and advisory services offered through LPL Financial, a registered investment adviser, member FINRA/SIPC.
This is a hypothetical situation based on real-life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Consult an adviser prior to investing. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
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