If there’s one thing I’ve noticed about entrepreneurs in my years working as a wealth manager is their laser-focus on their business. In fact, sometimes they’re so focused that they overlook critical wealth management strategies that are important for easing the transition of their business and personal estate when the time comes for that.
The reality is, as an entrepreneur, you have worked hard to build your business and, as a result, you have likely accumulated a sizeable estate. It’s important for you to have a plan in place to ensure continued success for your business, even when it’s being handed over to the next CEO. It’s also important to remember that a balanced estate plan will incorporate strategies that account for your business life as well as your personal life.
Below are some strategies that address wealth management for entrepreneurs by either reducing the size of your estate or assisting in the transition of your business and estate. These strategies can be used to formulate a balanced estate plan that helps ensure the results of your hard work live on.
Strategies for Transitioning Your Business
When it comes to planning the business-related side of your estate, there are a few strategies in particular that can be helpful to entrepreneurs.
- Establish a buy/sell agreement. A buy/sell agreement or contract is used to help guarantee that your business will continue on if one or more partners exits the business. This could be because of a planned retirement or sale of shares or due to unplanned events, such as divorce or death.
A buy/sell agreement is a strong wealth management tool for entrepreneurs because it allows the income-generating business to continue on despite one of these events. If funded properly, the business will not incur any financial hardship as you transition through the event. Most contracts like these are funded by life insurance or other money set aside prior to the event occurring.
Life insurance is a popular way to fund a buy/sell agreement because it guarantees payout upon the death of a partner and ensures that the partner’s family is taken care of while not affecting the cash flow of the business they helped to build. A wealth management advisor can help you develop, fund, and implement a buy/sell agreement properly for your business.
- Gift privately held stock. If you have structured your company with privately held shares, gifting these shares to someone in your family can be an advantageous way to remove them from your personal estate. When you do this, you allow the recipient to control that stock and sell it on their terms. This strategy allows you to pay gift or sell the stock now, rather than your family paying estate tax later, which can be up to 40%. This strategy will completely remove the private stock as an asset from your estate and ensure your company transitions to the right hands.
- Establish a family limited partnership. As an entrepreneur, you likely want to see the business you built continue to thrive after you’ve given up the reigns. For many business owners, this means setting up a family limited partnership to allow your heirs to smoothly transition into the leadership role
A family limited partnership allows you to leave your business to your family to continue owning and operating when you’re gone. To do this, you set up a general partnership and name specific family members as limited partners. While you are living, you are considered a general partner and the boss for all intensive purposes, so you maintain control of your business. However, the family members of your choosing now own a portion of the business. This reduces your overall estate because you don’t have sole ownership. It also helps ensure your business will be managed by your family according to your wishes.
Reducing Your Estate as an Entrepreneur
Now that you have some strategies related to your business, it is important to think about your personal estate planning, as well. One strategy I have helped many business owners implement is establishing an irrevocable life insurance trust. This gives you personal control over where your money will go while also limiting the amount that is considered taxable to the IRS.
An irrevocable life insurance trust allows you to transfer ownership of a life insurance policy to a trust that you establish with the help of an estate planning attorney. This removes the life insurance policy from your estate, effectively lowering your overall estate amount and reducing potential estate taxation. One important thing to note is that once an irrevocable life insurance trust is established, you can no longer make changes to the policy.
This strategy is best if set up prior to needing to implement it because the life insurance proceeds are considered part of your estate if the trust is set up less than three years prior to your death. Still, this wealth management strategy is a good tool for entrepreneurs looking to lower their estate and have control over where their wealth goes.
Experts in Wealth Management for Entrepreneurs
As an entrepreneur, you’ve likely spent years building your business from the ground up. It’s important not to overlook the need to plan for the next phase—for you, your family, and your company. That means working with a trusted wealth advisor to design and implement custom wealth management strategies that fit your unique needs as an entrepreneur now and in the future.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for integrated asset allocation and equity compensation management. He has developed wealth management strategies for entrepreneurs with large estates. For more information on how Wade and the Carpenter Team can advise you on strategic wealth management, reach out today for a complimentary consultation.
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