It is dangerous to pigeon-hole an affluent client’s financial needs. For example, a prospect referred to you with estate planning needs may be a business owner in need of a business exit plan. Without a clear process to exit the business, it is difficult to design a viable and sustainable estate plan. The exit and estate plans must work together.
Getting answers to following questions will help guide the advisor in creating an exit and estate strategy:
–What is the level of the client’s wealth (affluent, wealthy or rich)?
–When, to whom and how does the client want to transfer the business?
–How much liquidity exists for executing the transfer of the business, including taxes?
Is the client affluent or wealthy?
The level of the client’s wealth affects both the exit plan and the estate plan. If the client is affluent ($1 million-$5 million in net worth), issues concerning retirement income and adequate financial protection may prevail. The business owner is thus concerned with “Do I have enough to continue my life style; what happens if I have unexpected expenses?” If the client is wealthy with a net worth of more than $5 million, the pressing issues may well be more related to wealth transfer and estate taxes. (“How can I pass on my hard-earned wealth without losing it to taxes and costs?”)
One way to determine a business owner’s true wealth is to compare his or her retirement income goal with the likely sale value of the business interest. As an example, I’ll take two business owners with a retirement income goal of $200,000 per year, starting at age 60, who both plan to pay for their retirement primarily through the sale of their respective businesses.
One has a business that will generate a sale of $3 million while the other’s business will sell for $10 million. Although they are both millionaires, the first owner will likely need an exit and estate plan focused primarily on assuring adequate retirement income and sufficient business and insurance protection. In contrast, the business owner with the $10 million sale value is likely to have more than enough retirement capital to maintain the desired $200,000 per year retirement lifestyle. For this owner, how to pass on the excess wealth and avoid transfer taxes is probably a more pressing financial issue.
When, to whom and how to transfer the business?
No estate plan for a business owner will work without a firm understanding of how the business interest will be transferred. The three primary methods via which a business owner can dispose of a business interest are by sale, by capital transfer and/or by gift.