ICYMI: Pre-Sale Financial Planning for Entrepreneurs

Great event to kick off our 2020 event series – thanks so much to our speakers Uday Shah and Chris Tate from The Private Bank at Bank of America. The focus of their talk was on key financial planning techniques specifically for entrepreneurs. Here are some takeaways:  

Take-Away 1: Valuation, Valuation, Valuation.   

FY20 is the year of valuation for entrepreneurs if you are anywhere near approaching a potentially taxable estate (more on that below).  A qualified, third party business valuation is required to establish value for most financial planning and estate planning techniques. Taking it a step further, a quality valuation creates a road map for the entrepreneur. Uday made the analogy that “If you want to go to the mall, you can’t get there if you don’t know your starting point.” For an entrepreneur who will eventually exit their company, meeting financial goals in year X means you need to understand your starting point with a legit valuation now.

Take-Away 2: Changes in Estate Tax Exemptions and Impact on Planning Vehicles 

The current Estate Tax Exemption for 2020 is $11.58M and double that for a married couple (this means that a married couple can transfer over $23M in assets to heirs without paying any estate tax). That’s a pretty big number- there aren’t a ton of estates that are subject to estate tax at that threshold. But a couple of issues are likely to make this a high water mark. First, the current exemptions sunset in 2025 and return back to $5M – putting a huge swath of estates back in play for massive taxes. Second, there isn’t a lot of political support for what is seen as a “tax on rich people.” A change in administration makes this a really easy target for repeal back to much, much lower levels.

Why does all of this matter? By going through an estate planning and asset gifting / transfer process now, you will have moved assets out of your estate before any changes. Once out of the estate and in a trust vehicle those assets are no longer subject to an estate tax- even if / when the exemption returns to much lower levels. Another big consideration: effective planning means moving assets out of the estate when they have a low value. If you run a business that is growing you want to move that asset sooner rather than later. The portion now in a trust will continue to appreciate in value, but that value appreciation is no longer subject to estate tax.

Two keys to getting this done: start soon, start with a valuation. As we saw in 2012 there was a huge “gold rush” for valuation and estate planning professionals. Getting the valuation done establishes the baseline value, and getting the ball rolling with estate / financial pros assures you aren’t scrambling at year end trying to find support.

Take-Away 3: Get Granular on Post-Exit Cash Flow Needs 

Modeling your cash flow needs is critical to understanding what post-exit life (and retirement life) looks like. Think about the variables that go into a retirement financial model: You need to know:

  • What’s my current net worth (post- liquidity event usually)? 
  • How long will I likely live (meaning how many years does this asset base need to support my spending) 
  • What are the likely returns from that portfolio?
  • And perhaps most critically… how much will I spend?

In a nutshell this model above underpins most financial planning exercises. Working with your financial planner on cash flow needs (and being honest with yourself) is critical to planning for a retirement. For entrepreneurs, their operating company has often afforded them strong cash flows and an enviable lifestyle. When exiting ownership it’s critical to understand whether sales proceeds will support lifestyle requirements afterwards. 

Take-Away 4: Planning to Die Penniless 

One audience member (confession – it was me) asked: “Most estate planning revolves about minimizing taxes after I die. What about people who don’t care about after they die… but want to enjoy every penny until they day the die?” I asked this question only partly in jest- but turns out I’m not alone. Uday and Chris both commented that clients frequently want to maximize their spend while alive but for whatever reason may not have any interest in passing assets or wealth along to heirs.

Both espoused a similar playbook: consider “charitable intent.” At some point if you have accumulated enough wealth it becomes hard to spend it all- to spend big chunks you wind up purchasing assets that appreciate in value. Uday and Chris mentioned that a common theme is that such clients often find the most joy and personal satisfaction by turning their eye towards charitable endeavors that they find fulfilling. With many tools available (private foundations, Donor Advised Funds (“DAF’s”), and others) there are many vehicles to pursue these types of pursuits on a tax efficient basis.   

Note: we’ll be hosting an event later in the year on Charitable Intent and going deep on some of these concepts.   

Wrapping Up 

Both Uday and Chris where pretty consistent in talking points: financial and estate planning works better when you start earlier. An early start preserves flexibility and options (which often translates to certainty and tax efficiencies….). In a year where there is significant uncertainty about the economy, the political climate, and the tax climate, now is the time to start the blocking and tackling on this stuff if you have not already.