Type of Insight: Articles

Wealth Planning Update

Why now may be the right time to sell your business

Selling a business is a calculated, and often very personal, decision many owners make. Some consider selling due to the lack of a solid succession plan, an unclear path to continued success, or a desire to spend time elsewhere. Regardless of why, the ultimate consideration is often around timing and potential valuation.

 

You could be asking yourself, “Is now the right time?” The pandemic and resulting economic turbulence of the past few years may make you hesitant to sell, but there are viable reasons to consider it at the present time. While it is true that rising interest rates and uncertainty have slowed middle market deal activity, it has not halted it completely. And although these factors may mean buyers are being more selective, a professionally run, competitive, sale process can result in a compelling valuation, especially for the strongest of businesses.

When is the best time to sell?

Many owners who considered selling prior to the pandemic reprioritized and decided to maintain the business until the economy felt more stable. With stable markets and borrowing rates leveling out, those same owners are revisiting their plans. And rightly so.

Consider these four reasons for selling now:

The policy and legislative environment is favorable for selling.
While there is volatility in the market, there is still keen interest from investors in businesses that came out of the pandemic strong, especially in industries that are likely to be key beneficiaries of the Infrastructure Investment and Jobs Act, the CHIPS and Science Act and the Inflation Reduction Act, which together will provide fiscal stimulus to the tune of over $1.3 trillion toward the goal of building up key growth industries, repairing infrastructure, and encouraging expansion of U.S.” based manufacturing.

There is both appetite and scarcity value in the market.
The economy may scare some companies away from the market, which puts strong businesses with good fundamentals at an advantage. Both strategic buyers and private equity funds are still looking to deploy capital. Also, despite the trepidation many are feeling about the economy, banks and other lenders are still willing to finance attractive deals. Where there is a lending shortfall, private equity buyers may step up to finance the difference with additional equity, with plans to refinance at a later date.

Many industries are in a good position for a successful transaction.
As mentioned, businesses involved in infrastructure and targeted growth industries such as biotechnology green energy, predictive manufacturing, etc may have a market advantage due to recent legislation, but it’s worth considering the broader range of industries that the industrial renaissance covers, as well as other enticing industries for investors. These key industries include those involved in battery technology, electric vehicles, artificial intelligence and robotics, cybersecurity, additive manufacturing, health care, biotech, and green energy.

Certain business models will find greater success in M&A now.
While it’s important for your business to have strong fundamentals before you consider selling, there are also specific business models appealing to investors in these times. These include companies with recurring revenue or asset-light business models, as they are not as affected by supply chain issues and inflation, as well as companies that can identify and articulate sources of earnings before interest, taxes, depreciation, and amortization (EBITDA) growth.

What to know if you’re selling now? If you’re ready to sell, consider the following:

 

Transfer and estate tax strategies. Don’t overlook the technical aspects of the transition, such as taxes. Consider the best strategy for
preserving your generational wealth through estate planning, especially as some estate tax exclusions are set to expire in 2025.2

Due diligence process. M&A deals are challenging, and the process of due diligence within a merger or acquisition is especially long and
complex. Owners are wary of the economic environment, but so are potential investors and banks, so the process may take longer and be
more involved than usual.

Professional advice. In the current environment, it’s more important than ever to seek professional advice to ensure you receive a fair
valuation. A reputable investment banking firm with a track record in your industry can aid you through this delicate process.

Proper preparation. Selling your business is one of the biggest processes you’ll likely ever undertake. The key word here is process.
It’s not a one-time, simple event. Proper preparation of both your business and your personal estate planning will set you up for success.

What to do after the sale

Congratulations, you’ve sold your business! It’s worth considering the investment opportunities available to you now that one chapter of your life is complete. Your focus will now shift from creating and managing a business entity to managing the pool of capital those efforts have produced. Interviewing and assembling a team with distinct expertise around your new venture will become your next great undertaking!

The current dislocations in the global economy present opportunities to buy a variety of assets at lower valuations. Structured products, catastrophe bonds, large- mid- and small-cap U.S. stocks, and emerging market equities are all places worthy of consideration in building out a diversified portfolio. You can also pace your investments in a way that’s comfortable for you through dollar cost averaging and building bond ladders with maturities every few months.

Remember, you’re not in it alone. You can partner with a thoughtful team of financial, legal, planning, investment and wealth advisors who will help you build an overarching long-term plan and work with you to implement both relative to strategic targets and tactical market shifts at the right time for your business.

Taking the step

Contemplating selling your business can lead to a host of emotional, logistical, planning, and financial decisions in the best of economic environments and should not be undertaken without a good deal of introspection. In addition to retaining sound council on the legal, tax, financing and estate planning implications, it will be imperative to engage those closest to you who will inevitably be impacted by your choice to “go or stay.”

While the pandemic and resulting market and economic turbulence of the past years may have delayed decision-making, there are a number of viable reasons to consider the current framework as the ideal one for taking that next step into writing your own new chapter.

You can partner with a thoughtful team of financial, legal, planning, investment and wealth advisors who will help you build an overarching long-term plan and work with you to implement both relative to strategic targets and tactical market shifts at the right time for your business.

 

Feel confident about your future

Stoker Ostler—its professionals, disciplined approach, and
comprehensive advisory platform —can provide financial peace
of mind. Call your Stoker Ostler Portfolio Manager today.

www.stokerostler.com

Stoker Ostler

BMO (0 | A part of BMO Financial Group

1 Carnegie Endowment For International Peace, “After the CHIPS Act: The Limits of Reshoring and Next Steps for U.S. Semiconductor Policy,”November 22, 2022.

2 Crain’s Cleveland Business, “The time to consider wealth transfer is now,” November 5, 2022.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute. The FSA designation is overseen by the Sustainability Accounting Standards Board.

Stoker Ostler is a trade name used by Stoker Ostler Wealth Advisors, Inc., an SEC-registered investment adviser.

Stoker Ostler is part of BMO Financial Group. BMO and BMO Financial Group are trade names used by Bank of Montreal.

Investment Products are: NOT FDIC INSURED – NOT BANK GUARANTEED – NOT A DEPOSIT – MAY LOSE VALUE.

“BMO Wealth Management” is a brand delivering investment management services, trust, deposit and loan products and services through BMO Harris Bank N.A., a national bank
with trust powers; family office services and investment advisory services through BMO Family Office, LLC, an SEC-Tegistered investment adviser; investment advisory services
through Stoker Ostler Wealth Advisors, Inc., an SEC-registered investment adviser; digital investment advisory and financial planning services through BMO Direct Invest Inc., an SEC-
registered investment adviser; and trust and investment management services through BMO Delaware Trust Company, a Delaware limited purpose trust company. These entities
are all affiliates and owned by BMO Financial Corp., a wholly-owned subsidiary of the Bank of Montreal. BMO Delaware Trust Company does not offer depository, financing or other
banking products, and is not FDIC insured. You must be an existing customer of BMO Harris Bank N.A. and enrolled in BMO Digital Banking to qualify for services from BMO Direct
Invest Inc. Not all products and services are available in every state and/or location. Family Office Services are not fiduciary services and are not subject to the Investment Advisers
Act of 1940 or the rules promulgated thereunder. Investment products and services: ARE NOT A DEPOSIT-NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY-NOT GUARANTEED BY ANY BANK-MAY LOSE VALUE. Capital Advisory Services are offered by a division of BMO Harris Bank N.A.

Estate planning requires legal assistance which BMO Harris Bank N.A. and its affiliates do not provide. Please consult with your legal advisor.

This information is being used to support the promotion or marketing of the planning strategies discussed herein. This information is not intended to be legal advice or tax advice to any taxpayer and is not intended to be relied upon. BMO Harris Bank N.A. and its affiliates do not provide legal advice or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors.

The health and wealth connection

Three ways to incorporate health into your wealth plan, and prepare for the unexpected.
A strong correlation exists between your health and your financial well-being. With good health, you may work longer, travel more, and engage in activities that improve your quality of life and personal well-being. These things, in turn, affect your earnings power and savings potential.

However, even if you have a healthy lifestyle, an unexpected health event could derail your financial plans. That’s why planning ahead for a medical event is just as important as striving to remain healthy. This article highlights the effect that health decisions can have on long-term wealth and offers three strategies to help protect your wealth plan in case there is a turn in your health or the health of a loved one.

 

Start by aiming for a healthy lifestyle

Building wealth affords you the opportunity to pursue interests
you enjoy, and good health helps make that possible. For example:
• Lowering financial stress results in less risk of a heart attack,1 while reducing debt can reduce the risk of depression and anxiety disorders.2
• Getting adequate sleep can lead to stronger decision making, memory and reaction time.3
• Exercising regularly improves cognitive function and drive.4

It makes sense then that good health may help you to perform better at work, which may lead to advancement opportunities and higher lifetime earnings. One study showed that those who exercise regularly tend to earn about $25,000 more per year than those who don’t exercise regularly.5 Another concluded that a higher body mass index led to lower pay, particularly among women.6

Meanwhile, the cost of poor health can add up over a lifetime and can greatly reduce overall wealth. For instance, a study revealed that among 65-year-old males with a high school diploma, the median wealth of the healthy is almost twice that of the unhealthy.7

Also, poor health was associated with a reduction of more than $200,000 in household net worth over a 16 year period.8 One reason could be that declining health leads to more doctor visits, which can mean lower productivity and less career advancement, resulting in lower earnings and higher debt levels. This is wealth that you could have used to support your lifestyle or passed down to your family or community.

 

Be prepared by planning ahead

While good habits can help prevent negative health events, nothing is guaranteed. It’s important to have plans in place to mitigate the stress that can result from a change in your physical or mental condition. Here are steps you can take to be better prepared.

 

1. Assign Powers of Attorney.

Who do you trust to manage your finances if you become incapacitated? Have you told anyone how you would want your affairs managed? Powers of Attorney (POA) are documents that appoint someone to make decisions on your behalf if you are unable to do so. There are two types of POA that may be in place: Financial POA and Health Care POA. A Financial POA designates someone to make specific financial decisions, while a Health Care POA names an agent to make health care decisions and can provide direction around your wishes for your care.

The powers can be as broad as you decide and can cover many aspects of your personal and financial life. For example, you can name an agent to:

• Manage your investment and bank accounts
• File tax returns
• Manage your real estate
• Make gifts on your behalf to loved ones or charities you support
• Make health care decisions for you

When choosing an agent, consider the person’s physical location, particularly for health care decisions in an emergency. For financial agents, consider someone who is financially responsible and who will execute your wishes. Work with your attorney to put documents in place that conform to your needs and to your state’s statutes.

 

2. Protect your business.

If you’re a business owner, have you named someone to keep your business running if you have a serious health event? Oftentimes, life and disability insurance, when strategically designed, can be used as an effective funding vehicle for buy/sell agreements and key person coverage. They provide a smooth transition of power at agreed upon terms to ensure your business continues to operate without significant disruption if you are unable to carry out your responsibilities.

Buy-sell agreements spell out terms to transfer ownership of a business in the case of specific triggering events, such as death, disability or incapacity. For example, if you become ill and could no longer make financial decisions, the buy-sell terms could “trigger” and other owner(s), or key employees, could purchase your interest (“cross purchase”) or the company could do so (“entity purchase”), at the agreed upon price and terms in the document. This allows the company to continue to run smoothly.

Think carefully about what circumstances would cause a buy-sell agreement to trigger for your business and clearly outline them. For example, define the length of any incapacity that would place the agreement in force and whether it applies to mental health, physical health or both. Review the conditions with your attorney and business partners to ensure everyone is in agreement.

In addition to buy-sell agreements, review Operating Agreements (which govern the operations of a business and may include the terms of a buy-sell agreement), Trust Documents and POAs with your attorney to ensure they are in alignment and named Agents and Trustees are the most appropriate to take over your duties. If you have a Revocable Trust in place, discuss with your attorney if your Trust should be named as owner of your business interest, which could allow for smoother transition to your heirs through your estate plan. Additionally, if you are a sole proprietor, your Trust or POA is much more applicable, as the named agents, or successor Trustees would take over the management of your business if you could no longer do so.

 

3.Understand the impact of changes in your income.

Could you manage the loss of income and increased expenses caused by a health crisis? The steps below can help you determine if you can adequately cover additional expenses or lost income, or if you need to explore alternatives to avoid a significant disruption in your lifestyle.

 

Both your physical health and your financial well-being are connected to good habits and hard work, as well as access to information and support from professionals.

 

First, calculate how much your lifestyle costs today and then identify all sources of income to support it, including employment wages, earnings from investments, business income, etc. Work with a wealth planner to project costs and income for the long term, being sure to adjust for inflation, along with the anticipated growth of your savings and investment assets.

Next, earmark which assets would be available to support your needs and how you would spend those down. Consider these strategies to ensure you spend down assets tax efficiently:

• Tap health care policies first, then after tax accounts, and finally retirement or other tax-preferred accounts.
• Work with your wealth planner and CPA to determine the optimal time to access Health Savings Accounts. These accounts continue to grow tax deferred, but can be withdrawn tax-free when used to pay for qualified medical expenses. Depending on your tax situation, assets available and level of expenses, you may want to pay for medical costs with a balance of taxfree and taxable money, or let these accounts grow and use after tax money. This can also change year to year depending on circumstances.
• Work with your CPA to manage tax deductions and the timing of expenses. You may be able to maximize the deductibility of medical expenses by paying them in one year, when possible, instead of spreading them over multiple tax years.
• Focus on prudent savings, creating a balance between pre-tax retirement, Roth and taxable accounts, to ensure you have the means to support any other unknowns that life may present.

Finally, if you determine that your asset base is significant enough to support a loss of income, consider the impact to your heirs. Perhaps you had planned to provide education funding for your children or grandchildren. Or you may have wanted to support your community through philanthropic endeavors. Would the loss of income that is currently supporting growth of your assets, along with additional health-related costs of potentially $50,000–100,000 per year, impact your ability to help these individuals? If yes, you may want to consider other ways to bolster that part of your savings.

Both your physical health and your financial well-being are connected to good habits and hard work, as well as access to information and support from professionals. As you take steps to protect your health, it’s just as important to have a clearly defined plan that can give you peace of mind knowing that you’re prepared for any event. Ask a financial professional whether your wealth plan adequately incorporates provisions for your health.

 

Do you need long-term care insurance?

Although seniors are most often affected, the need for long-term care can come at any age due to illness or an accident. For couples, a serious health event that requires nursing home or assisted living care for one person may result in the need to budget for two households.

The average annual cost of assisted living is $54,000, while a private room in a nursing home costs $108,405 per year. These costs continue to rise by 3–4% per year and vary among states.9

Long-term care (LTC) insurance policies can help manage these costs. Policies include:
• Permanent life insurance with a LTC rider. Leave a legacy but also have a cushion of cash value to use for health care costs, if necessary.
• Hybrid LTC policies. Pay a single sum or a series of payments into a policy that provides an immediate pool of funds to cover qualified health care costs. There is also a death benefit if you don’t use the LTC coverage in your lifetime.
• Traditional LTC coverage. Pay annual premiums to a policy that will cover solely long-term care needs. There is typically no death benefit. The number of insurers providing this type of policy is decreasing.

Intergenerational planning: How to use annual exclusion gifts effectively

Waiting to transfer your assets to family members via a will or revocable trust upon death may not be the most effective strategy. Instead, it may be advantageous to transfer some assets during your lifetime.

Proactive intergenerational planning can help transfer assets from one generation to the next while aligning with your personal goals and family values by focusing on gift and estate tax efficiency, generation skipping transfer (GST) tax efficiency and income tax efficiency.
Many parents enjoy witnessing the positive effect a significant gift can have on their children’s lives. For example, asset transfer can help children buy a home, raise a family or start a business. With meaningful benefits to transferring assets during your lifetime from a gift and estate tax perspective, intergenerational planning can be a win-win for those giving and those receiving.

 

The basics of annual exclusion gifts

Individuals can give annual exclusion gifts to their descendants.

Such gifts are defined as the value transferred in a single calendar year to another person without using the estate tax exemption. In 2022, that value is $16,000. For example, a married couple can transfer $32,000 per year to each child, each child’s spouse, each grandchild, and anyone else they’d like without gift or estate tax implications.

Keep in mind, you can only transfer a limited value of assets without incurring a gift or estate tax. As a result, it’s beneficial to transfer assets sooner (while the value is lower) rather than later (when the value is higher).

Individuals concerned with giving children too much access to assets too soon can use structures to determine when and for what purposes the recipients may gain access. Take trusts, for example. When designing a trust, you decide the distribution provisions and who will serve as the trustee to enforce those provisions. This makes it possible to separate the timing of the gift from when the recipient can access the gifted assets.

Note that annual exclusion gifts are a “use it or lose it” opportunity. If you don’t make an annual exclusion gift during a calendar year, it’s a lost opportunity. Designing a strategy to consistently use your annual exclusion gifts can make a meaningful impact on reducing a taxable estate.

 

Individuals concerned with giving children too much access to assets too soon can use structures to determine when and for what purposes the recipients may gain access.

 

Seven annual exclusion gift strategies

The following strategies are often used for annual exclusion gifts. Each has benefits and drawbacks. Your family’s unique goals will determine which is best for you.

 

1. Uniform Transfers to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA).

UTMAs/UGMAs provide the simplest way to make annual exclusion gifts to children: You open an account for the benefit of the child and deposit a check into the account each year. The accumulated funds can be invested to maximize growth over time. Once the child turns 18 or 21 years old — depending on your state’s law — the funds legally belong to the child, who can use them for any purpose. Many parents explore other options because of this provision. Note: some states allow you to convert the account to a trust. One cautionary factor to consider: A person must be at least 18 years old in order to create a valid will. Therefore, in the event a child were to pass away, the UTMA/UGMA funds would pass according to the intestacy laws of the state in which the child resides. As a general rule, this means one half of the assets will pass to the child’s father and the other half of the assets to the child’s mother. This would be an undesirable outcome such as divorce or separation of the mother or father from his or her family including the child.

2. 529 Plans.

A 529 Plan is a tax-advantaged savings plan designed to pay for education. The account owner contributes after-tax dollars to the account, makes investment decisions and names a beneficiary. Income tax on all account earnings is deferred and withdrawals are income tax free if they are used for qualified education expenses, including college tuition, room and board, books and supplies, and elementary and secondary education expenses.

Many states allow an income tax deduction or credit for contributions to their state’s 529 Plan. If the beneficiary does not use the funds for qualified education expenses, then the account owner can name a different beneficiary or withdraw the funds, but the earnings will be subject to income tax and a 10% tax penalty will apply.

3. Crummey Trusts.

A Crummey Trust is a trust created by a “grantor” for the benefit of one or more beneficiaries. The grantor decides what the distribution provisions will be and who will serve as the trustee to enforce them. Each year, the grantor makes annual exclusion gifts to the trust, which can be cash, stock or even closely held business interests. Each time you make a gift to the trust, you must notify the beneficiary, who then has a right to withdraw that gift for a period of time (usually about 30 days). However, if the beneficiary does not exercise that right within the window of time, the assets remain in the trust. Thereafter, the trustee can distribute them according to
the provisions outlined in the trust.

The benefit: the entire trust balance never becomes available to a beneficiary at any point in time, provided you don’t choose to create the distribution provisions to do so.

4. ILITs (Irrevocable Life Insurance Trusts).

An ILIT is effectively a Crummey Trust, but the assets are used to purchase a life insurance policy, usually on the life of the surviving parent to help leverage larger wealth transfer via insurance upon the death of the surviving parent.

5. 2503(c) Trusts.

A 2503(c) Trust works much like a Crummey trust, with a couple of important distinctions.

First, the 2503(c) Trust may only have a single beneficiary, but separate trusts can be created for each child. Second, the child need not have the right to withdraw the annual gifts to the trust, rather, upon reaching age 21, the child has only one window of time (usually 30 days) to withdraw all trust assets. If the child fails to do so within that time frame, the assets are distributed by the trustee according to the trust’s provisions.

6. 2642(c) Trusts.

A 2642(c) Trust is used when grandparents (vs parents) would like to create would like to create a trust for the benefit of a grandchild. This type of trust operates much like a 2503(c) Trust (described above). The difference is that it is designed to allow grandparents to make annual exclusion gifts to the trust for the grandchild without having to use any of the grandparent’s generation skipping transfer (“GST”) tax exemption. (In other words, as a general rule, gifts from grandparents to grandchildren require the use of the grandparents GST tax exemption. But gifts to a 2642(c) Trust do not require that).

7.  Intrafamily Loans.

Families who want to give more than the annual exclusion amount to a child in a given year can establish an intrafamily loan. Each year, a portion of the loan (equal to that year’s annual exclusion amount) may be forgiven.

 

Those who have set up trusts to use part of their annual exclusion gift each year will want to consider how much is left for other types of gifts when doing so.

If your gifts to a beneficiary exceed the annual exclusion amount in a given year, you may need to file a gift tax return for annual exclusion gifting as well and use a portion of your gift tax exemption. If no gift tax exemption remains, a gift tax will apply.

In addition to annual exclusion gift strategies, there are several others that use little or none of your estate tax exemption that may also be beneficial for your family. Consult with your BMO Wealth Management expert when considering the best strategy for your family’s annual exclusion gifts.

Digital assets An essential component of your estate plan

No one enjoys end-of-life planning. But properly designed, completed and executed estate plans that include wills, powers of attorney and trusts are crucial to protecting your legacy and ensuring the seamless transfer of assets to your heirs.

Today, that includes providing family members with access to or control of your information, including your digital and online property. These assets range from your social media accounts and electronically stored photos and videos, to domain names and blogs, to blockchain assets such as cryptocurrency, non-fungible tokens (NFTs) and central bank digital currencies (CBDCs). Just like you would for your house, your retirement savings and that special family heirloom, you can arrange to have your digital property managed, safely administered and smoothly passed to your beneficiaries. Estate plans can also designate a digital trustee to oversee your online accounts and direct executors on locating and securing your online account information and access credentials.

 

What do I need to know about protecting my digital property?

At the time of this writing, digital assets have surpassed a $2 trillion market cap with a staggering number of Americans investing in, trading or holding cryptocurrencies, which has inspired President Biden to sign an Executive Order1 identifying priorities for the regulation of this innovative space.

Most states have enacted laws to address access to someone’s digital assets after death or incapacitation and have adopted a version of the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA). The 2015 RUFADAA gives executors and trustees access to digital assets, subject to some limitations. Still, legislation governing digital assets varies at the state level, and some crossborder differences exist. Some digital platforms (such as Apple, Google and Microsoft) now allow users to set “Legacy Contacts” and to decide who can access your account assets — photos, notes, mail and more — after you pass away. Social media platforms such as Meta (formerly Facebook), Twitter, LinkedIn and Pinterest do something similar. Upon first creating their accounts, most consumers accept a platform’s longwinded terms of service agreements and privacy policies without even glancing at them. This leaves open the possibility you’ve signed away the rights to transfer your assets or to memorialize your online presence.

 

What can I do to protect my digital assets?

For executors, a challenge is often just determining whether digital assets are in the decedent’s estate, and then determining the powers and terms for accessing and administering them on the beneficiaries’ behalf. When it comes to blockchain technology, executors need to know the whereabouts and details of the private key(s). Some good first steps in planning for these assets are to:

Take inventory

To understand your broad-based digital footprint, take inventory of your digital assets, including:

  • Personal emails and account sign-in information (e.g., iCloud and Google)
  • Social media account information, including your business accounts (e.g., LinkedIn, Facebook and Instagram)
  • Data or documents stored on your electronic devices, including phones and computers
  • Domain names
  • Blog content or podcasts
  • Bitcoin or other cryptocurrencies
  • Credit card points
  • Frequent-flyer miles and other travel points
  • Loyalty program benefits (e.g., wine clubs, Starbucks rewards)
  • Digital photos and videos
  • Your literary, musical or other works
  • Digital eBooks you’ve purchased
  • Digital music you’ve purchased through iTunes, Spotify or Pandora
  • Digital online betting accounts
  • Online credits with Venmo, Amazon, eBay or other online purchasing entities
  • Virtual and smart property, such as online gaming avatars, that exists in the metaverse, where unique digital assets are bought and sold for cash or NFTs

Get help from planning experts

Once you’ve inventoried your digital assets, have a proactive conversation with your BMO Private Wealth Advisor, who works closely with the firm’s trust and estate planning experts, who have substantial knowledge and experience in this area. We will help you develop this comprehensive digital asset inventory and, for each asset, harness the opportunities, understand the limitations and engage the best strategies for protecting them.

Planning “actions” must be performed while you are alive, from setting up cybersecurity protocols, antivirus subscriptions and access planning guides to legal authorizations, consents for release of electronically stored information, powers of administration/disposition and other legally binding documents.

Say you’re in the process of drafting a novel, and the file is saved in the cloud. That draft not only has emotional value but also potential financial value to your family should you pass away before completing it. The same holds true for family photos, an online diary or other tokenized assets, access to which you likely would want to control. Expert digital assets estate planners have several tax-efficient solutions and tools they can stress test, custom design and implement, where appropriate, to meet your intention and goals.

 

Conclusion

Without proper planning, digital assets could be lost. The more prepared you are, the stronger your estate plan will be, enabling you to avoid the pitfalls we see time and again. The key to success is early discussions with your BMO Private Wealth Advisor. Together, with your independent tax and legal advisors, our wealth planning team can help determine the appropriate estate planning strategies for you.

Six best practices for selling or transferring your business

Contemplating the sale or transfer of a business can be very exciting. It’s the culmination of many years of hard work and an opportunity to monetize what is most likely your largest, albeit most illiquid, asset. A sale or transfer can also free up your time to pursue other interests, as you embark on the next chapter of your life. Further, it helps lay the groundwork for estate planning.

That said, transitioning from being a business owner to your next stage in life requires forethought and planning to achieve your goals.

Preparation is the most important factor in a successful transition. The best outcomes are realized through years of advanced planning. This important preparation assures you have plenty of time to assemble a team of advisors, who will lead you through each step along this journey, and provide you with time in the case of any necessary restructuring that ensures the most favorable outcome, at the optimal price and with the best terms.

With years of experience in this arena, BMO Wealth Management shares these six best practices to guide you in the pursuit of a sale or transfer of a business.

1. Leave ample time to structure the kind of transition you want.

Start by thinking about your long-term goals. Do you wish to monetize your company’s value, continue to grow the business, or pass the family enterprise to the next generation?

Next, think about who you would like to see as a buyer. Some owners want to keep the business in the family for children or grandchildren. Others want the business to go to trusted employees, who will continue to make an impact in the community. Still others may want to sell to a strategic buyer with whom they can achieve the highest value possible.

All these considerations take time to execute, so it’s prudent to start years before any planned transfer. Use this time to assemble a team of trusted advisors, including corporate and estate lawyers, accountants, exit planning advisors, and bankers. This also leaves you time to train and mentor your successors and gain a realistic valuation of your business. And by starting early, you will have enough time to make tax-efficient gifts or sales to your family or community.

2. Understand the true value of your company.

To establish a starting point for negotiations with a potential buyer, you must have a fair market valuation for your company. This work is typically conducted by a mergers and acquisitions firm or an investment bank. Knowing the realistic value of your business helps ensure you avoid surprises when considering offers.

A valuation conducted by a qualified appraiser with knowledge of your industry will not only establish a fair price for the business at present time, but also it will identify areas for improvement, which if completed may increase your firm’s value.

You will also need a fair market value if your transition plans involve making gifts to family in order to have a valuation of shares or interests transferred for estate planning purposes.

3. Consider the emotional aspects of a sale or transfer.

While the sale or transfer of your business is primarily a financial transaction, there are also many emotional aspects. To set yourself up for the best chance of success, make sure you are emotionally prepared to accept the change before you begin your negotiations. Your business has likely been one of your highest priorities for many years. Consider what it will feel like for you on the other side. Taking the time to process this, to envision how this will look for you, will not only help you make appropriate decisions throughout the negotiation process, but also help you realize you have things to look forward to when the sale is complete.

We recommend you set aside some time to develop a well-crafted plan for your next chapter. Are there charitable organizations you wish to join? Is your hope to travel? Or maybe you want to spend time with family. A transition will go more smoothly when you have a plan for how you’ll spend your time when the sale is complete.

4. Create a solid plan for the outcome you desire.

The structure of a transfer depends on your goals, which will direct you to the right type of buyer, whether it’s an outside buyer, management, strategic partner or family member. In addition, sellers will have a big say in the terms of the sale and will also want to structure it in a way that fits their goals.

For example, you may want to stay involved in the business during a longer transition period after a sale. In that case, you will want to find a buyer who welcomes your involvement. Or you might feel strongly that the future owners should stay in the community that you cherish. These negotiations are your opportunity to structure the deal with the most favorable terms for you.

However, you should know that insisting on specific conditions may mean agreeing to a lower sale price. Some owners are willing to give up some value if it means executing a sale on their own terms.

5. Plan for unforeseen circumstances.

A business is an illiquid asset, and a sale is often necessary to monetize the value. However, emergencies may arise that can preempt even the best-laid plans, such as the death of an owner.

If a business needs to sell fast, perhaps to settle an estate, that’s a less than optimal situation to obtain the best price. For starters, the right people may not be in place to take over, and the market cycle may not be as receptive as other times.

Again, advanced planning is vital, so you can sell on your terms and realize the valuation you seek.

6. Understand the tax implications.

A sale of a business will most likely require capital gains on the appreciation of the sale or stock or interest units (if you are selling securities). In addition, there may be ordinary income and income recapture if the buyer only purchases the business’s assets. However, with early planning you can minimize some of the tax consequences of the transfer.

For starters, you can structure the sale so you receive income payments over time, rather than in one lump sum, which requires you to accept all payment in a single year. Installment payments may lower your overall tax obligation by keeping you in a lower tax bracket.

Keep in mind that utilizing an installment sale involves some risk. In theory, by doing this, you will be financing the buyer’s purchase. So, if the buyer is unable to pay or the business fails you may not realize all your payments. Or you may need to step back in and run the business for a time, and then begin the transition all over again.

Consult with your tax and estate planning professionals for the most tax-efficient strategies for your particular situation.

As you begin the next chapter of your business and look toward the future, work with your team of advisors to help you optimize value, find new owners, and protect your heirs with the necessary estate planning – all on your own terms.

Feel confident about your future

Stoker Ostler – its professionals, its disciplined approach, and comprehensive advisory platform – can provide financial peace of mind.

Call your Stoker Ostler Portfolio Manager today.

The time for estate planning is now

Planning is important in any environment. When done correctly, you may be able to both minimize transfer taxes while exerting control over your legacy assets. But the environment in which you execute your plan is just as critical because it determines both the manner in which you pass assets and the amount you’re able
to shield from taxation.

Today’s environment is perfect for high net worth individuals and families to maximize flexibility, minimize taxation, and execute their desired plan. But given the current economic and political climate, the outsized benefits available today may not be available tomorrow. That is why it is critical to execute your plan now.

Estate tax

Estate tax is a tax the government collects on the value portion of a person’s assets above a certain exemption amount when that person passes away. Currently that exclusion amount is $11.7 million per taxpayer, or $23.4 million per couple. Unfortunately, at the end of 2025 a number of tax benefits contained in the Tax Cuts and Jobs Act of 2017 are scheduled to sunset, including this increased exemption. At that time, the exemption will fall back to an inflation-adjusted $5.49 million, the amount it was in 2017.

While legislation has not yet been drafted, President Biden’s recently announced Jobs Plan and American Families Plan provide a high-level list of proposed policy changes — many of which would result in higher tax liabilities for high net worth families. For example, the plans propose to eliminate the “step-up” in basis of transferred assets, which could result in an immediate capital gains tax on appreciated assets at death.

The good news is that the estate planning you do now should hold up over time. The Internal Revenue Service has been reluctant to “claw back” money from estates that took planning steps prior to future tax laws. But please note, if you don’t use the full exemption and the threshold is reduced, there won’t be retroactive opportunities to take advantage of these generous exemption amounts.

Gifting vs. selling strategies

We can achieve estate planning objectives through a variety of sometimes complex, but very well-established trust strategies. But in order to move the asset into a trust, we have two options: gifting and selling. Gifting is a sound strategy for estates under the exemption amount. But for larger estates or those looking for flexibility in their plan, selling offers a number of great opportunities.

One obvious strategy planners are quick to utilize today is to lock-in the increased gifting allowances described above before they expire. For estates larger than the exemption amount, today’s historically low interest rates also offer significant additional opportunities to minimize the estate tax.

Today’s low interest rates allow us to implement selling strategies that result in lower estate taxes. For example, we might recommend transferring an appreciating asset, such as a business, to a family member through a grantor retained annuity trust (GRAT). In order to execute the GRAT, once an asset is transferred into the trust, the grantor receives payments from the trust for a certain number of years. The amount of these annual payments is based on the 7520 rate set by the IRS. As of June 2021, the rate was just 1.2%. Meaning, any appreciation of the underlying assets over 1.2% passes to the next generation free of the estate tax.”

At the end of the term, any assets that remain in the trust pass to the beneficiary. If the grantor outlives the trust, any amount within the GRAT is excluded from the estate.

Valuation discounts

Another tax minimizing strategy available today is valuation discounts, which can artificially reduce the value of an asset for transfer purposes.

Assume that a husband and wife owns real estate that is worth $100 million. Gifting it outright would subject the vast majority of the asset to estate and gift tax. Instead, under current law, the couple may choose to use a family limited partnership (FLP) to recapitalize their asset into 10 general partner voting shares and 90 limited partner non-voting. The underlying asset is worth the
same but the non-voting shares don’t have the same value as voting shares due to their lack of marketability and control.

A valuation expert can determine how much of a discount the non-voting shares should have, but for the sake of argument, let’s assume a 30% discount, meaning 90% of the real estate can be transferred for a value of $73 million, not $90 million. At the current 40% federal estate tax rate, that $17 million reduction in valuation saved the couple $6.8 million in federal transfer taxes.*

In this case, gifters retain control of the entity and assets, while also transferring the future value of the asset to the next generation.

Valuation discounts are one area we continue to watch for legislative action. We worry that it may not survive future tax reform, so taxpayers who want to employ this strategy should do so sooner rather than later.

No time like the present

Naturally, estate taxation is affected by shifts in the government and political landscape. The amount of value in an estate that avoids the estate tax is a constant source of policy discussions and changes can have significant financial implications. The estate tax rate itself can and does change, and each state has a different approach to how it taxes an individual’s wealth upon death. Other factors, such as the step-up in basis to market value on the date of death that estates now benefit from, are also subject to change.

While the forces that push and pull on the taxation of estates are as unpredictable and varied as anything in politics, what we can control is our ability to act. A high debt, low tax, high exemption, low interest rate environment is highly unusual and historically not sustainable; but it does offer planners a plethora of options to meet your needs.

On a more personal level, having a plan can create a feeling of security for next of kin and harmony for everyone in the family. Parameters can be placed on the use of inherited wealth, and it works out best when everyone understands the need for those parameters, or at the very least has a chance to hear the rationale behind them. Family communication is perhaps the most important element of good financial planning. The favorable conditions that exist today for estate planning, the potential changes that could be imminent, and the massive benefits of proper planning have created an environment where planning is necessary, rewarding, and worth exploring. Communication and the need for careful, well-reasoned forethought are just as relevant in successful estate planning as they are in any other area of life. The time is now to start learning how you, your heirs, and your legacy can benefit from a well-crafted estate plan.

Philanthropy of their own

How women are shaping the future of family giving

 

Women are becoming a mighty force in philanthropic giving, bringing their passions, creativity, and concerns to a host of issues they want to address. With their growing earning power and rising wealth, women are helping to drive the agenda on philanthropic giving, creating an opportunity to draw their families into the endeavor as well.

Take McKenzie Scott, one of the latest billionaires to sign The Giving Pledge. Previously married to Amazon founder, Jeff Bezos, Scott, a novelist, is the fourth wealthiest woman in the world and has committed to donate the vast majority of her wealth within her lifetime. On her list of priorities are education, racial injustice, and women’s empowerment. Though Scott’s activities grab headlines, she’s by no means alone.

As women’s financial influence grows, their philanthropic might will too. Globally, nearly a third of all wealth is now controlled by women, and the number of women serving as the primary breadwinner in families has steadily increased over the last few decades. Younger women have greater financial literacy than women in previous generations, with 70% of millennial women saying they make the primary financial decisions in their households.

What’s more, women are on track to control the majority of the $30 trillion of wealth expected to change hands by 2030. All of this translates into greater philanthropic activity, given that women tend to place a strong emphasis on philanthropy when it comes to decisions in how they spend their money. For example, single women are more likely than single men to make charitable contributions and they tend to give larger sums. As their earnings rise they are also more likely to increase their charitable donations.

With women’s wealth on the upswing and their influence on charitable giving at peak levels, it’s only natural that they are transforming philanthropic giving and shaping the future of family philanthropy too.

The case for taking a long-term view

As you think about how you want to shape the future of your philanthropic giving, it’s important to articulate your family values and agree on what you hope to accomplish with your gifts over your lifetime and beyond.

While some charitable giving is used to address immediate problems and relieve suffering (say, for example, providing food assistance during periods of economic hardship), generational philanthropy efforts often take a more global view.

Thinking long term also allows you to engage your family in crafting your philanthropic vision. It can galvanize your family around issues you want to tackle. For example, if your family’s giving centers on poverty, it gives different family members a way to express their passions depending on their skill sets and interests. Perhaps your granddaughter wants to fund delivery of organic produce in communities located in food deserts, while your son wants to foster economic empowerment. Introducing charitable giving into the family narrative provides an opportunity to engage the next generation, teach them to be responsible stewards of wealth, and establish philanthropy as a core family value.

Choose the right vehicle

Once you decide on the vision for your philanthropy, you need to decide what form that giving will take, such as gifts of cash or stock directly to a specific charity, or through a structure like a private foundation or donor-advised fund (DAF).

Both private foundations and DAFs are commonly used for significant giving. Think of these entities as a basket you fill for your future charitable donations. You can bunch your charitable giving into years that provide the most tax benefit, and then dip into this basket each time you wish to make a gift to a charitable organization in the future. If the basket is not empty upon your passing, you can designate family members to continue funding charitable causes from assets remaining in the basket. But there are important differences between private foundations and DAFs.

A private foundation can be established by an individual, family, or corporation to fund their charitable activities. The Bill & Melinda Gates Foundation is an example of this structure. While a private foundation gives families the most flexibility and control over their charitable giving, these vehicles also have many restrictions, such as requiring a board of directors or trustees to oversee the foundation’s operations. Foundations must also file tax returns and give away at least 5% of the value of their noncharitable use assets each year. In addition, there are legal and administrative costs for setting up and managing a private foundation.

An increasingly popular vehicle for charitable giving is the DAF which provides many of the same benefits as a private foundation, but with less administrative burden for the donor and a potentially larger income tax benefit. DAFs allow you to make charitable contributions — and receive a corresponding income tax deduction — currently up to 60% of your adjusted gross income (compared to 30% for private foundations). Additionally, DAFs are not subject to the 5% minimum distribution rule that applies to private foundations. Donors should be aware, however, that although they may recommend grants, the charitable sponsor (who holds the DAF funds) makes all final decisions.

 

As women take the reins of wealth, they have an opportunity to create a lasting philanthropic legacy, both for their families and communities.

While the origins of your philanthropic mission may be yours, allowing younger generations to have their say and building the structures to honor their contributions, will allow the important work you are passionate about to live on for many years to come.

 

Engage your family

With the understanding of your philanthropic might and the right vehicle in place to carry out the work, turn your sights to passing down your charitable values to the next generation. A philanthropic entity can unite a family around shared goals and visions. Whether it’s education, poverty, racial equity or climate change, your philanthropic activities set a powerful example for younger family members and leave a lasting legacy.

Consider these steps to engaging family members

  • Be an open book.
    Help your children and grandchildren understand why the causes you support are so important to you. Sharing your views engages multiple generations and helps you model core values.
  • Share the power.
    Give family members a forum for expressing differing ideas and perspectives. You may find that bringing in a consultant to coach family members on respectfulness, listening, and sharing candidly will help shape discussions.
  • Teach them.
    While philanthropy is an important goal in and of itself, it’s also a powerful platform from which children and grandchildren can learn financial, governance, and due diligence skills. Philanthropy can also be a good way to teach the responsibilities that come with wealth so children who will inherit wealth are prepared.
  • Give the gift of time.
    Time is our most precious commodity. The time you spend together working in the pursuit of a greater good will surely become your most cherished memories.

 

Kris Yamano is Vice President and Arizona Market Leader with BMO Private Bank. She has 20 years of experience in the financial services industry. Kris leads a team of professionals dedicated to providing high-net-worth families, closely-held businesses, and charitable organizations with a full range of customized wealth services including investment management, private banking, trust & estate services and comprehensive wealth planning.

Are you prepared? Children and grandchildren need to get ready for their roles as inheritors

For many high net worth families, amassing wealth may be the easier part. Passing down the knowledge and tools necessary for a successful wealth transition, that’s where things get difficult. Wealth creators can be busy with their businesses and community obligations and neglect this important step or, more commonly, simply don’t know how best to start.

As an inheritor, this can leave you in an awkward position, not knowing what’s expected of you, what role you should play and how you should prepare. It’s an all too common situation. According to the survey, Preparing heirs: five steps to a successful transition of family wealth and values, by Williams & Preisser, a quarter of heirs feel unprepared for their roles.

Empower yourself with knowledge and skills to help yourself and the wealth creator make the best decisions for themselves and your family’s legacy.

An inheritance is a challenge

Do your parents like your taste in music? Do they have the same views on community involvement? Parents and children have different opinions on many things and an inheritance may  be one of them. When we work with families of wealth, we see four main challenges:

1. Sense of entitlement.

Parents may worry that wealth will undermine their children’s ambition and financial responsibility. They want to ensure that inheritors will be good stewards of the wealth.  As a result, they may want to parse out your inheritance only after you hit certain milestones such as a college graduation or a certain income threshold which demonstrate ambition and values. You, on the other hand, may feel that an inheritance should come with no strings attached.

2. Heirs’ differing needs.

Parents generally hope to treat their children equally or fairly.  However, within each family there are bound to be differing capabilities and needs. It can lead parents to consider providing for inheritors differently. For example, you might have a sibling with a chronic illness or you may have a sibling earning a smaller salary because they chose to be an artist or teacher or work for a not-for-profit.  These differences may lead your parents to consider providing a bigger inheritance to your sibling to ensure lifetime support and an equal comfort.  Unless you understand the reasoning, you might take offense about your smaller share.

3. Grandchildren.

Your parents might struggle with how to divide their estate equitably if you and your siblings have a different number of children.  Often grandparents seek to treat all grandchildren equally, but this could mean one sibling’s family receives a larger share if they have more children.  Again, it is important to understand the philosophy here to avoid strife.

4. Lump sum or extended distribution.

Parents may worry about leaving lump sum payments if their children haven’t achieved a certain level of maturity.  They can also be concerned about protecting inheritance from creditors or ex-spouses.  For this reason parents often consider trusts to protect your inheritance for your benefit.

The key to tackling these challenges is open communication, giving parents an opportunity to explain their intentions and allowing you to understand your parent’s intentions as well as to have the time to learn the skills you need to become a responsible and prepared inheritor.

Tell me a story – the tale of the family values, vision and mission

Everyone loves to talk about themselves, especially people who’ve lived exciting lives and built successful businesses and careers. While your parents may be reticent to open up about their estate plan, how much they have and how much they intend to leave you, chances are they will relish the chance to tell their story.

Storytelling sessions aren’t about dollars and cents—that part comes later. Instead, it’s a chance to learn about your family’s unique journey so that you can appreciate the values, vision and mission that led to the creation of the wealth as well as where you fit in.

Remember that each generation and each person has a preferred communication style. To glean as much as possible from your parents’ storytelling, make sure you’re communicating in their preferred style. Skip the Tweets if your parents place a premium on face-to-face communication. On the other hand, your parents might prefer to write you a letter or a short memoir detailing their life.

Also recall that different personality types have a preferred approach.  For example, some family members may be very detail oriented whereas others may be more about the big picture and punchline.  Taking into consideration personality preferences can also help to facilitate the best open communication.

As you talk, keep these things in mind:

  • Be empathetic and respectful.
  • Inquire about how your parents created their wealth.
  • Ask about the challenges they encountered and how they overcame them.
  • Find out about what they consider to be their greatest accomplishment (the answer may surprise you).
  • Ask if they have any regrets.
  • Listen more than you talk.
  • Consider what is similar to your values, vision and mission and how they differ to best bridge what you have in common.

The key to engaging in family storytelling is that within the family story, are the values and strategy that was deployed to garner the family wealth.

The family blueprint

Once you understand the family story, you can move to the next phase. Work with your parents to help them more clearly articulate and document their vision, mission and values for the family, if not already done, as part of outlining the overall  family blueprint.

A family blueprint can include a family tree, mission statement (family goals and objectives), family entity diagram, family balance sheet, income tax projections, cash flow projections and   an outline of the estate disposition. It can be a guiding document for not only the values your family holds dear—but also how the assets, cash flow and estate disposition serve that purpose.  It can also help you to see your roles and responsibilities within this family construct.

For example, if running a successful business is central to your family’s values, the family blueprint helps to lay out the roles that family members can play.

Likewise, if one of your parents’ value towards philanthropy is education funding, the family blueprint can help to instill the sense of generosity and gratitude in younger family members and counter the sense of entitlement your parents may worry about. The family blueprint can articulate what form that philanthropic intent will take. It allows the younger generation to learn about money management and due diligence in a supportive environment, under the watchful eye of a matriarch or patriarch.

A family blue print is an evolving document reflecting market conditions, changing family dynamics, life events and philanthropic focus. It will be revised time and again as things change but can be not only a benchmark for the family to be strategic in moving toward family goals and objectives, but also a means to educate family members regarding the wealth enterprise.

The business at hand: the family meeting

With an understanding of your family’s story, you are ready to delve deeper into conversations about wealth transfer. Use the structure of a family meeting to provide the space for that to occur. Family meetings can be an opportunity for information gathering and working together to resolve potential problems.

Some families have well established, open lines of communication. Their family meetings can be as simple as a hike in the woods or a Sunday brunch—pretty much any time they gather together. Other families prefer a more formal approach. They might want to set aside several times throughout the year to discuss family business.

Regardless of how your family conducts its meetings, make sure there’s an agenda so nothing falls through the cracks and assign action items for each member to tackle before the next meeting. If your family is finding it difficult to get started, consider using a neutral third party to facilitate a family meeting.

As your family moves forward with the wealth transfer process, your parents can start assigning roles to different members based on their interests and skillsets. In general, there are four roles within a family’s wealth transfer that can be filled by members of the next generation: beneficiary, trustee, steward and shareholder.  Oftentimes, family members play one or more of these roles and should understand the different hats they might wear in playing each of these roles.

Final thoughts

In a perfect world, parents would have a well-thought out plan for wealth transfer, explain their intentions and help their heirs learn their roles and responsibilities. But life doesn’t always unfold in an orderly way or provide such a roadmap. Sometimes, inheritors may need to step in to play a more active role so they can empower themselves to be educated, responsible and prepared.

The new SECURE Act makes changes to retirement saving

Key things to know and planning strategies to consider

 

After a long delay, the SECURE Act (which stands for “Setting Every Community Up for Retirement Enhancement”) has now been signed into law by President Trump.  The Act makes some significant changes for retirement account planning.  Some of the key provisions impacting individuals include:

RMDs moved back to age 72
Required Minimum Distributions (RMDs) from traditional IRAs, 401(k) and other qualified retirement accounts generally have been required to begin when you turn age 70½.  The SECURE Act pushes the initial year of RMDs back to age 72 for everyone born July 1, 1949 or later.  So if you do not need to access your retirement accounts for cash flow needs you can now let your retirement funds grow tax-deferred an extra 1½ years before being required to start taking distributions.

Elimination of “Stretch” IRAs for non-spouse beneficiaries
The SECURE Act eliminates the current rules that allow non-spouse IRA beneficiaries to “stretch” RMDs from an inherited retirement account over their own lifetimes which potentially allowed retirement funds inherited by children or grandchildren to grow tax-deferred for decades.  Instead, all funds from an inherited IRA (or other retirement account) received as a result of a death occurring after December 31, 2019 must now be distributed to non-spouse beneficiaries within 10 years of the IRA owner’s death.  There are no RMD requirements within those 10 years, but the entire balance must be distributed by the expiration of the 10th year.  These new RMD rules do not apply to retirement accounts inherited by a non-spouse beneficiary as a result of a death occurring on or before December 31, 2019.

Surviving spouses who inherit a retirement account of a deceased spouse will still be permitted to “roll over” those accounts into their own names and delay taking RMDs based on their life expectancy until they turn age 72.  Distributions over the lifetime of a non-spouse beneficiary will also still be allowed if the beneficiary is a minor, disabled, chronically ill or not more than 10 years younger than the deceased account owner.  For minors, the exception only applies until the child becomes an adult and then the 10 year distribution requirement takes effect.

No age restrictions on IRA contributions
The SECURE Act repeals the previous rule that prohibited contributions to a traditional IRA by workers age 70½ and older.  Now you can continue to contribute to a traditional IRA if you decide to continue working into your 70s.  There also continues to be no age-based restrictions on contributions to a Roth IRA.

Penalty- free withdrawals for adoption or birth of a child
The SECURE Act allows up to $5,000 to be withdrawn from a retirement account within one year following the birth or adoption of a child without the usual 10% early-withdrawal penalty.  For married couples, each spouse can withdraw up to $5,000 from their retirement accounts penalty free.  Income taxes will still be owed on the distributed funds.

 

Grad student fellowship/stipend payments treated as compensation
Under the SECURE Act, aid amounts paid to students in pursuit of graduate and post-doctoral study or research (such as fellowships, stipends or similar payments) will now be treated as compensation for purposes of making IRA contributions.  This will allow students who may not have work related earnings to begin saving for retirement while still pursuing advanced degrees.

Planning considerations

 

The SECURE Act makes some significant changes to retirement accounts.  Key planning considerations include:

Roth conversions
Roth IRAs may be more attractive now.  One option to reduce the impact of future taxes would be to convert traditional IRA funds into a Roth IRA.  You would pay the taxes now but your beneficiaries’ future withdrawals would be tax-free.  Tax rates may be going up in the future so you might be paying less in tax now with conversions rather than what your beneficiaries may pay in the future.

 

Charitable donations
Consider using RMDs from your IRA to make qualified charitable distributions (QCDs) and using your retirement accounts to fund charitable bequests rather than using your other assets for such gifts.  Taking advantage of a QCD once you reach your RMD age to fund your charitable giving is especially beneficial if you no longer are able to itemize deductions for income tax purposes because of the recent significant increase in the standard deduction.  QCDs are not included in your adjusted gross income which can also potentially reduce your Medicare tax amount.  Unlike an individual, a charity will not pay income taxes on retirement funds it receives so funding charitable bequests with retirement account assets and using your other assets to fund bequests to your children, grandchildren or other individual beneficiaries will produce the best overall income savings.

 

Spend IRA funds and bequeath taxable investments
Depending upon tax brackets, it may be beneficial for you to use your retirement accounts to fund your cash flow needs during your lifetime and preserve your taxable investment accounts to pass on to your heirs.  Your stocks and other securities will receive a tax basis adjustment to their values as of the date of your death, meaning all prior appreciation will escape tax and your beneficiaries will only realize gain on a subsequent sale on the increase in value after your death.  Your beneficiaries will also be free to sell such securities whenever they wish and time sales to take into consideration taxes, rather than being forced to withdraw IRA assets within 10 years making it more challenging to plan for a favorable tax outcome.

 

Review estate plan
You should consider having your estate plan reviewed if you have named a trust as a beneficiary of your retirement accounts to avoid potential unintended consequences resulting from the new 10-year distribution rule under the SECURE Act.  Many trusts that are intended to receive retirement funds are structured to be “conduits” meaning that any retirement account distributions received by the trust are immediately distributed to the beneficiary.  While this can be favorable for income tax purposes because of the high tax rates trust are subject to, it may result in a beneficiary receiving substantial amounts at a younger age than possibly intended.  Some trusts also provide for the potential accumulation of retirement account distributions which can have adverse tax consequences.  Trust provisions should be reviewed to ensure that your trustees are afforded flexibility to manage retirement account distributions in the most beneficial manner.

 

Reassess IRA distribution strategies
As you approach your RMD age, consider whether it will be beneficial as part of your overall wealth planning to delay taking distributions from your retirement accounts until age 72 to fund your cash flow needs.  Alternatively, consider whether making withdrawals from your retirement accounts earlier in retirement to take advantage of lower tax brackets may provide overall long-term tax savings.

The SECURE Act changes to retirement savings should be evaluated in light of your complete financial picture and long-term wealth plan.  Working with your trusted advisor to determine how these changes personally impact your planning may help avoid potential pitfalls and identify tax savings opportunities.

Are you prepared? Children and grandchildren need to get ready for their role as inheritors

For many high net worth families, amassing wealth may be the easier part. Passing down the knowledge and tools necessary for a successful wealth transition, that’s where things get difficult. Wealth creators can be busy with their businesses and community obligations and neglect this important step or, more commonly, simply don’t know how best to start.

As an inheritor, this can leave you in an awkward position, not knowing what’s expected of you, what role you should play and how you should prepare. It’s an all too common situation. According to the survey, Preparing heirs: five steps to a successful transition of family wealth and values, by Williams & Preisser, a quarter of heirs feel unprepared for their roles.

Empower yourself with knowledge and skills to help yourself and the wealth creator make the best decisions for themselves and your family’s legacy.

An inheritance is a challenge

Do your parents like your taste in music? Do they have the same views on community involvement? Parents and children have different opinions on many things and an inheritance may  be one of them. When we work with families of wealth, we see four main challenges:

1. Sense of entitlement.

Parents may worry that wealth will undermine their children’s ambition and financial responsibility. They want to ensure that inheritors will be good stewards of the wealth.  As a result, they may want to parse out your inheritance only after you hit certain milestones such as a college graduation or a certain income threshold which demonstrate ambition and values. You, on the other hand, may feel that an inheritance should come with no strings attached.

2. Heirs’ differing needs.

Parents generally hope to treat their children equally or fairly.  However, within each family there are bound to be differing capabilities and needs. It can lead parents to consider providing for inheritors differently. For example, you might have a sibling with a chronic illness or you may have a sibling earning a smaller salary because they chose to be an artist or teacher or work for a not-for-profit.  These differences may lead your parents to consider providing a bigger inheritance to your sibling to ensure lifetime support and an equal comfort.  Unless you understand the reasoning, you might take offense about your smaller share.

3. Grandchildren.

Your parents might struggle with how to divide their estate equitably if you and your siblings have a different number of children.  Often grandparents seek to treat all grandchildren equally, but this could mean one sibling’s family receives a larger share if they have more children.  Again, it is important to understand the philosophy here to avoid strife.

4. Lump sum or extended distribution.

Parents may worry about leaving lump sum payments if their children haven’t achieved a certain level of maturity.  They can also be concerned about protecting inheritance from creditors or ex-spouses.  For this reason parents often consider trusts to protect your inheritance for your benefit.

The key to tackling these challenges is open communication, giving parents an opportunity to explain their intentions and allowing you to understand your parent’s intentions as well as to have the time to learn the skills you need to become a responsible and prepared inheritor.

Tell me a story – the tale of the family values, vision and mission

Everyone loves to talk about themselves, especially people who’ve lived exciting lives and built successful businesses and careers. While your parents may be reticent to open up about their estate plan, how much they have and how much they intend to leave you, chances are they will relish the chance to tell their story.

Storytelling sessions aren’t about dollars and cents—that part comes later. Instead, it’s a chance to learn about your family’s unique journey so that you can appreciate the values, vision and mission that led to the creation of the wealth as well as where you fit in.

Remember that each generation and each person has a preferred communication style. To glean as much as possible from your parents’ storytelling, make sure you’re communicating in their preferred style. Skip the Tweets if your parents place a premium on face-to-face communication. On the other hand, your parents might prefer to write you a letter or a short memoir detailing their life.

Also recall that different personality types have a preferred approach.  For example, some family members may be very detail oriented whereas others may be more about the big picture and punchline.  Taking into consideration personality preferences can also help to facilitate the best open communication.

As you talk, keep these things in mind:

  • Be empathetic and respectful.
  • Inquire about how your parents created their wealth.
  • Ask about the challenges they encountered and how they overcame them.
  • Find out about what they consider to be their greatest accomplishment (the answer may surprise you).
  • Ask if they have any regrets.
  • Listen more than you talk.
  • Consider what is similar to your values, vision and mission and how they differ to best bridge what you have in common.

The key to engaging in family storytelling is that within the family story, are the values and strategy that was deployed to garner the family wealth.

The family blueprint

Once you understand the family story, you can move to the next phase. Work with your parents to help them more clearly articulate and document their vision, mission and values for the family, if not already done, as part of outlining the overall  family blueprint.

A family blueprint can include a family tree, mission statement (family goals and objectives), family entity diagram, family balance sheet, income tax projections, cash flow projections and   an outline of the estate disposition. It can be a guiding document for not only the values your family holds dear—but also how the assets, cash flow and estate disposition serve that purpose.  It can also help you to see your roles and responsibilities within this family construct.

For example, if running a successful business is central to your family’s values, the family blueprint helps to lay out the roles that family members can play.

Likewise, if one of your parents’ value towards philanthropy is education funding, the family blueprint can help to instill the sense of generosity and gratitude in younger family members and counter the sense of entitlement your parents may worry about. The family blueprint can articulate what form that philanthropic intent will take. It allows the younger generation to learn about money management and due diligence in a supportive environment, under the watchful eye of a matriarch or patriarch.

A family blue print is an evolving document reflecting market conditions, changing family dynamics, life events and philanthropic focus. It will be revised time and again as things change but can be not only a benchmark for the family to be strategic in moving toward family goals and objectives, but also a means to educate family members regarding the wealth enterprise.

The business at hand: the family meeting

With an understanding of your family’s story, you are ready to delve deeper into conversations about wealth transfer. Use the structure of a family meeting to provide the space for that to occur. Family meetings can be an opportunity for information gathering and working together to resolve potential problems.

Some families have well established, open lines of communication. Their family meetings can be as simple as a hike in the woods or a Sunday brunch—pretty much any time they gather together. Other families prefer a more formal approach. They might want to set aside several times throughout the year to discuss family business.

Regardless of how your family conducts its meetings, make sure there’s an agenda so nothing falls through the cracks and assign action items for each member to tackle before the next meeting. If your family is finding it difficult to get started, consider using a neutral third party to facilitate a family meeting.

As your family moves forward with the wealth transfer process, your parents can start assigning roles to different members based on their interests and skillsets. In general, there are four roles within a family’s wealth transfer that can be filled by members of the next generation: beneficiary, trustee, steward and shareholder.  Oftentimes, family members play one or more of these roles and should understand the different hats they might wear in playing each of these roles.

Final thoughts

In a perfect world, parents would have a well-thought out plan for wealth transfer, explain their intentions and help their heirs learn their roles and responsibilities. But life doesn’t always unfold in an orderly way or provide such a roadmap. Sometimes, inheritors may need to step in to play a more active role so they can empower themselves to be educated, responsible and prepared.