Few of us are as fortunate as insiders like venture capitalist John Doerr, who in this month alone has sold Google shares worth about $30 million. The reality is you don’t need to be a Google director to be financially secure.
Whether you’re an entrepreneur who will some day exit your business or a senior executive who plans to retire comfortably, you do need to maximize the probability of success with sound wealth management.
Sound wealth management for those with a net worth above $5 million does not only encompass investment planning but includes a stress tested financial analysis, estate planning beyond a living trust, and tax strategies that go beyond just minimizing capital gains and income taxes.
Here are some situations we’ve come across that highlight the need for sound wealth management.
The $100 million question: We were introduced to the owner of a growing Bay Area business who expected to sell his company for close to $100 million. For several months, we encouraged the seller to make some decisions about the structure of the sale, but to no avail. Getting a mound of cash from the transaction was, in our opinion, going to be one of the easy parts of his exiting strategy.
The trick was how to keep the tax man’s sticky fingers out of that pile. If the business sale were structured properly ahead of time we knew he could potentially save millions of dollars in taxes.
For example, part of his existing strategy could be to establish a charitable remainder trust to potentially avoid any capital gains taxes going to Uncle Sam. The owner wanted to discuss these strategies later, but this is something that needs to be executed before a letter of intent has been signed. That’s just the sort of strategic decision with huge tax implications that can affect your wealth.
High-probability wealth plans vs. traditional techniques: Two months ago, a well-to-do referral came into our office with an extravagant investment plan prepared by his bank. At the heart of the plan was a cash flow worksheet. The banker had shown how the client’s nest egg could grow 2 percent per year, by assuming an 8 percent investment return each year and assuming that the client took out 6 percent each year.
He asked us to prepare an alternative cash flow worksheet to see which plan would give him the most income and leave more money to the heirs.
Well, we had to break the bad news: there’s a flaw with cash flow analysis. Chances are none of us are going to experience an 8 percent investment return year in and year out. We explained that the correct analysis would be to go back to 1925, and stress test his financial goals by running them through 1,000 different real lifetime scenarios to determine the probability of success.
A plan that does not achieve the goals in at least 750 different lifetimes, or 75 percent of the time, is not acceptable and may lead to financial ruin.Luckily for this individual, we were able to draft and implement a plan with a high probability of success. A cash flow worksheet may look pretty, but odds are it won’t get you where you want to go.
Securing your financial independence: An accounting firm we know asked us to help out a business owner who had been in business more than 20 years and wanted to work for a few more years before retiring. Unexpectedly, someone had offered to buy his business.
The first question for the owner became, “How much is my company worth?” He contacted three M&A firms and determined what the business could be sold for.
When he came to us, he was excited about the prospect of exiting his business but was unsettled as to whether or not it was the right time to leave his business and if this would secure his financial independence. He was asking the right questions so we focused the discussion around his desire to maintain his current standard of living. We discussed his goals — plans for traveling with his wife, helping with his grandchildren’s college education and donating to charities. After stress testing his financial situation, we determined that he needed to net about $5 million after taxes to have a betterthan- 75-percent probability of achieving all that was important to him.
If his exit strategy raised less cash, his chances of achieving his goals would decline. So, from this new vantage point, he could focus on the real issue: maybe it wasn’t the right time to sell the business.
Wealth management is strategic, long-term planning, not a bunch of tactical portfolio allocations with your money from quarter to quarter or year to year. Asking the right questions, combined with rigorous planning and discipline are needed to help ensure success in managing and preserving your wealth.
Christopher G. Snyder and Haitham “Hutch” E. Ashoo are principals of Pillar Financial Services in Walnut Creek. Contact them at 925-356-6780.