It’s Never Too Early to Start a Succession Plan

So here’s a topic that all business owners have thought about but few have taken action on: succession planning. I was reading a study by Wilmington Trust the other day that polled 200 different owners of privately held businesses. Personally, I’ve yet to meet a business owner who doesn’t agree that succession planning is important to their company and stakeholders. Yet in this study, 58% of the businesses polled don’t have a succession plan in place!

Successions impact…everything: your family, your legacy, your finances, your employees, your partners, your customers, your stakeholders, and anyone else who touches your company. My guess is that you want all these pieces intact throughout your transition and after you leave. Yet most business owners don’t tackle the issue until a) it’s high time to exit, or b) they’re forced to for a reason out of their control.

Why? Many people start to realize that the emotions involved are heavy and deep. Your business is probably something that you’ve poured your heart and soul into for a long period of time. You may have taken significant financial risks that have impacted your family along the way. The decision making required in succession planning brings up a lot of emotion, and many business owners prefer to kick the can down the road rather than deal with them.

Problem is, there are many situations out of our control that could force a succession at an inconvenient time. Health problems, car accidents, or even changes in the economy or your industry could easily force your hand. Rather than rush into a transition unprepared (and in a potential fire sale), you’ll reach a far more desirable outcome when your succession is planned for. What happens if you get into an accident and come out with diminished mental capacity? What happens if you have a heart attack & die tomorrow? What’s the game plan? Who will step in, and how will your family, employees, customers, and other stakeholders be taken care of? These are the questions a good succession plan answers. They’re also the questions that must be made while you’re in a calm, stable, and clear state of mind.

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8 Considerations When Protecting Your Business With Life Insurance

I read a stat recently that stated 71% of small businesses depend heavily on a few individual owners and/or employees. This number makes quite a bit of sense, once you consider the limited resources most small businesses have to work with. It also presents a great deal of risk. Losing a key employee, manager, or professional could easily be the death knell for businesses without much bench strength.

To protect themselves, their families, and their businesses from this possibility, many business owners use life insurance. As you probably know, life insurance comes in many shapes, sizes, and forms. Depending on your business and objectives, there is probably a way to minimize the risk of your or your colleagues’ premature death using life insurance.

There is a lot to write about on this topic – in part because there is such a wide variety of life insurance products available. This post will review 8 considerations when protecting your business with life insurance. If you’re dipping your toe into the subject for the first time, this is a good place to start.

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Family Business Succession Planning: 3 Best Practices & A Review of the Statistics

If you’re reading this post, you’re probably familiar with the statistics: the failure rate for second generation family businesses is very, very high. When you consider the fact that family businesses make up about 60% of the gross domestic product in the U.S., it’s easy to see that succession planning is a major issue facing business owners across the country.

Transitioning a family owned business to the next generation is challenging for many different reasons. This post will review the statistics on family business succession planning, cover three common problem areas, and offer best practices for navigating them.

Family Business Succession Planning: The Statistics

To get us started, let’s review the statistics and examine why thoughtful succession planning for family businesses is so important.

First off, only about 30% of family businesses even make it to the second generation. 10-15% make it to the third, and 3-5% make it to the fourth. These numbers sound pretty low, but they’re only counting businesses run by families’ younger generations. Many businesses are sold or merged, which I would argue isn’t a failure at all.

Additionally, according the Conway Center for Family Business, 40.3% of family business owners expect to retire at some point. But of those planning to retire in less than 5 years, less than half have selected a successor.

That alone tells me that many failed successions are probably a result of poor planning. In fact, other research from the Conway Center for Family Business tells us that 70% of family businesses owners would like to pass their business on to the next generation. But only 30% are actually successful in doing so.

Common Succession Problems

Just to give us some context, the landscape of family businesses across the country is as diverse as our economy. Family businesses cover all corners of industry in this country, and range in size from single person sole proprietorships to Wal-Mart. There’s a lot of space in between those extremes.

Because of the large universe of companies, the specific problems impeding successful transitions is diverse as well. Nevertheless, regardless of a company’s size, industry, profitability and other nuances, succession problems are usually tied to two fundamental issues: poor planning and long term family dynamics.

Entitlement & The Fall Back Plan

Through years of effort and grind, successful companies often produce significant wealth for founders and their families. Whereas the founder may have developed his or her work habits out of necessity, their children are often brought up in a more comfortable environment.

This financial success also gives founders’ children far more options, and allows them to pursue whatever path they choose in their careers. As great as this sounds, flexibility allows the children to treat the family business as a fall back plan, rather than an objective that they’ll need to work toward.

The downside here is pretty obvious. Kids comes back to join the business, and are often propelled into management positions sooner than they should be. Not only are they inexperienced and prone to make critical errors, but their career trajectory will undoubtedly alienate other employees.

Insisting on proper training and screening is a good place to start. You can always give your kids an opportunity, but a job with the family business shouldn’t be an entitlement. Family members should go through the same formal vetting process that other employees do. Implementing a minimum education and/or experience requirement, and formalized training process is a good place to start.

Again – you can always give your kids an opportunity, but resist the temptation to thrust them into a leadership position.

Familial Ties vs. Diversity of Experience

In medium and larger businesses, it’s common for immediate family members to follow their parents to certain departments. For example, let’s say a founder’s daughter is interested in finance and spends most of her career as the company’s CFO. If her children park decide to pursue finance because of their mom’s influence, they often have a hard time developing the skills necessary for upper management. Rather than blazing their own trail in an area of interest or gathering experience in multiple areas, younger generations often tend to go with what’s familiar.

The solution here is to try and minimize the amount that family members report up to each other. All employees, family or otherwise, should be held to the same standards and expectations. Business coaches and mentors can be helpful here as well. Any way to offer outside influence, objective feedback, and accountability tends to help, and will prepare the next generation for management responsibility.

Business Size: Supporting the Family

Starting a business can be quite a challenge, and most founders spend a few years struggling to put food on their family’s plate. As the business becomes more financially successful this tends to be less of a problem. Once founders reach the point where they’re comfortable and have met all their financial objectives, many tend to take their foot off the gas, rather than continue to grow the company.

Now consider what happens when the founder’s children enter the picture. If the founder has two kids, and both kids have two of their own, all of a sudden there are a lot more mouths to feed. Whereas the founder was originally responsible for supporting four people (including the kids and his spouse), now the business needs to support 10! To stay in the family long term, the business will need to generate a great deal more revenue. If it can’t, it will need to merge, be sold, or fold.

To avoid this problem, all new employees should have a responsibility for growth. This could be in the form of direct business development or preparing the business for scaling. A good example might be a new family member that comes on board right after college. They may not be experienced enough to interact directly with clients or develop business, but they could be responsible for updating the company’s CRM system to support more efficient growth.

Successful Family Business Succession Planning

It’s no secret that succession planning is a huge challenge for family-owned businesses. Family dynamics, communication, trust issues, preparedness of the younger generations, and different expectations for family members vs other employees can all contribute to problems.

There are far more causes to the low success rates than what we reviewed in this post. The point here is that many of these issues can be solved or eliminated by prudent planning. Experienced attorneys, accountants, financial planners, and bankers can all be valuable resources who can help you reach a desirable outcome. If succession is in the cards for your business, the input of a qualified professional is often worth its weight in gold.

Grantor Retained Annuity Trust: An Easy Way for Business Owners to Reduce Wealth Transfer Taxes

For business owners starting to think about the next generation, the phrases”estate tax” or “transfer tax” almost seem like curse words. The bad news is that when you build an estate of a certain size, the IRS wants to get in your pockets regardless of what, when, or how you transfer your assets to beneficiaries. The good news is that there are plenty of strategies available to help you minimize these taxes. The grantor retained annuity trust is one of them, and will be the topic of today’s post. We’ll cover what they are, why they’re beneficial, and how you might go about using one.

Gift Tax Review

Ok – before we dive into the details, let’s review what taxes typically apply when you gift an asset to someone else.

First off, you’re allowed to give away $14,000 per year, per person tax free. If you’re married, you and your spouse are both allowed $14,000 per person per year, or $28,000 total. So, if you and your spouse want to gift each of your kids $28,000 for their birthday every year, you could do so tax free. (It’d be one heck of a birthday present, too).

You also have a lifetime gift exclusion. This is the amount that you can give away, either while you’re alive or after you die, without incurring any federal estate or gift taxes. Anything that exceeds the $14,000 annual limit (or doesn’t qualify) works against your lifetime exclusion. The lifetime gift exclusion in 2017 is $5.49 million, which inches higher with inflation over time. Here again you can combine your lifetime exclusion with your spouse, for a total of $10.98 million.

So let’s say that one year you and your spouse decide to gift your oldest child $128,000. The first $28,000 would be covered under your annual allowance and excluded from tax. The remaining $100,000 would work against your lifetime exclusion. Neither you nor your child would owe tax on the gift, but you’d have worked your lifetime exclusion from $10.98 million down to $10.88 million. If your future gifts (either while you’re alive or after death) exceed $10.88 million, they’ll be subject to the federal gift/estate tax:

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You’ve Inherited an IRA. Now What?

Inheriting an IRA is quite a bit different than inheriting any other asset. Unlike cash or investments in a traditional investment account, if you inherit an IRA you’ll need to start withdrawing from the account in order to avoid hefty penalties. In this post we’ll cover what your options are when you inherit an IRA, and how you can best manage it for you & your family.

How IRAs are Passed After Death

Whereas many of your assets will be distributed to heirs according to your will, IRAs are instead distributed by contract. Your custodian (the brokerage firm that holds your account, like Vanguard or TD Ameritrade) lets you designate as many beneficiaries and contingent beneficiaries as you like. Once you die, your account bypasses your will, the probate process, and is distributed according to this beneficiary designation.

When account holders don’t designate any beneficiaries things get a little murkier. When the account holder dies, their account is distributed according to their custodian’s default policy. At most custodians this default policy diverts the IRA back to their estate (and goes through probate) but at some it’s diverted to their spouse first. Unfortunately, if the account holder didn’t designate a beneficiary while they were alive, you’re at the mercy of your custodian’s policy.

If the account is indeed diverted back to their estate, it’ll be distributed according to your state’s interpretation of their will. And if they didn’t have one (meaning they died intestate), the state will make its own decision on who should inherit the asset.

The moral of the story? Take advantage of the opportunity to bypass probate, and designate your beneficiaries formally while you’re still alive.

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Adventures in Estate Planning: The Educational Trust Fund

Helping loved ones finance the cost of education is a wonderful & long lasting gift. But when you build this type of gift into your estate planning aspirations, the more traditional vehicles can be limiting in many ways.

529 plans and Coverdell ESAs are two of the most popular options, but the accounts can be rigid and limiting. If your objectives are more unique, say you want to help multiple beneficiaries or include other requirements for access, you’ll need a more customized solution.

Enter the educational trust fund. Educational trust funds give you complete control over how your gift is to be managed and distributed. If your gifting strategy is even marginally complex, an educational trust fund might be your best option.

How They Work

When contributing to the 529 or Coverdell account of a loved one, you’re faced with numerous and rigid restrictions. There are contribution limits, there are limitations on what the funds can be used for, and there are restrictions on portability and who may use the funds. They provide a great way to save for college on a tax advantaged basis, but there’s not much room to customize.

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The Ultimate 7 Step Checklist For Hiring a Financial Advisor

A few years back, I had a friend approach me at a BBQ. He had some questions about how his financial advisor was managing his accounts.

Friend: “Yeah, I just don’t know if this guy is doing the right thing for me. We talk every now and then, he seems like a nice guy, but my portfolio hasn’t really gone anywhere.

Plus, every time we chat he has some brand new investment idea he tries to sell me on. And every single time, he talks up his new idea like it’s the Michael Jordan of portfolio management. (My friend is a big NBA fan). His ideas sound good….I’m just not sure I’m in the right situation. I feel like there’s more going on behind the scenes that I don’t see, but I don’t know what questions to ask.”

Me: “Well how did you find him?”

Friend: “A coworker recommended him. Said the guy made him a ton of money a few years ago.”

Me: “How are you paying him?”

Friend: “Well, I’m not really sure. Everything gets wrapped through the account somehow.”

Me: “OK. Let’s take a step back. Maybe it’d help to identify what you’re looking for in an advisor. If you were starting fresh, what would you like an advisor to help you with?”

Friend: “Hmmm. I guess manage my money and help it grow, make sure I’m on track for retirement, and make sure I don’t run out of money after I stop working.”

Me: “So if you were starting from scratch, what qualities would you look for in an advisor? What criteria would you use?”

Friend: “I really have no idea. I’ve never thought of it that way. Plus there’s about a million financial advisors around here, I get information overload. I guess I’d go with someone I know and like, and seems to have a good reputation. What should I be looking for?”

I had to think about my friend’s question for 10 seconds or so. At the time, I was working at Charles Schwab, but strongly considering starting my own firm.

Me: “I think if I were looking for an advisor, I’d try to find someone who’s competent, trustworthy, unbiased, enjoyable, and looks after for my finances for a fair and transparent price.”

Friend: “Whoa whoa whoa. Slow down with the laundry list. That’s a whole lot of stuff I don’t understand. It sounds GOOD though. I need to tend the grill, but let’s reconvene in a few minutes.”

Coincidentally, this was one of the very reasons I was considering starting my own firm. There are about 300,000 professionals in the U.S. today who call themselves “financial advisors” or “financial planners.” But in my opinion, only a small portion of them have the qualities and service model I’d look for in an advisor.

I’ve had this question come up many times in the years since, and my friend isn’t the only one who’s not sure how to evaluate a potential advisor. And without knowing what questions to ask, how can you be sure you’re finding someone trustworthy and competent?

Because of this, I thought it’d be helpful to build a checklist you can use to evaluate financial advisors & planners. If I were looking to hire someone for help with my finances, these are the exact qualities I’d look for and the exact criteria I’d use. And at the very least, hopefully you’ll be armed with a few good questions to ask.

Click here to download the Ultimate 7 Step Checklist for Hiring a Financial Advisor

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How to Analyze a Variable Annuity

Ever had a variable annuity pitched to you? Maybe you own one. They’re a popular way for many people to mix guaranteed retirement income with the growth potential of equities.

But I’m guessing even if you hold a variable annuity, you’re not 100% sure how it works.

“What are the annual fees again?”

“How does that bonus period work?”

These were a few of the questions a client asked me recently when he was considering a variable annuity.

**Full disclosure – I do not sell variable annuities**

This client just wanted a second opinion. He’d recently met with an advisor who pitched him a variable annuity, and wanted input from an objective source.

My client was in a tough position. He’d just lost his father, and was about to receive a sizable inheritance. He wanted to use this inheritance to produce income throughout retirement, since he was about to turn 60.

He was skeptical about investing in the markets, fearing that another financial crisis would destroy his nest egg. At the same time, he struggled with the idea of buying an annuity. He was attached emotionally to the money since it was coming from his father’s estate, and he didn’t want to fork it over to an insurance company. On top of that, the annuity he was considering was complicated and confusing, and he was feeling a little lost.

After walking through everything together, my client decided to use some of his inheritance to purchase an annuity – but not the one he was being pitched. He opted for a fixed rather than a variable annuity, which he bought with a small portion of the money from his father. He decided to invest the majority of the money in a diversified portfolio geared to produce income.

My client isn’t alone, and I get a lot of questions about variable annuities. Since they have so many moving parts, I wanted to share exactly how I analyze variable annuities using my client’s contract as an example.

There’s a lot of nonsense floating around the internet when it comes to annuities. Hopefully this framework is useful to you if you’re considering buying one.

American Legacy Annuity Analysis

In this video, I’ll analyze the American Legacy variable annuity offered by Lincoln Financial Group, which my client was considering. This specific contract is the American Legacy Shareholder’s Advantage annuity, with the i4LIFE Advantage Guaranteed Income Benefit. I’ll also assume that the Enhanced Guaranteed Minimum Death Benefit (EGMDB) is chosen.

Framework: How a Variable Annuity Works

Before we discuss how to analyze a variable annuity, let’s take a step back and review how they work & where they came from.

Variable annuities have become very popular in the retirement planning industry over the last 25 years. Essentially, they’re a contract between you and an insurance company that guarantee you a series of payments at some point in the future.

There are two phases in a variable annuity: the accumulation phase and the payout phase. What’s unique about a variable annuity is that you invest your contributions during accumulation phase – hence the term “variable.” These investments are known as sub accounts and behave a lot like mutual funds. They are professionally managed and will follow a specific investment strategy described in a prospectus.

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The 3 Most Important Duties of an Executor

Being named the executor of someone’s estate can be an honor, and comes with important duties and obligations. Unfortunately, you might be balancing this honor with the grief of losing a loved one.

The 3 Most Important Duties of an Executor

To start, if you’re nominated to be an executor you’re not required to accept the position. You might feel you need to accept in order to honor the deceased, but you’re by no means required to. If you decline to be an executor, a contingent executor will step in or the probate court will appoint one.

Legally speaking, executors are responsible for protecting the assets of the decedent (the person who died). This job lasts until the decedent’s assets are fully distributed to the appropriate parties.

Being an executor can come with legal liability if done imprudently, so it’s important to understand what you’re getting yourself into. Here are the 3 most important duties of an executor:

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