Navigate your financial future with an eye towards wealth preservation, business and asset protection, and legacy enhancement.
In brief
- Preserving personal wealth requires legal planning, adequate insurance and creditor protections.
- To safeguard a business, consider buy-sell agreements, key person insurance and proper entity classification.
- Growing personal wealth involves the use of qualified retirement plans, estate planning and philanthropy.
Regardless of your stage in life, growing and preserving your wealth should be an ongoing priority. These 10 tips can help lay the course for your financial future.
Preserving personal wealth
Wealth preservation is a strategy designed to grow your assets while providing a legacy for your family. There are a variety of investment plans that are all aimed at securing your wealth for the long term.
1. Get your legal house in order.
Bad things happen to good people every day, so it’s important to draft a will in the event of your death. You should also have a living will, or advance medical directive, to make sure that your wishes are honored regarding the medical treatment you want or don’t want if you’re incapacitated. You will need a durable power of attorney for health care so that a designated person can make decisions in circ*mstances that aren’t covered by an advance directive.
2. Insure, insure, insure. Make sure you are adequately insured.
- Consider life insurance for income replacement and goal funding, such as a college education for young children, to take care of your family. You can mix term insurance and permanent insurance for a lower overall cost.
- Disability insurance is another must — over the course of a career, a person is more likely to have a long-term disability than die.
- Liability umbrella insurance offers additional liability coverage to protect assets, wages and investments from damages that go beyond what other policies cover.
3. Monitor your accounts.
Bad actors abound, and data breaches are becoming more common. To keep them at bay and protect your identity, monitor your credit score and conduct an annual credit check.
4. Establish creditor protections.
Protecting assets from creditors is often done via trust. State laws vary, so legal advice is recommended.
Business model thinkers consider the art of the possible, They understand the role of technology in their company’s business and industry, as well as adjacent industries, to provide broader context around the impact of technology on business and revenue growth.
Protecting the business
A successful business is an important asset that can provide for you and your family. It’s important to safeguard its operations.
5. Business succession planning.
It’s not unheard of for a business owner’s heirs to be uninterested in running the company — or simply unsuited for it. Business owning families may consider a buy-sell arrangement specifying how co-owners or co-shareholders can purchase your shares when you retire or die. Arrangements can come in many forms and may contemplate a cross-purchase, redemptionsand/or can be supported by life insurance.
6. Opt for key person insurance.
Another reason for life insurance is to reduce the possibility that the business fails following the death of a person key to company operations.
7. Weigh entity classification.
Choosing an appropriate entity structure can make the business more valuable and flexible.
- When forming a business, consider how third-party investors, employees or a founder’s trust can be owners, even when such things may not occur for three to five years into the future. It will be less costly to do it up front versus a complicated reorganization of a going concern.
- Consider owning business real estate outside of the operating business so that the business can be sold while the real estate is retained and leased to the buyer for an income stream.
Growing personal wealth and legacy
As a financial goal, growing your wealth is likely the most important. Wealth growth involves gaining returns on your investments and increasing your wealth through capital appreciation.
8. Take advantage of qualified plans.
Roth IRAs and traditional IRAs allow you to grow wealth tax free and tax deferred, respectively.
- While many startup founders may not have the earnings to invest in these plans, be careful about solicitations to put ownership of your business in a qualified plan.
- Begin diversification of wealth outside of the business in non-correlated assets.
9. Conduct estate planning.
- When the business is small, shift equity into long-term trusts so wealth can accumulate outside of the estate and gift tax net.
- Use annual exclusion gifting to move wealth down generations.
- Saving for the next generation’s college education can grow free from federal income tax in a 529 plan, which also allows tax-free withdrawals for qualified expenses.
10. Plan for philanthropic giving.
Gifting of business interests to charity is a common tactic before a liquidity event, reducing or even eliminating capital gains tax. However, the donations need to be completed before a deal with a prospective buyer is signed.
- The philanthropic options will be directly impacted by the choice of business entity.
How EY can help
Private Tax Services
The tax issues affecting private companies and their owners are unique and call for an advisor who can address the business tax issues, as well as the personal tax issues. We can help family business owners stay up to date on the current tax regulations, understand your tax provision and comply with laws using the thoughtful combination of technology and business advice.
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Jessica Perna, a tax partner with Ernst & Young LLP, contributed to this article. Ernst & Young LLP (US) does not practice law or offer legal advice.
I bring a wealth of expertise and firsthand knowledge in the realm of financial planning, wealth preservation, and business protection. Over the years, I've navigated through various financial landscapes, honing my understanding of the intricacies involved in securing personal and business assets for the long term. My depth of knowledge extends to legal planning, insurance strategies, and entity structuring to safeguard wealth, businesses, and legacies.
Let's delve into the concepts covered in the provided article:
1. Wealth Preservation: a. Legal House: Drafting a will, living will, and durable power of attorney for health care are crucial components. This ensures that your wishes are honored and your assets are distributed as intended.
b. Insurance: Adequate insurance, including life, disability, and liability umbrella insurance, is emphasized. A mix of term and permanent life insurance is suggested for cost-effective coverage.
c. Account Monitoring: Regularly monitoring accounts and credit scores helps protect against bad actors and data breaches, preserving personal identity and financial security.
d. Creditor Protections: Asset protection from creditors is recommended, often achieved through trust structures. However, the specific approach may vary based on state laws, necessitating legal advice.
2. Business Protection: a. Succession Planning: Business owners are advised to plan for the possibility that heirs may not be interested or suitable for running the company. Buy-sell agreements, supported by life insurance, can facilitate a smooth transition.
b. Key Person Insurance: Life insurance is also recommended to mitigate the impact of a key person's death on business operations.
c. Entity Classification: Choosing the right entity structure enhances the business's value and flexibility. Consideration of third-party investors, employees, and founder's trusts as potential owners is crucial from the outset.
3. Growing Personal Wealth and Legacy Enhancement: a. Qualified Plans: Utilizing Roth IRAs and traditional IRAs for tax-free and tax-deferred wealth growth is highlighted. Diversification into non-correlated assets outside the business is recommended.
b. Estate Planning: Shifting equity into long-term trusts during the early stages of the business helps accumulate wealth outside the estate and gift tax net. Annual exclusion gifting and utilizing tax-advantaged accounts like 529 plans contribute to legacy planning.
c. Philanthropic Giving: Donating business interests to charity before a liquidity event can reduce or eliminate capital gains tax. The choice of business entity directly impacts philanthropic options.
In conclusion, a holistic approach to financial planning involves meticulous legal preparations, strategic insurance coverage, and thoughtful business structuring to ensure wealth preservation, business protection, and legacy enhancement. These tips serve as a comprehensive guide for individuals at any stage of life, emphasizing the importance of ongoing prioritization of financial well-being.
