Michael and Ann’s Story
The Facts:
Michael is 100% owner of the manufacturing entity XYZ, LLC. Michael thinks the value of the business could be in the $10M to $12M range. His daughter is heavily involved in the business as the CCO, but his son wants nothing to do with it. Michael would like to retire in 6 to 8 years but does not have any retirement account savings or significant cash set aside. He believes the business would have to be sold to make retirement a reality. Considering he started the business from scratch, his basis in the business is very low. His wife, Ann, is a CPA for an accounting firm and has set aside money over the years in a 401k account. She also would like to retire at the same time – when both are in the 65 to 67 range.
Both Michael and Ann have big plans once they retire. They would like to travel, buy a condo in the mountains, and have a strong desire to be charitable. They also want to gift to their children, if possible. But they also have concerns regarding the future cost of long-term care and how that might affect their legacy plans.
The Problem:
Michael needs to prepare for the transition of the business in the coming years, but isn’t sure what steps to take, or what his options are to make this reality. There are tax planning and continuity considerations, along with liquidity and budgeting concerns. How does he create the needed resources to retire if he doesn’t sell the business outright? Is there a way to transfer or sell the business to his daughter? And what about his son?
Neither Michael nor Ann knows how much in savings they will need, how they would replace the lost income if either left their jobs, what their budget will look like in retirement, how soon to take Social Security, or how much Medicare will cost once they retire. The questions are swirling and they don’t know where to begin.
The Solution:
Peak Asset Management takes a comprehensive approach when advising business owners. With a retirement goal of 6-8 years, we focus on Michael and Ann prioritizing objectives and building a comprehensive plan designed to give them the strongest possible foundation for retirement.
Regardless of whether Michael wants to pursue an outright sale or an ongoing transition of the business, if he has significant cash flow that can pass through to him personally, Peak advises to start contributing to one of the highly tax-efficient retirement account options that are available for business owners. By contributing consistently to one of these accounts, Michael can begin building liquidity for retirement and may benefit from meaningful tax deductions, subject to applicable contribution limits and eligibility rules. He also would start to diversify his balance sheet, which can be a healthy wealth management strategy to leverage.
Selling the business in a few years might involve the easiest logistical route. Well in advance of the event, a careful analysis of the capital gains tax exposure associated with a sale would be needed, along with a corresponding review of solutions designed to mitigate as much of this tax as possible. Harmonizing this process with strategic charitable planning could result in Michael and Ann achieving multiple goals all at once – the business would sell, cash would be created for retirement requiring a thoughtful re-deployment of liquidity, and a Donor Advised Fund would be established and subsidized in the year of the sale to reduce taxes and provide future years of distributions to charities that both want to support in retirement. Peak models this out and other potential solutions so Michael and Ann understand and assess the results of this multi-faceted plan before implementing it.
Transitioning membership interests of the LLC to his daughter might require a more sophisticated planning approach, but Peak explores all possible paths. Depending on the size of the estimated future estate, discounted transfer valuations due to marketability and minority interest discounts could be in play here. But an in-depth analysis of whether the interests could be gifted or must be sold, how his daughter would pay for the interests if sold (i.e., installment sale, loan options), whether Michael and Ann would have enough for retirement depending on the strategy, or how they might equalize any gifts to their son would all be thoughtfully considered. Splitting and recapitalizing the entity into voting and non-voting shares for his daughter and son might be a possibility, but is this practical considering family dynamics? Are there key employees Michael should consider in his planning as well? The operating agreement would likely need to be revisited, and the LLC possibly restructured, before Michael puts in place any type of succession plan.
Michael and Ann have complex circumstances to consider leading up to a future retirement. Peak will work to understand goals, prioritize initiatives, vet options, and deploy the appropriate strategies both artfully and tactfully.
Our focus is to make sure your objectives are advanced in the context of a comprehensive financial plan. Allow Peak Asset Management to partner with you on your wealth building journey – we will organize and help you manage all the financial details and complexities, so you can focus on what matters most, with clarity and confidence in your financial direction.
DISCLOSURE
The above case study is a hypothetical example provided for illustrative purposes only and does not represent an actual client. Any similarities to real persons or situations are purely coincidental. This example is intended to demonstrate the types of financial planning services Peak Asset management may provide and should not be considered representative of the experience of any specific client or a guarantee of future results.
Investment Advisory Services are being offered through Peak Asset Management, LLC, a Registered Investment Adviser. Any content included in this presentation developed from third party resources is believed to be accurate information. The opinions and recommendations expressed, and financial planning material provided, are for general information purposes, and they should never be considered a solicitation for the purchase or sale of any security. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk.
This financial planning presentation is intended to facilitate a discussion concerning estate, business and financial planning goals, objectives and needs, and to provide you with general information regarding your planning options. Peak Asset Management (Peak) cannot provide legal, accounting or tax advice and any statements made by a partner, officer, advisor, employee or agent of Peak, including any legal and/or tax information, is not intended to be nor should it be interpreted as legal or tax advice, or an opinion. Such services must be provided by your outside attorney and/or CPA or tax professional. Please consult with these outside professionals accordingly.
