As discussed in Part 1 of this post, many successful entrepreneurs are too busy to realize their estate plans have lapsed and that they have outgrown their current advisors. We also reviewed qualified small business stock (QSBS) and business valuation freezes, which can help entrepreneurs protect and transfer assets to heirs on a tax-advantaged basis.
Here we will discuss Private Placement Life Insurance (PPLI), Defined Benefit Plans and other strategies that successful business owners can use to protect the wealth that they’ve worked so hard to build both pre- and post-exit.
Private Placement Life Insurance (not just for the ultra-wealthy)
Two wealth protection strategies that family offices may use for the super wealthy are Private Placement Life Insurance (PPLI) and Defined Benefit Plans. Let’s start with PPLI.
For example, suppose you just sold your business and have $1 million that you want to invest for the long run. You can invest in a traditional diversified investment account in which a 7 percent, pre-tax, annualized return is not unreasonable to expect. Or you can invest that $1 million in a PPLI wrapper. The PPLI creates the ability to accumulate wealth on a tax-deferred basis and ultimately can be a tax mitigation tactic. By avoiding the need to pay income tax on dividends, interest and capital gains on your PPLI policy, over time you may be in a position to achieve exponential growth (see chart below).
Source: Zurich PPIVUL Zurich American Life Insurance Company
PPLI is a strategy that would not be appropriate for all of your assets. Instead, it should complement your core long-term investment plan. Costs and fees should be closely examined prior to going forward with this strategy.
Defined benefit plans
Another strategy often overlooked by successful business owners ( > $20MM in personal wealth) and financial advisors is a defined benefit plan.
If your company is fairly profitable, a defined benefit plan (DBP) can be a great solution for mitigating your company tax burden, for saving much larger sums of money toward your retirement and for providing increased benefits to your employees. This may lead to increases in w orker satisfaction and a lowering of staff turnover. Are financial advisors knowledgeable about DBPs? Yes, most are, but notice that only 8.8 percent have actually implemented a DBP for even a single client. I believe that this is a missed opportunity.
The goal of a DBP is to maximize contributions in amounts far greater than you could make with a traditional 401(k). This approach favors business owners while also providing benefits to employees.
Entrepreneurs are among the most interesting clients I have the pleasure of serving. They are smart, extremely hard-working and recognize the importance of delegating responsibilities so they can focus on growing their businesses. With over 467,000 financial advisors to choose from in the U.S., selecting the right advisor is crucial and you need to do your due diligence. In future posts I will discuss the risks that you are currently exposed to (some you may not be aware of) and how to spot pretenders, predators and other advisors who will never be the right fit for you.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Gold Family Wealth, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Gold Family Wealth, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Gold Family Wealth, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Gold Family Wealth, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request. If you are a Gold Family Wealth, LLC client, please remember to contact Gold Family Wealth, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services.
Stress Testing: Are you 100 percent sure everything in your financial and wealth plans will deliver as promised?