Last month, we discussed how owners
can devise cash-flow planning strategies
to fund their lifestyles and long-term goals after their business is sold. The next
step is planning how to transition the rest of
the estate to other entities, whether they are
future generations, charitable organizations
or a family foundation. But, estate planning
includes more than mitigating taxes or deciding how to distribute wealth.
“Whether owners plan for it or not, the
emotional and social aspects of their capital
are part of the estate they pass on to future
generations,” says Joel J. Guth, an advisor in
the Citi Family Office at Smith Barney, a division of Citi Global Markets. “It’s important to
define a strategy so all categories of capital
work together.”
Here, Guth discusses how owners can
leverage discounted gifting mechanisms to
help preserve the financial aspect of the
estate and why owners should seriously consider the values and social impact future generations will carry on.
What are the main goals of estate planning?
There are three pots of capital owners pass
on to future generations. First is physical capital, which is the financial piece: How can
owners preserve their wealth and mitigate
exorbitant estate taxes by leveraging discounted gifting techniques before they sell
their businesses? The second is emotional
capital: How will they structure their estate in
a way to perpetuate their goals, values and
vision for the family? Third is social capital:
How do founders want future generations to
impact the community?
When should owners begin estate planning?
Estate planning should begin at least three
to five years before owners sell the business,
but the sooner the better. The current tax
rates are punitive toward estates. The marginal estate tax bracket, including state and
federal taxes, might be as high as 50 percent.
Owners who spend a lifetime accumulating
their wealth want to retain as much of it as
possible to pass to future generations. This
can only be done by planning well in advance
because prior to selling the company, there are several discounted gifting techniques that
owners can leverage that may allow them to
pass as much as 65 cents on the dollar to
future generations — if the stock is privately
held. If done correctly, the owner can use various trust strategies to pass private stock
down to future generations at a discounted
value compared to the real market value.
Why are the emotional and social pieces of
estate planning so important?
Most owners start estate planning by asking the question: How can I mitigate or
reduce tax costs? But there are times when
they could reduce tax costs at the expense of
what they really want to instill in their children. In an industry survey, wealthy families
said it was much more important to pass
their values to future generations than their
money. But typically, owners spend a lot of
time talking about how to pass on money and
very little time discussing how they will instill
the family values.
How should an owner start family conversations about the estate and future plans?
We are taught at a young age not to talk
about money. But when owners are wealthy,
the family recognizes that they are living a different, more privileged life. So it’s important
to have open dialogues that many families do
not have concerning money and values. Do
the children understand the family’s net
worth? Do they understand the parents’
intentions for the money? If the owners of the
estate plan to leave half of their money to
charity, how will the children feel about that?
Will the owners choose to support one child
who has an entrepreneurial spirit, and will
the other children feel like they still were
treated fairly? These are all issues to consider as owners plan all three aspects of their
estate so they can preserve their wealth and
values for generations to come.
Citigroup Inc., its affiliates, and its employees are not in the business of providing tax or
legal advice. These materials and any tax-related statements are not intended or written
to be used, and can’t be used or relied upon, by
any such taxpayer for the purpose of avoiding
tax penalties. Tax-related statements, if any,
may have been written in connection with the
“promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law.
Any such taxpayer should seek advice based
on the taxpayer’s particular circumstances
from an independent tax advisor.
Citi Family Office is a business of
Citigroup Inc., and it provides clients with
access to a broad array of bank and nonbank
products and services through various subsidiaries of Citigroup, Inc.
Citi Family Office is not registered as a broker-dealer or as an investment advisor.
Brokerage services and/or investment advice
are available to Citi Family Office clients
through Citigroup Global Markets Inc., member SIPC. All references to Citi Family Office
Financial Professionals refer to employees of
Citibank, N.A. or Citigroup Global Markets
Inc. Some of these employees are registered
representatives of Smith Barney, a division
of Citigroup Global Markets Inc., that have
qualified to service Citi Family Office clients.
Citigroup Global Markets Inc. and
Citibank, N.A. are affiliated companies
under the common control of Citigroup Inc.
JOEL J. GUTH is an advisor in the Citi Family Office at Smith
Barney, a division of Citigroup Global Markets. Reach him at
[email protected] or (614) 460-2633.
