For business owners and entrepreneurs, wealth management and planning is not a project, it is a process.

“It’s something you never complete; it’s ongoing in nature,” says J. Harold Williams, CPA/PFS, CFP, president and CEO, Linscomb & Williams, an affiliate of Cadence Bank.

He says that too many people approach wealth management erroneously, thinking, “I’ll get a financial plan done and check that off my list.” However, financial planning is much like designing a blueprint for a house, building it and maintaining it — a process that never ends.

Smart Business spoke with Williams about how to lay the foundation of your financial future while transitioning out of business ownership.

What actions are important for entrepreneurs before year-end in light of the expiring tax provisions such as the $5 million gift and estate tax exemption?

There is a unique condition in 2012 where you can gift, during your lifetime, tax free, just over $5 million. Business owners generally have some complexity to their estate planning, in that ownership of their business is their predominate asset and it is illiquid, which makes it difficult for estate planning purposes.

This special provision in 2012 allows you to transfer a significant portion of your wealth during your lifetime in a way that the future growth on the amount that you gift is not going to be counted in your estate.

For example, if you have a successful family business worth $20 million and you expect that its value will grow, it is possible to take a partial interest in that business this year, as much as $10 million of the value, and gift it into a trust for your heirs. If you gift half of it in 2012 and the business value doubles, the doubling of value in the half that you gave away would not be counted as part of your estate when you die.

There have been a lot of discussions about what the estate tax rate will be in the future. Right now, the estate tax rate is 35 percent, so if you can move appreciation to the next generation and not have it taxed, the result could be a savings of 50 percent of the amount that is transferred. That is a powerful planning concept.

If business owners are considering selling their business, how do they gauge financial security to be sure the income they had previously been earning is adequately replaced?

It is common for business owners who are about to sell, or have just sold their business and are walking away from an attractive paycheck, to begin wondering how they will replace that paycheck.

Before you sell the business, do some planning to confirm that you can sustain the lifestyle you have enjoyed while relying upon a more traditional portfolio of investments. When the business is liquefied, you pay some tax and need to invest the money.

It is likely not possible to get the same returns on an investment portfolio that you got from the business, so it is important to run the numbers and recruit someone who can help you determine the various contingencies. Doing this before you sell the business will allow you to engineer some things into the structure of the selling contract to enhance your ability to sustain your lifestyle.

Are Family Limited Partnerships (FLP) still being used as an estate planning tool, and what is the IRS’s attitude about this?

They are being used, and most cutting-edge estate planning attorneys recommend them as a viable vehicle. FLPs are not particularly loved by the IRS, but they are effective if done right. The main thing is to stay involved with your FLP; don’t just begin one, make a file and put the file away. The IRS could potentially scrutinize an FLP because it gives you a discount on the business interest connected to the estate or gift tax return. It will look to see if this has substance and form.

It is important to be diligent about keeping your records and following proper procedures when creating an FLP. When FLPs are not generating the estate tax savings that are desired, it’s often because the originator paid for a lot of documents to be created and didn’t live with them and make them part of the ongoing planning.

To do it properly means careful coordination with the lawyer who will draft the documents, the accountant who will advise you on tax law and other tax matters, and the wealth manager or planner who helps design the plan on the front end and maintains it on an ongoing basis.

Considering all the new 401(k) plan disclosure rules being issued on plan fees and expenses, how can a business owner avoid the risk of personal liability and make sure they don’t unintentionally violate these requirements?

For business owners, this is a bit of a minefield. In some cases, you might not realize you’re walking through it until it blows up. Generally, regulators look for a good-faith climate of compliance. The important thing is to document everything appropriately and leave a clear trail that shows you are trying to be in compliance.

The government often has a more favorable attitude if it can see you are trying to comply. It doesn’t want to see neglect, so intent goes a long way. It’s an area where, depending on the size of your 401(k) plan, you may need legal counsel to advise you on those policies and procedures.

J. Harold Williams, CPA/PFS, CFP, is president and CEO, Linscomb & Williams, an affiliate of Cadence Bank. Reach him at (713) 840-1000 or info@linscomb-williams.com.

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Published in Houston