Smart Business spoke with Donahue about the concept of a wealth management plan and how business owners can create a plan, use it to effectively pass on their assets while alive to minimize the tax burden and, more importantly, to make wishes known and carried on by the next generation.
Could you explain the differences between a will and a wealth management plan?
Most people have a will, which is simply about the distribution of property and assets upon the death of a person. But a wealth management plan is much more comprehensive.
Each wealth management plan is unique: it can include a succession plan for the business, a gifting strategy for children, a plan for favorite charities to continue receiving funds after an individual has died, and a system of equalizing the proceeds of the estate among the various heirs.
Could you explain the difference between equal and equalizing the assets of an estate?
In a family with three children, an equal distribution is taking all the assets — liquid or otherwise — and dividing their ownership in thirds.
Equalizing, on the other hand, takes the assets and makes value judgments. ‘Who would better enjoy the vacation house?’ or ‘Which of my children is best suited for taking over the business?’ or ‘Who will be the beneficiary of my life insurance policy?’ The actual dollar amount of the distribution is equal, but it is divided in ways that best suit each heir. This can be one of the best benefits of creating a wealth management plan.
What are the consequences of not having a wealth management plan in place?
The biggest consequence that comes to mind for most people is the tax implication. But, more serious, is that the person’s wishes for how the wealth will be divided and enjoyed among the heirs will never be met.
Without a plan, you are, in essence, leaving someone else to make decisions on your behalf.
If this is okay with you, then a will is fine. But if you have specific wishes you want met, then you must have a wealth management plan in order to make sure that what you want to happen will actually take place.
What is the first step to setting up a wealth management plan?
Create and consult with a team of your trusted advisers: your attorney, accountant and other consultants. It is important that these people understand your business, the various wealth planning techniques availabl, and the tax consequences of each technique. This will also be the time to start setting up the gradual gifting of wealth to the next generation.
What are some things that should be included in a wealth management plan?
An attorney or an accountant can best look down these avenues, but they can include succession plans, provisions for medical decisions, who will control the finances in the event that the owner becomes incapacitated, and the gradual transfer of wealth to heirs by creating trusts.
I’d like to point out that transferring wealth does not necessarily mean transferring control. For example, owners can transfer nonvoting stock rather than voting stock. There will be a point, of course, when a business owner wants to start transferring control, but this can be gradual over the course of many years.
The succession plan is a major part of the wealth management plan, and these issues are best discussed while the owner is alive.
How often does the plan need to be updated?
You should meet with these advisers on a regular basis — once a year around tax time or even twice a year — to take a look at the plan, see if it is still valid, and to re-examine goals. The best plans are ones that can be amended in response to the changes in one’s life.
MICHAEL DONAHUE is the tax director at Kreischer Miller, (www.kmco.com), an accounting and consulting firm based in Horsham, P.A. Reach Donahue at mailto:firstname.lastname@example.org or (215) 441-4600, ext. 148.