Being a business owner is full of peaks and valleys.
The journey through the valley has made you who you are today and you wouldn't change it for the world.
After years of doing the hard thing you have built a successful business that has put you in a position where you have gone from building wealth to stewarding wealth.
Wealth management for business owners is complex. In this blog, we will simplify the 5 key areas every business owner should know about.
Wealth Management for Business Owners
You are unique. You need advice that is tailored to you from a perspective that you can trust.
Every good plan starts with a foundation. Here are the 5 foundational elements every business owner should have.
Financial Planning - Building a plan with a clear roadmap to your goals.
Tax Planning - Creating a lifetime tax strategy to avoid leaving the IRS a tip.
Estate Planning - Giving direction for the assets you have and the people you love.
Risk Management - Fortify your wealth to protect you from unknown risks.
Investment Management - Build an investment strategy that complements your appetite for risk.
Financial advisors are known to explain topics with words that are confusing and hard to follow. In this blog, we will educate you with simple and clear terminology you can understand.
Financial Planning for Business Owners
Back in the 90's before the internet was around road tripping was a thoughtful quest. Prior to your travel you would call up AAA and outline the route you wanted to take to your destination. Then they would mail you a map with your route outlined. This was your roadmap to get to the destination.
The problem? You couldn't make adjustments on the fly.
A financial plan is the same. This is not a set it and forget it plan, It is a living breathing document that changes as your needs and goals change.
So how do we build out your plan?
It all starts with determining our final destination. Often we see business owners fail to set a clear path forward.
When you are setting goals we want you to think about them in the same way you build goals for your business. They need to have all the components of traditional SMART goals.
Specific
Measurable
Attainable
Relevant
Time Bound
If your goals don't have these characteristics it will always feel as though you are behind and chasing the next big thing. As a business owner, you are used to moving the goalpost. At times this can be helpful, but when you are building out a financial plan it is not.
Once you have your goals it is time to build out the roadmap. The roadmap is going to have 3 inputs.
Income
Spending
Saving
Our goal when building this roadmap is to forecast what inputs we need to meet your goals. Building a roadmap should give you a clear picture of what you need to do today in order to get the desired outcome in the future. If you can't answer these questions your Trip Tik is off course.
Is what I am saving enough?
Is my spending at a level that I can sustain?
Do I know what I need to do to reach my goals?
Being able to answer these questions will put you in a situation to succeed. So remember financial planning for business owners is a GPS not a Trip Tik.
Tax Planning for Business Owners
Tax planning is a never-ending game of chess. There are always moves to be made both today and in the future. Our goal is that we pay our fair shares as a business owner but never leave the government a tip.
How do we do that?
We focus on two areas for tax planning.
Future Year Tax Benefits - Strategies that help us pay less tax later.
Roth Conversions
Roth IRA Contributions
Portfolio Optimization
Present Year Tax Benefits - Strategies that help us pay less tax now.
401(K) Contributions
Wage Optimization
Tax Loss Harvesting
So how do we know when to use a future-year strategy or a present-year strategy? It is my favorite answer. It depends. In order to determine which strategies to use it is about understanding where we are at today and where we are going in the future.
Let's look at a real-life example that we can see both present and future year benefits pan out.
A common situation we see for business owners is a high income for a sustained period of time with the culmination of a business sale. After the business sale, the income dramatically drops. Let's look at the case study of Joe.
Case Study - Present Year Tax Strategy
Joe is making $1,000,000 in his business and continues to get beat up by taxes. He is trying to determine what he can do to save money on taxes now because he is in the highest tax bracket.
After looking at Joe's tax return it is clear that he is not optimizing his salary to maximize his qualified business income deduction.
Joe is paying himself the following between wages and distributions.
W2 - $100,000
Distributions - $900,000
This will result in a $50,000 deduction for qualified business income. The simplified way to think about this deduction is the lesser of 50% of W2 wages or 20% of distributions.
After reviewing the situation we switch his W2 wages and Distributions to the following.
W2 - $300,000
Distributions - $700,000
This tweak results in a $140,000 deduction for qualified business income which will reduce Joe's taxable income by an additional $90,000.
This alone saved Joe in the ballpark of $30,000 in taxes.
Now let's take a peek at a future year strategy.
Case Study - Future Year Tax Strategy
Let's continue on with Joe. Joe ended up selling his business 1 year ago and his new hobbies don't pay him any income. This results in Joe being in the 15% effective tax bracket.
Joe has always invested in municipal bonds because they are tax-free and he was always in the highest tax bracket. With the dramatic drop in income, we reviewed if this was the best option moving forward.
Current rates for taxable bonds are 6% while municipal bonds are paying 4%.
After performing an after-tax yield calculation it is determined his municipal bonds are paying him a 4.7% taxable yield. This means that for every $1,000,000 Joe had invested in municipal bonds, he was leaving over $10,000 on the table.
The solution is to optimize his portfolio by rebalancing from tax-free bonds to taxable bonds.
There is no one-size-fits-all when it comes to tax planning for business owners. The key is to understand taxes are like a game of chess every move matters both for today and in the future.
Estate Planning for Business Owners
99% of business owners we meet with are confused about what their estate plan says. Although there can be a lot of legalese in estate planning conversations typically we are trying to meet 3 primary goals.
Give direction to your assets in advance.
Give direction for how to take care of yourself and your loved ones.
Save money on taxes.
We can meet each of these goals by implementing an estate plan with these 5 core components.
Trust
Your trust is going to be the most important tool in your toolbox. First, what goes into a trust? Think about this as anything with a physical title. Examples of this are brokerage accounts, business assets, homes, and cars. Assets with a title are meant to go in your trust.
This is important for two primary reasons.
To Avoid the Probate Process
To Give Direction to Assets
First what is the probate process and why do we want to avoid it? Probate is the government's plan to distribute your assets for you. This process has many downsides. Let's just name a few.
It is a public process
Anyone can come make a claim to your assets
A judge gets to decide where assets go
It is costly, 5% of your assets typically
You don't want this plan.
The nice thing is that with a properly set up trust all this can be avoided.
Our second primary reason is to give direction to assets. Unlike a beneficiary on a brokerage account, a trust can always have a backup. After all, you have worked your whole life to have the assets on your balance sheet. Don't you want them to go where you decide?
Health Care Directive
Our goal with estate planning is to leave nothing up to chance. This includes your health care. You have heard that without your health you have nothing. A health care directive is the best tool to allow you to control your path in the health care system.
In your directive, you can state what type of treatment you want as well as treatment you do not want.
Do you want life support - You Decide
Do you want to be resuscitated- You Decide
Do you want to be kept alive at all costs? - You Decide
I imagine you would want to make these choices for yourself.
Outside of this being helpful for you it is also helpful for your loved ones. No one wants to put a spouse, friend, or family member in a position where they have to decide whether or not to pull the plug.
Guardianship
You likely fall into one of these three categories. You have kids, you know someone with kids, or you want kids in the future. In all of these categories, you have witnessed a parent with unconditional love towards their kids.
With this love, we want to ensure that we are taken care of. This is where guardianship for your kids comes into play.
Every estate plan should include guardianship for minor kids. In this guardianship, you can direct specifically who will take care of your kids and how they will be taken care of.
Pour Over Will
The most common arguments that happen when distributing assets of an estate can be avoided with a pour-over will.
A pour-over will can give direction to all of your assets without a title. Here are a few examples.
Mom's wedding ring
Dad's famous paintings
The priceless family heirloom
A pour-over will allows you to assign these assets to individuals to avoid any family disputes during the distribution process.
Financial Power of Attorney
Similar to a health care directive a financial power of attorney allows you to state in advance who gets to make financial decisions for you.
When setting up a financial power of attorney it is important to understand there are two different types.
Springing Power of Attorney - Your authority springs into action when an event occurs.
Durable Power of Attorney - Your authority is effective immediately.
When setting up a power of attorney know which document you are signing as it can have serious implications for you and your family.
So remember estate planning for business owners doesn't need to be confusing. Lock down your legacy today with an estate plan that is tailored to your needs and goals.
Risk Management for Business Owners
Protecting your assets and your family from risks becomes a priority when there is more to lose. As your net worth increases the downside risk increases.
Your risk management plan should cover two basic areas.
Insurable Risks
Uninsurable Risks
An insurable risk is going to be one that we can buy insurance to protect against. These are the two most common insurable risks we see.
Personal Liability Protection
This type of insurance is going to protect you from a lawsuit brought against you. The most common situation we see is when someone is injured while you are driving a car or when a worker is at your home.
We protect against this by having the correct liability coverage on your home, auto, and umbrella. More times than not we see business owners underinsured in this area.
A good rule of thumb is to have your net worth covered in total liability protection.
Life Insurance Protection
Life insurance is there to protect your family if you can no longer provide for them. When we build out life insurance protection for business owners there are two needs we regularly see.
Income replacement for your family.
Buyout of your company shares from a business partner.
Remember life insurance is there to protect your family on your worst day. It is not there to be your highest performing asset.
An uninsurable risk is one that a business owner can't use insurance to protect against. Although you can't use insurance to protect these risks they are equally as important. These are the two most common uninsurable risks we see.
Bad Investment in Your Business
Investing in your business has gotten you to this point, but when is enough enough. One of the most common risks we see for business owners is investing too much money into an ineffective deal.
This could include a new verticle in your business or even going all in on your current profit center. Exposing yourself in your business can happen, but with proper guidance, you can avoid this situation.
Poor Debt Management
Leverage can be the catalyst you need to take your business to the next level. Many business owners have used leverage to their advantage.
Debt can be like playing with fire. One wrong move and you have set your business on fire. When you are playing with fire you need to know why you have the debt and what your plan is to get rid of it. Don't get caught in debt payments and let it ruin your business.
Risks are everywhere in life. A risk management plan for business owners should be unique. Tailor your risk management plan to your needs.
Investment Management for Business Owners
You built wealth by concentrating. At some point in time, your largest asset was your business. That could be today or it was at some point in the past.. Concentration is the best way to build wealth and it is also the fastest way to lose wealth.
Our job isn't to try and hit another home run. You have already done that. Our job is to diversify and keep you rich.
We simply investment portfolios into 3 fundamental buckets.
The War Chest – The bucket that we have for peace of mind.
The Growth Strategy – The money you have set aside for long-term investments.
The Aspirational Strategy – The money you have allocated for higher-risk strategic investments.
Let's look at what goes into each one of these buckets.
The War Chest
The war chest is our safest money. These are the assets we need to protect. The way we do this is by investing in assets we know will be there for us in the short and long term.
Money Markets
Municipal Bonds
Corporate Bonds
Government Bonds
We can determine the amount that needs to go into the war chest by referencing our financial plan for business owners.
The Growth Strategy
The growth strategy is what is going to keep you wealthy. As much as we would love to lock everything in the way chest that would not be a sustainable way to compound wealth. The assets in our growth strategy are going to be long term investments that we will focus on growth. Typically these investments include:
Diversified Public Equities
Public Real Estate Investments
Public Alternative Investments
These investments will have significantly more volatility than the war chest but they will also have significant growth opportunities. The amount in this bucket will be determined by your financial plan along with your risk tolerance.
The Aspirational Strategy
This is our legacy bucket. These assets will be the most aggressive investments and are assets that we don't need to meet our financial planning goals. Often these assets will be illiquid and have a risk of losing some or all of your principal investments. The types of investments we see in the aspirational strategy are the following.
Private Equity Investments
Venture Capital Investments
Private Real Estate Deals
Buying a Small Business
These are the sexy investments that everyone wants to be a part of, and the reality is they have the highest chance of outsized rates of return. Like anything in life, there is no reward without risk. It is our job to help you navigate these waters and ensure you have the proper amount in this bucket based on the risk you want to take and the ability you have to take risks.
So remember investment management is not a one size fits all. When it comes to investment management for business owners you need to take a customized approach to ensure you are effectively allocating money.
If you are a business owner who is looking to find a financial team that specializes in you, schedule a call, and talk with a Moment founder.
Not sure what questions to ask, check out this video on 10 questions you should ask when interviewing a financial advisor.
Get in Touch With An Advisor
Frequently Asked Questions
Here are some answers to questions I received frequently about this topic.
Are you a fiduciary? Moment Private Wealth serves clients as a fiduciary 100% of the time.
How does Moment Private Wealth make money? We are only paid in one transparent way, by our clients. We receive no kickbacks or participate in any profit-sharing arrangements. Our fees are simple, transparent, and clear for our clients.
How are you different than other financial advisors? We are specialists in working with professional athletes and business owners. We limit the number of new clients we take on. This allows us to provide unparalleled value and highly personalized service to professional athletes and business owners. We work as a team to service our clients. We believe in building a team of “A” players. This ensures our clients receive world-class tax, estate, insurance, and investment strategies. We focus on educating first, then executing.
Where do you hold my investments and how can I see them? Moment Private Wealth uses Fidelity Investments as a third-party custodian for our client investment accounts. As a third-party custodian, Fidelity safeguards and provides reporting to you and the IRS each year. Clients can also access all financial information via the Moment Private Wealth Client Portal.
How do you work with other members of my team? We believe in the power of the team. For most of our clients, their team consists of Moment Private Wealth, an accountant, an attorney, a banker, and an insurance specialist. We help our clients build out their team of individuals or work with existing partners clients have. Our goal is to ensure every family has a team of experts to protect their interests.
How do you choose investments for clients? As independent financial advisors, we can gather research and make recommendations based on all available options. We determine clients’ portfolios in partnership with some of the largest asset managers in the world. Each quarter, we have calls with teams of CFAs (Chartered Financial Analysts) to ensure our clients are receiving the most up-to-date strategies and recommendations.
What does your average client look like? Our clients are nearly all athletes and business owners. Our average client has a net worth greater than $5M. The strategies, solutions, and planning that we implement have a high-net-worth andultra-high-net-worth client in mind.
Does Moment Private Wealth help you pay less in taxes? Taxes are going to be your largest lifetime expense. Our goal is to help you pay the least amount possible and never leave the IRS a tip. Our team of specialists understands this and works to reduce your taxes today and in the future.
Can Moment Private Wealth help business owners with succession planning? Yes, this is part of creating a roadmap for your goals. Having first-hand knowledge of selling a business will allow you confidence throughout the process. Many business owners get one chance to sell a business. Having a firm that can help is key.
Why should I consider hiring Moment Private Wealth? Great question! But first, let us explain why you shouldn’t hire us. If you’re looking for an advisor who will pitch shiny object investments or be a “yes man” you are in the wrong place. Why? Because we believe in being truth tellers and only giving advice that we take ourselves. The investments, strategies, and planning we do are all things our advisors do with their own money. If you are an athlete or business owner interested in things like lowering your tax bill, investing smarter, and finding a trusted partner we might be a good fit.
*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.
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