The sale of a family business — or any event that results in an influx of wealth, often referred to as a liquidity event — is a momentous opportunity. Simultaneously, it can complicate your family’s finances and prompt you to reassess your goals and objectives, hindering preparations for what happens next.
With any anticipated major windfall of cash, the issues you may want to discuss with your advisors well in advance include updating your estate plans, anticipating the potential tax consequences and utilizing insurance products to create or preserve generational wealth. Doing so will put you in a better position to decide on your family’s investment strategy and, more specifically, the allocation of your portfolio among asset classes.
Here are a handful of tips to help you navigate your upcoming milestone.
“When preparing to sell a business, planning on the personal side often gets overlooked,” said Dave Panneton, Executive Vice President of FNB’s Advisory Business Group. “Managing this type of event can be an emotional whirlwind, so planning for the transition early can help balance your concerns about risk with opportunities to enhance the wealth that you’ve created.”
Creating a financial plan well in advance (typically, two to five years) of a liquidity event is important to understand how deal structure (e.g., asset vs. stock purchase, earnout, equity rollover, etc.) will affect your after-tax proceeds and, ultimately, future lifestyle. Beyond lifestyle considerations, your plan should also estimate excess liquidity — the funds available for wealth transfer, charitable giving, etc. Overall, early planning provides you with a range of options to minimize taxes and implement systems to handle your new wealth.
It is also important to establish or update your estate plan before a liquidity event. A carefully considered strategy can help you safeguard your assets and designate how your wealth will be transferred, whether it be to your heirs, taxes, philanthropy or something else. Your estate plan should leverage written documents and other legal entities to minimize the tax burden imposed on your beneficiaries.
The goal of wealth-transfer planning is not only removing the current value from an estate, but also optimizing the federal estate and gift tax on the transferred assets’ future growth. There are multiple strategies to address this estate planning challenge — trusts, gifting, installment sales and even life insurance (see the next section) are all good starting points for consideration. Every owner’s situation is unique, so consulting with a wealth advisor is highly recommended.
Consider this recent example, where an F.N.B. Wealth Management advisor used estate planning techniques to help a married couple maximize their income after selling their business. Prior to the sale, the advisor devised a strategy, as authorized under applicable law, to leverage their lifetime exemptions by gifting discounted business shares to spousal lifetime access trusts for each other’s benefit. The gifts to these irrevocable trusts enabled the clients to forever remove the gifted value from their estates — while maintaining the ability to access the funds, if necessary, as they adjust to their next chapter. The assets will remain in trust for future generations, providing the couple with creditor protection and a continuing family legacy.
While you’re planning for your business exit, it is also a good opportunity to revisit your life insurance policy and options. In addition to providing your family with liquidity when it’s needed the most, life insurance can help with estate planning by affording a tax-free source of income for beneficiaries and offsetting estate taxes. An irrevocable life insurance trust, for example, permits wealth to pass from one generation to the next without being subject to estate and generation-skipping taxes.
Most importantly, life insurance can ensure your family’s wealth is protected and distributed in the manner you wish.
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Find Your Team
Assemble an experienced team of professionals to manage the objectives you set, including an estate attorney, tax advisor and a financial partner such as FNB that employs insurance specialists, private bankers, trust advisors, financial planners and investment advisors. Choose professionals you are comfortable communicating with and who are willing to engage with you. You may have questions and require reassurance while you gain confidence in the strategy your team designs and implements. Need help planning for an upcoming liquidity event? Learn more about the F.N.B. Wealth Management team at fnb-online.com/wealth.
Deciding how and when to leave a business is difficult, so check out this article, “Planning for Succession of a Business Interest,” for more information on the process.
