When discussing wealth management with founders and executives, some of the most common questions we hear are, “what should I be thinking about”, or “what are the hacks”? Here are five questions that you need to be asking yourself, and your advisors, about your personal wealth:
If you have succeeded in building significant wealth, such that you will someday be subject to estate taxes[1] , this section is for you. If you are over the lifetime exemption threshold, any life insurance owned by you, your spouse, your revocable trust, or any other vehicle considered “inside” your estate for tax purposes, will be subject to federal and state estate taxes. For example, if you are from Massachusetts, the blended estate tax rate is approximately 50%[2]. That means if you have a $20M policy of which your estate or your spouse is the owner and beneficiary, approximately $10M of the death benefit will go to the government[3]. Clients often give a bewildered look when we tell them this, so just to reiterate, yes, HALF of the death benefit you have been funding via premiums will go to taxes.
Luckily, there is a fix to avoid this. Irrevocable Life Insurance Trusts (commonly referred to as ILITs) can be set up to be both the owner and the beneficiary of the life insurance policy. Since they are irrevocable trusts, the policy is outside of your estate, thus, not subject to estate taxes. The trust can be funded upfront with a large gift to subsidize future premium payments, or you can make annual exemption gifts[4] to the trust to avoid using any of your lifetime exemption for each beneficiary of the trust. One requirement if you opt to make annual exclusion gifts is that anytime you make a gift to the trust, you will have to send each beneficiary notice of the gift, via a “Crummey Notice”, giving them thirty days to withdraw the funds since the gift needs to have a present interest to qualify for the annual exclusion.
If you are just learning this now, do not fear as you can transfer the existing life insurance policy to an ILIT. The transfer may be subject to a gift if there is cash value, and you do need to survive three years beyond the transfer date to avoid having the policy pulled back into your estate, but this can be accomplished with the help of an estate attorney.
If you have a large estate as defined above, unless substantial gifting and planning has been done, you will likely owe estate taxes at your death. A common scenario we see with entrepreneurs and executives is much of their net worth is tied up in their business, in homes, in other illiquid investments, etc. If there is not sufficient cash and marketable securities[5] , your beneficiaries will likely have to sell some of the illiquid assets to cover the estate taxes, potentially during inopportune market conditions, and likely at a discount if the buyer is savvy enough to understand the urgency of the sale[6].
If this is the case, life insurance owned in an ILIT is often a good solution to mitigate this risk. If you are a married couple, survivorship universal life insurance is usually the right product since the proceeds are paid at the same time the estate taxes come due, which is the later of your deaths.
If you have a large position in a business that has the potential to be sold, you may be able to shield up to $10M dollars of capital gains, or up to 10x your basis if that is larger. This is per tax paying entity, so if you have a family trust that also has a stake in the business and that pays its own taxes (sometimes referred to as a QSBS multiplier trust), both entities will receive this benefit[7].
This is very powerful, and something definitely worth looking into. The requirements for the business to qualify are as follows:
To be successful, you will want to work with your company’s CPAs to make sure documentation exists for the company showing all of this criteria was met before the sale. To learn more about leveraging QSBS and planning for a liquidity event, read our article here.
Entrepreneurs and executives often hold large positions in shares of their companies, and often these shares have very low cost basis. From one lens, this is great since their position has increased substantially. However, to cash out of this position, it often comes with a large tax bill.
If you are charitably inclined, donating long-term, highly appreciated stock (important: it needs to have been held for over one year to get the full market value tax deduction) is a great way to minimize your personal tax bill. An example is best to show the power of this:
Say you have 100,000 shares of stock which you have held for more than one year worth $50 per share ($5M total value), with a per share basis of $1. You want to give back to your alma mater with a $500,000 gift, and are considering writing them a check. You tell your advisor, and they recommend donating $500,000 worth of the stock (or 10,000 shares) you hold instead. By following the advice of your advisor, you have effectively saved $116,620 (or the difference between the “Total Net Cost of Gift” here):
| Donation of Cash | Donation of Stock | |
| Amount of Gift | $500,000 | $500,000 |
| Income Tax Deduction[8] | ($204,000) | ($204,000) |
| Capital Gains Avoided[9] | $0 | ($116,620) |
| Total Net "Cost" of Gift | $296,000 | $179,380 |
If you have an exceptionally high income year and are looking to reduce your income tax bill, but do not have specific charities picked out to receive these funds, you can set up a Donor Advised Fund, or Family Foundation to make the donation to, and make grants at a later date[10].
If you are interested in learning more about using charitable giving strategies to reduce your tax bill, read our article, Charitable Giving Strategies for Entrepreneurs.
When thinking about property and casualty insurance, you are really thinking about risk management, and protecting the assets that you have accumulated. Mostly everyone has subscribed to the theory that you should have homeowners insurance to cover the value of your home if it were to burn down, and you should have auto insurance to cover the value of your car if you were to get in a fender bender. Although protecting these assets are important, once you reach a certain level of wealth, losses on these are unlikely to materially impact your balance sheet.
The largest financial risk we believe high-net-worth individuals face is if you or a family member were found liable in something disastrous and were sued for a large sum of money by one or more parties (i.e., being found at fault in a large auto accident). If your assets are not protected from creditors (i.e., by being in irrevocable trusts, LLCs, limited retirement accounts, etc.), they could be exposed in a lawsuit. Your homeowners and auto insurance policies will have liability insurance included up to a certain amount (e.g., $500,000), but anything over that could be lost in litigation.
Excess liability or “umbrella” insurance is available over and above these limits to protect against these disaster situations. We view this insurance as the best premium dollars spent for high-net-worth individuals, as it is not very expensive[11] , and protects against the worst-case scenario. This should definitely be something every high-net-worth person has in place, but something we often find absent (or too low) for busy entrepreneurs or executives who are focused on growing their business.
While entrepreneurs and executives may have a lot on their plate, it’s essential to make time for personal wealth management and financial planning. Building a portfolio that allows for a comfortable lifestyle in the long-term takes strategic planning and foresight. If you would like to review some of the strategies discussed in this article and identify items that can be applied to your situation, please don’t hesitate to reach out.
[1] Federal estate taxes begin at amounts over $12.06 million per person as of 2022 (the “lifetime exemption amount”). State estate taxes vary as to when they kick in (e.g., Massachusetts currently kicks in after $1M).
[2] The Federal rate is 40%, and the MA estate tax rate is 16%, but you do receive a Federal estate tax deduction for state taxes paid. The math approximates to a blended rate of approximately 50%.
[3] Technically, if your spouse is the owner/beneficiary, estate taxes will not come due until his/her death if you predecease her/him since the marital exemption will protect the funds from estate taxes at your death.
[4] Currently $16k per recipient.
[5] Assets that can be sold in under a week.
[6] Not to mention at a very emotional time having just lost a loved one.
[7] Read about the trade-offs to consider between QSBS multiplier trusts and holding assets in a grantor trust here: https://www.lakestreetadvisors.com/blog/weighing-income-and-estate-tax-savings-with-future-flexibility
[8] Assumes highest Federal income tax rate of 37%, plus 3.8% medicare surtax (40.8% total)
[9] Assumes highest Federal long-term capital gains tax rate of 20%, plus 3.8% medicare surtax (23.8% total). The calculation is the $500,000 donation, less the basis of $10,000, multiplied by the tax rate.
[10] You can read about Donor Advised Funds here:
https://www.lakestreetadvisors.com/blog/charitable-giving-through-a-donor-advised-fund
And Family Foundations here:
https://www.lakestreetadvisors.com/blog/how-do-i-start-a-family-foundation
[11] A $20M policy in MA typically ranges from $5k-$10k pending their risk factors.