If you are in the enviable position of having years of hard work pay off with an upcoming liquidity event, there is a lot to prepare for before the liquidity event itself. At that point, it is more important than ever to have a thoughtful financial plan that will build a solid foundation to meet your long-term financial and personal objectives. Your financial plan should be as unique as your fingerprint, custom to your vision and goals in order to support growth and protect assets to ensure financial success now and into the future.
In anticipation of a forthcoming liquidity event, here are a few actions to consider in liquidity planning:
Concentrated stock positions with significant appreciation potential make excellent wealth transfer candidates, saving gift and estate taxes. Additionally, with advance planning, it is possible to eliminate state income tax on a future sale of concentrated stock.
Before embarking on any strategy, it is important to consider the amount of:
Below is a brief summary of potential strategies to consider. As with most financial planning, the earlier you embark on it, the more effective it usually is.
There are extremely beneficial tax rules related to not recognizing tax on gains from Qualified Small Business Stock (QSBS). If you own QSBS (or think you have stock that might one day be QSBS), it is important to make sure you have the appropriate documentation – the earlier the better!
First, QSBS is defined as follows:
If you have stock that meets QSBS requirements, then you can shield up to $10m (or 10x your basis, whichever is greater) of capital gains from taxes. This $10m of tax-free gains can be multiplied if the stock is owned in more than one taxpaying entity.
Having basic estate documents is important no matter how much money you have. That said, as wealth grows, the financial stakes are higher if something happens to you and you don’t have the appropriate documents in place.
This document appoints a trusted family member, friend, or advisor as your “attorney-in-fact” to handle financial items on your behalf, if needed. This can include signing tax returns, depositing checks, handling banking/credit accounts, etc. The document can be structured as “springing,” which means it would only go into effect if you became incapacitated, or “durable,” which means it is effective immediately. Either way, it is crucial that you trust the person you appoint in this document as they will have full financial authority over your assets.
A Health Care Proxy appoints a trusted family member or friend to make medical decisions on your behalf if you are unable. If it includes a Living Will, it can also indicate your preferences on treatment in various circumstances, but the ultimate decision is left in the agent’s hands.
The Last Will and Testament accomplishes a number of things:
The consequences of not having a will are serious; your resident state’s intestate laws will dictate where your assets go (typically outright to your spouse, else your children, else your parents/siblings).
Your Will eventually becomes a public document once it is submitted to the Probate Court. For privacy, many people create a Revocable Trust and either own assets in that trust during their lives or have their Will direct all their assets to this trust at their death. The Revocable Trust contains the details of who should get what and how, which is something that most people want to keep private. As its name indicates, a Revocable Trust can be changed/revoked at any time during your life. Its terms can be customized to meet your family’s specific needs and circumstances.
Please contact us if you would like to talk more about your unique situation and how we can help you reach your goals.