Planning for a Liquidity Event
By: Kristin McCamish Bell, CFA, CFP®
In this ongoing series, we are profiling some Simon Quick clients to reveal some of the financial and estate planning challenges faced by wealthy families and how we have been able to help them meet these challenges.
All names and identifying details have been changed, but otherwise, the case studies reflect real-life families and situations.
Meet the Matthews Family
James and Holly Matthews are both in their late 40s and have three teenaged children. They live in Atlanta, Georgia where James owns shares in three different businesses in the food and beverage industry.
In the spring, James started talking to Simon Quick about the upcoming partial sale of one of his businesses, which would result in a windfall of $19 million. At the time he had a relationship with a brokerage firm, but he wasn’t receiving financial planning advice from his advisor there, nor was the advisor offering a holistic investment strategy that considered all aspects of his family’s financial situation. In subsequent conversations, we gathered more information about James and Holly’s overall financial picture. We uncovered several tax and estate planning opportunities for the Matthews family.
Fiduciary Responsibility and Alignment of Interests with Client
James liked the fact that Simon Quick invests alongside its clients so there’s an alignment of interests. Our Partners and Principals at the firm invest in the same investments as their clients. James also realized the importance of the fiduciary relationship - the fact that Simon Quick is required by law to puts the interests of its clients ahead of its own (that wasn’t the case with his brokerage firm) and is committed to transparency and doing what is right for the client. For example, it is common practice for brokerage houses to accept fees from third-party managers to allow their funds to be on their platform. Simon Quick does not accept any fees from third-party managers due to the inherent conflict of interest, and if offered a fee, SQ will use that offer as leverage to negotiate lower fund fees on behalf of clients.
Expertise in Liquidity Event Planning
James was also impressed with Simon Quick’s history of working with business owners navigating wealth created by the sale of a business. Rather than diving right into a discussion of asset allocation and potential investments, they took the time to talk through every aspect of his and Holly’s financial lives, many of which had been neglected in the years prior while James had focused almost solely on building his businesses. James had never considered alternative corporate structures that might have saved him and his partners a lot of taxes, but there was still opportunity to do some things post-closing as well as prior to future sales. James and Holly made the decision together to switch to Simon Quick Advisors.
Estate Planning Strategies for High Net Worth Individuals
We quickly got to work on the estate planning opportunities we had identified. Due to the high level of their wealth, they needed to consider advanced estate planning techniques beyond the basics, so we introduced them to an estate planning attorney who had plenty of experience working with very high net worth families like them and could effectively communicate complex concepts through diagrams and plain language. We were involved in all those planning meetings to provide input related to the investment assets when needed, i.e. how much would be needed for retirement, charitable goals, and what assets with high appreciation potential could be given to future generations via trusts, saving millions on future estate taxes for their heirs. We also served as a sounding board to talk through the different options. We worked closely with the attorney and client through the process of updating of all their estate planning documents and then helped with the re-titling of all assets as needed.
One of the advanced planning techniques we used was the formation of spousal lifetime access trusts (SLATs) for both James and Holly. This is an irrevocable trust formed for the benefit of the other spouse, which effectively gets assets outside of your estate during your lifetime, but still gives the couple access to the funds in the trust should they be needed via the beneficiary spouse. When that spouse dies, the assets would pass to the children via dynasty trusts that would keep assets outside the estates of many future generations and also offer creditor protection and protection from a child or grandchild’s future spouse getting assets intended to stay in the family in divorce scenarios.
We funded the SLATs for James and Holly in different tax years with different assets, but the primary assets that we used were the unsold business interests. We worked with a CPA to value those interests and then moved as much as possible into the SLATs to utilize Matthew’s lifetime estate tax exemption.
Tax, Charitable Giving, and Retirement Planning Opportunities
At the same time, we were developing a plan for the cash generated by the current liquidity event by customizing an Investment Policy Statement that outlined an asset allocation/plan for investing the assets that James and Holly were comfortable with. We determined it made sense to allocate part of the cash to a diversified qualified opportunity zone fund (QOF). A QOF is a real estate investment in designated impoverished areas around the US that would benefit from the jobs, affordable housing, and better conditions for living that development would bring. The IRS gives investors in QOFs certain tax advantages. They can roll realized capital gains into a QOF and defer paying tax on them until 2026 and potentially reduce the amount owed by 10%, but the main benefit of the QOF is the fact that if you hold the investment for 10 years, you will not pay any capital gains tax on the appreciation of the fund. James had realized a large capital gain when they sold part of their business that year, so investing in the QOF helped shift some of the capital gain to a potentially lower income year and round out his real estate portfolio.
The Matthews were already charitably inclined, giving regularly to their church and other community organizations. We helped them set up a Donor Advised Fund to facilitate their charitable giving. This allowed them to take a deduction for the amount they were putting into the fund in the current higher-income year, causing them to pay less tax at the highest rates, but also allowed them to invest the money in the fund for future growth and to give to charities of their choice over time. They were excited about involving their children in the process of selecting charities that were meaningful to the family.
We also noticed that the Matthews didn’t have much in the way of funds saved in 401ks or IRAs. We asked James why this was so. He said that the company had established a Traditional 401k plan years ago when they could not afford to contribute on behalf of its employees, so as a highly compensated employee (HCE), he was unable to contribute much due to annual testing which limits HCEs on their contributions based on the average percentage of income deferred by non-HCEs.
We helped him evaluate whether his company was a good candidate for a cash balance plan or a safe harbor 401k plan, which requires the company to contribute 3% of salary to every employee of the firm (this expense is deductible, further reducing the owner’s income), but then also allows owners not to be bound by annual testing limits of non-HCEs and to contribute the maximum amount allowed by the IRS ($61k in 2022 for under 50 years old).
If you’d like to learn more about our financial planning and advisory services and how we can help your family navigate complicated financial matters, please call us at (973) 525-1000 or send an email to email@example.com.
How A Financial Advisor Can Help
Please contact us if you’d like to learn more about our financial planning and wealth management services and how we can help you plan for a liquidity event. Call us at (973) 525-1000 or send an email to firstname.lastname@example.org.
About Kristin McCamish Bell
Ms. Bell joined Simon Quick in 2018, extending the firm’s reach to the Southeast by opening an office in Chattanooga, TN. As Director of the Southeast and Client Advisor, Kristin counsels and advises high net worth individuals and families on wealth management and financial planning to help them achieve their financial goals. She also advises endowments and foundations on developing an investment policy statement, asset allocation, and portfolio implementation. Kristin completed the Chartered Financial Analyst program and received the CFA designation in 2004. She is a member of the CFA Institute, the CFA Society East Tennessee, as well as the Chattanooga Estate Planning Counsel. In November of 2019, Ms. Bell became a Certified Financial Planner. Kristin holds a B.S. in Psychology from Wheaton College, where she was also captain of the Women’s Tennis Team. She has served on a variety of non-profit boards but currently serves on the Board of Directors and Development and Finance Committees of the Children’s Advocacy Center of Hamilton County. Learn more about Kristin on LinkedIn.
This information is for general and educational purposes only. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from Simon Quick Advisors & Co., LLC (“Simon Quick”) nor should this be construed as an offer to sell or the solicitation of an offer to purchase an interest in a security or separate accounts of any type. Asset Allocation and diversifying asset classes may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Investing in Liquid and Illiquid Alternative Investments may not be suitable for all investors and involves a high degree of risk. Many Alternative Investments are highly illiquid, meaning that you may not be able to sell your investment when you wish. Risk of Alternative Investments can vary based on the underlying strategies used.Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Simon Quick), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Simon Quick is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a Simon Quick client, please remember to contact Simon Quick, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Simon Quick Advisors, LLC (Simon Quick) is an SEC registered investment adviser with a principal place of business in Morristown, NJ. Simon Quick may only transact business in states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of our written disclosure brochure discussing our advisory services and fees is available upon request. References to Simon Quick as being "registered" does not imply a certain level of education or expertise.This newsletter and the accompanying discussion include forward-looking statements. All statements that are not historical facts are forward-looking statements, including any statements that relate to future market conditions, results, operations, strategies or other future conditions or developments and any statements regarding objectives, opportunities, positioning or prospects. Forward-looking statements are necessarily based upon speculation, expectations, estimates and assumptions that are inherently unreliable and subject to significant business, economic and competitive uncertainties and contingencies. Forward-looking statements are not a promise or guaranty about future events.Economic, index, and performance information herein has been obtained from various third party sources. While we believe the source to be accurate and reliable, Simon Quick has not independently verified the accuracy of information. In addition, Simon Quick makes no representations or warranties with respect to the accuracy, reliability, or utility of information obtained from third parties.Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices or benchmark index, as comparative indices or benchmark index may be more or less volatile than your account holdings. You cannot invest directly in an index.Indices included in this report are for purposes of comparing your returns to the returns on a broad-based index of securities most comparable to the types of securities held in your account(s). Although your account(s) invest in securities that are generally similar in type to the related indices, the particular issuers, industry segments, geographic regions, and weighting of investments in your account do not necessarily track the index. The indices assume reinvestment of dividends and do not reflect deduction of any fees or expenses.Please note: Indices are frequently updated and the returns on any given day may differ from those presented in this document. Index data and other information contained herein is supplied from various sources and is believed to be accurate but Simon Quick has not independently verified the accuracy of this information.