Transcript Exit Planning - Applied Economics

Steve Hopkins
Doug Sippel
Securities offered through Linsco/Private Ledger (LPL), Member FINRA/SIPC
Financial Planning services through Hall Riback Childress & Gore LLC, A Registered Investment Advisor
What is True Wealth?
• What is an asset?
• What is the most important asset you possess?
• True Wealth is made up of:
• Financial Capital
• Human Capital
• Intellectual Capital
What is True Wealth?
• Social Capital
Divide – Defer – Dump!
What does “Keep it in the Family” mean?
• What is your definition of “Family”?
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Blood Relatives
Spouses
Children
Step-Children
What is the Problem?
• Not enough income to support your retirement &
the next generation
• Elder Care Costs
• Appreciation
What is the Problem?
• Property taken out of Production
• Losing the ranch?
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Taxes
Death, Divorce or second marriage
Lawsuit
Poor management
• Losing the Legacy?
• Breakup of the family?
• Family stops talking to each other?
What is the Problem?
• Shirtsleeves-to-Shirtsleeves in three
generations
– 70% failure rate of wealth transitions*
– Involuntary removal of assets from the
beneficiaries control
• Why?
*Source: The Williams Group
Worksheet
• Take a minute to write your definition of:
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The Problem
Your Goals and Objectives
Your Values
Family to include in planning process
What is the cause?
• Misunderstanding the cause
– hint: It’s not the taxes!
• Professionals asking the wrong questions
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Divide – Defer – Dump - Dissipate
Who should get the wealth?
When should they get the wealth
How much wealth should they get?
*Source: The Williams Group
What is the cause?
• Communications breakdown and lack of trust –
60%*?
• Poor Communications – Heirs don’t understand
the intentions of their parents
– No shared goals
– No shared process
– No shared experience or actions
*Source: “Preparing Heirs” Roy Williams and Vic Preisser
The 8th Habit -- Stephen Covey
• Only 37% said they have a clear understanding of what their
organization is trying to achieve and why
• Only one in five was enthusiastic about their team’s and their
organization's goals
• Only one in five said they had a clear “line of sight” between
their tasks and their team’s and organization’s goals
• Only 15% felt that their organization fully enables them to
execute key goals
• Only 20% fully trusted the organization they work for.
Mackenzie and Emily
What is the cause?
• Lack of trust – What messages are you
sending*?
– Reliability – Do you keep promises?
– Sincerity – Do you have a false front?
– Competence – “Beginners Mind”
*Source: Building Trust, Robert Solomon & Dr. Fernando
Flores
What is the cause?
• Un-prepared Heirs – 25%
– More time spent preparing documents than
preparing heirs for the impact of those
documents
– No mentoring or training to share knowledge
and wisdom
– No skill/talent/interest assessment
– No experience
What is the cause?
• All other causes – 15%
– Failure of Professionals – 3%
• Financial, Tax, and Legal advice
– Lack of a Wealth Philosophy and Mission
Statement
How is the communication in your family?
• Do you have family meetings?
• Have you developed “Rules for Talking”
• Do you encourage individuals to “Live their
Passion”
• Conflicts you can’t resolve?
– Don’t be afraid to bring in a professional to mediate
Why don’t you start?
• Confusion
– What do I do and How ?
• Fear of:
– disrupting family dynamics
– Cost of professionals
– making a mistake
• Procrastination
• The tyranny of the urgent
Why is this so hard?
Ownership
Succession
Planning
Happens
Here
Family
Business
Common Exit Paths for Family Business
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Give the business to one or more children now
Leave it to one or more children after you die
Sell the business to one or more of your children
now
Sell the business to one or more key employees or
partners
Sell the business to an outside 3rd Party
Advantages of transferring to family
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Leave the business to someone you know and
trust
Ability to retain control and remain involved
Continue the legacy
Perpetuate the family banking and business
model
Disadvantages of transferring to family
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Financial Risk
Conflicts over Cash Flow
Business/Management/Family member conflicts
How to treat family members fairly and equally
Fair vs. Equal
• What is the right amount of wealth to leave each
child?
• Look at each child as an individual
• What are their unique abilities and talents?
• How much is enough?
– Your children should “Earn their own”
– Consider a “fund” approach
• When should you transfer?
Fair vs. Equal
• Use Life Insurance to help equalize
• Diversify assets to make it easier to divide
• Separate ownership – lease to siblings
– Land
– Cattle
– Equipment
True Wealth Succession Planning involves
Estate Planning Choices
$10 million
estate
By Default
Charity
By Design
0%
Charity
?%
Government
34%
Government
?%
Heirs
66%
Heirs
?%
Financial Realities: Important questions to ask
• Do we have enough income to support multiple
families?
• Have we created another source of retirement
income besides the ranch?
• What happens if one or both of us need to go into a
nursing home? Do we need Long Term Care
Insurance?
Family Wealth Philosophy
• What is the Purpose of our Wealth?
– Provide a Lifestyle, a home, a job?
– Provide level of comfort to family members?
– Provide educational and occupational
opportunities?
– Grow for future generations?
– Philanthropy?
Important questions to ask
• It’s 10:30 in the morning, the day after your
birthday 5 years from now…
• What are you doing?
• Where are you living?
• What are your children doing?
• Where are they living?
• Are you still involved with the business?
Important questions to ask
• What’s important to you about passing the ranch
to your children?
• What’s important about it to them?
• What is the net worth of the assets on the Human
Balance Sheet?
• How do I want to be remembered?
• How will I be remembered?
What are the solution(s)?
• Have a Process
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Step 1: Determine your Goals & Objectives
Step 2: Do a thorough financial analysis
Step 3: Develop Preliminary plan with your Advisor(s)
Step 4: Schedule a family meeting to share your Goals
& Objectives and seek input from family members
– Step 5: Finalize the plan based on family input
– Step 6: Implement the plan
– Step 7: Continue family meetings as needed
What are the solution(s)?
• Family communication system
– Include the entire family – Spouses and minor
children also
– Parents don’t give up control – seek input
– Shared process - Shared definitions of success
– Communication skills training for building trust
– Consensus leads to clarity of purpose
Resources
What are the solution(s)?
• 5 Primary Estate Planning Strategies
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Maximize Valuation Discounts
Credit Shelter Trust – Preserve the credits
Gifting – Lifetime transfers are less expensive
Use Life Insurance Leverage
Give away the Estate Tax to Charity
• Grow the wealth – reduce the tax
– Family Asset Allocation
What are the solution(s)?
• Other Important Tools
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Pre-nuptial Agreements
Diversify the Balance Sheet
Cash Flow Analysis
Create a Balance sheet of Human and Intellectual
Capital
What are the solution(s)?
• Family Meetings
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Use to communicate with all family members
Hold at least annually
Use a Facilitator
Use to educate all family members
• Financial Planning
• Estate Planning
• Charitable Planning
Why is it important to have a written plan?
• Creates peace of mind
• Eliminates conflicts and emotional decision making
• Decisions based on financial reality
Why is it important to have a written plan?
• Eliminates or reduces the risk of :
– Asset concentration
– Liquidity events – 5Ds, 1 B & 1 R
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Death
Disability
Disease
Divorce
Demand for Dividends
Bankruptcy
Retirement
Why is it important to have a written plan?
• Increases the value of the business and
confidence of:
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Lenders
Investors
Customers
Vendors
Family members
Why is it important to have a written plan?
• Greater family wealth transfer to future generations
• Reduces capital gains and estate taxes
• Creates a proper valuation for the business
Why do you need a team of specialists?
• This is a unique, and complex set of issues
• Most advisors don’t deal with these issues
on a regular basis
• They don’t have a shared process
• Don’t operate as a team
• Good communication is critical
Organization
Wealth
Preservation
Planning
Personal
Financial Plan
Business
Continuity
Business
Valuation
Owner’s Exit
Objectives
Insurance
Needs
EXIT PLAN
Conclusion
• What is most important?
• What is financially feasible?
• Does your family understand the tune you’re
tapping?
• Do you want the default plan?
• Do you have a team?
Action Steps
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Commit to start Today!
Write down what’s important
Work with a team of succession planning specialists
Attend another workshop
Schedule a Family Meeting
Action Step…24 Hours