Accounting and Taxes | Archive

Wealth Preservation Tips for the Successful Business Owner

by Kevin M. Shea
for Virginia Business
May 2006

When advising business owners about strategic business planning and how to best manage the wealth they are accumulating from their successful businesses, I consistently emphasize the following four 'bedrock' tips that every business owner should consider:

Tip 1: Manage your wealth with the help of an all-star team.
Arguably the most important consideration for a business owner is choosing the team that provides him or her with business advice and counsel. While successful business owners are extremely skilled at running their businesses, is it realistic to expect owners to be on the cutting edge of accounting rules, legal issues and human resource matters? Successful business owners understand the value of building a top-caliber team to keep ahead of business and personal growth opportunities.

Tip 2: Accumulate wealth with the help of Uncle Sam.
The best way for business owners to accumulate wealth, besides the successful execution of the business itself, is to minimize tax liability and allow financial assets to grow without unnecessary taxation. Tax legislation enacted in the 1990s and early 2000s has expanded the business owners' ability to defer income and design retirement plans that accomplish the objectives most important to the owner. For instance, in 2006 an owner operating a 401k/profit-sharing plan can contribute $15,000 ($20,000 if the owner is over age 50) and another $29,000 as a profit-sharing contribution, if desired, for a total of $44,000. For owners that are older with younger employees, a defined benefit plan will offer even greater tax deferral opportunities. Owners can even operate both plans concurrently if the demographics of the owner and employee groups warrant offering both plans to accomplish the financial objectives of the owner.

Tip 3: Protect your wealth from known and unknown risks.
For most business owners, there are two key risks that must be avoided: loss due to liability and loss of property. Property insurance can be purchased to protect the valuable assets of the business. In addition, business owners can purchase business overhead insurance covering the untimely event of the owners' disability or death. In today's highly litigious environment, liability protection has also become increasingly important because too many successful business owners are seeing their life's work destroyed or taken away due to frivolous lawsuits and claims. To avoid losing their hard work to litigation costs, business owners should work with their team of key advisors to identify potential areas of liability and then craft a plan to manage those exposures as much as possible. Potential options run the full spectrum - from personal umbrella policies to asset protection trusts.

Tip 4: Preserve your wealth from estate taxes.
Business owners should also have a written succession plan detailing how your business will operate in the event of your death or a disabling accident. This plan should not be exclusively embedded in your personal estate planning documents alone because these documents likely won't be addressed in the immediate days after your death. Because you certainly do not want your business operations to be disrupted even for a single day, have a documented succession plan that your family knows how to access and also consider giving a copy of the plan to your trusted advisors. The second step to building a successful estate plan is minimizing estate taxes in the event of your death. When you die, estate taxes will be assessed based on the fair market value of any assets that you own, including all of the assets you would normally find on a personal balance sheet, such as cash, securities, your primary residence and any personal property you own. Life insurance proceeds AND the value of your business are also included. (Note that estate tax laws change frequently, but these tax rates usually range between 37 percent and 55 percent, and the taxes are generally due to the government within nine months following the date of death.) If your estate is comprised of illiquid assets such as real estate and your business, paying the estate tax bill that will be due after that nine-month period expires could be troublesome and deplete everything you worked hard to pass on to your family. Therefore, design a plan that delivers both sufficient liquidity AND reduces the value of your taxable estate as much as possible.

Although these four tips may seem obvious or rudimentary, many business owners are so busy running their companies that they forget to take the simple steps that will help them maintain or pass on the wealth that they shed a lot of blood, sweat and tears to accumulate. By following these simple tips, business owners will protect themselves from unexpected issues that can negatively affect their businesses and their lives.

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