Trusted Counsel merged with Moye White on September 1, 2021. The following podcast was recorded prior to the merger.
This week on “In Process: Conversations about Business in the 21st Century,” we continue our third annual series of podcast episodes dedicated to the topic of preparing and selling your business.
In this fifth installment of our six-part podcast series, Managing Partner, Evelyn Ashley and John Monahon, Partner of Trusted Counsel speak with Alvina Lo, Chief Wealth Strategist at Wilmington Trust. Lo oversees wealth planning, strategic advice and thought leadership services for Wilmington Trust’s fast-growing Wealth Advisory Division.
Wilmington Trust is a boutique wealth management firm that is located in every metropolitan area in the United States. The firm provides clients with a wide range of private management services which includes; 1) Asset management for private wealth clients, 2) Fiduciary, where it serves as trustee and executor to clients who choose to set up a trust or a foundation, and 3) Private banking. The interview provides practical advice on what business owners need to do when thinking about selling their business.
During the course of the podcast, entrepreneurs, business owners and C-level executives will learn about:
- The benefits of taking advantage of tax exemptions
- Planning strategies for trusts
- The definition of a trust protector
- Business transition planning steps to take now
Below is an excerpt of our interview with Wilmington Trust. Alvina provides practical advice on what business owners need to do when thinking about selling their business.
TC: As modern trust law advisors, what do you educate your clients on?
WT: Gone are the days where a person would put money into a trust, and you give it to the corporate trustee, and you don’t know what’s in it. That might have been a grandparent’s trust. Trusts are cool again, believe me. With modern trust language, with modern statue, there is a level of flexibility that we can build into the trust that gives the client a level of flexibility and also a level of control.
TC: What exit or succession planning strategies do you recommend?
WT: Start to assemble your team of advisors. Your accountant, lawyer, financial advisor, and also your M&A advisor to really think through what the right steps are.
TC: With respect to trusts, what planning strategies do you recommend?
WT: Depending on your needs, purpose and goals, there are options such as asset protection trusts, dynasty trusts, or the generation skipping trust. Currently, dynasty trusts are the most popular. Regardless of the state where you reside, we can help individuals and families take advantage of Delaware’s favorable environment for trusts. For example, the asset protection trust helps protect your assets from creditors. The directed trust enables you to plan for complex assets and retain the services of a trusted investment advisor, and lastly the dynasty trust allows for the duration of the trust to last in perpetuity.
The other option that we often see in trust documents is the use of what’s called a trust protector. A trust protector may be given some powers such as removing and replacing a trustee, allowing the trust to be amended due to changes in the law, resolving disputes between trustees or between beneficiaries and the trustee(s), and changing distributions from the trust, based on changes in the beneficiaries’ lives.
Technically anyone can serve as a trust protector, but we recommend that it be someone who is not in the day to day affairs of the trust.
TC: Are there any other remarks that you’d like to sum it up with?
WT: Do plan, plan early, and don’t give up. If you are a business owner and you are saying “yeah, yeah, yeah, I’ve got this, we’ll talk about this later. We as advisors have to just keep asking and keep at it, it’s our job!
For this series of podcast episodes, Trusted Counsel has united with GrowthPoint Technology Partners, Wilmington Trust, Aprio, Xcentric which sold to Right Networks, and OnBoard Security which sold to Qualcomm. Is Your Business Ready to Sell?” For more information visit our virtual event happening now at www.preppingtheprincess.com.
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Is Your Business Ready to Sell: (Part V of VI)
With Alvina Lo, Chief Wealth Strategist Wilmington Trust
Trusted Counsel (Ashley) LLC. All Rights Reserved.
Speaker 1: It’s time for In Process: Conversations about Business in the 21st Century, with Evelyn Ashley and John Monahon, presented by Trusted Counsel, a corporate and intellectual property law firm. For more information, visit Trusted-Counsel.com. Now with In Process, here are Evelyn Ashley and John Monahon.
John: Hello, and welcome to In Process. We’re entering the fourth installment of our six part series of podcasts about what business owners and their chief executives should be thinking about in order to get their businesses to a point where they’re ready to be sold. We’d like to thank our sponsors who made this series possible. That’s Aprio GrowthPoint Partners Technologies and Wilmington Trust, who we’re actually speaking with today. Today, we have joining us via phone Alvina Lowe, chief wealth strategist of Wilmington Trust, who works out of the New York office. Alvina oversees the wealth planning, strategic advice, and thought leadership services for Wilmington Trust’s fast-growing wealth advisory division. She’s a seasoned wealth management executive and has more than a decade of experience in the financial services industry. Alvina, welcome to the show.
Alvina: Great, thank you so much. Thank you for having me.
Evelyn: Absolutely. Alvina, tell us a little bit… We found that clients aren’t necessarily knowledgeable about Wilmington Trust. I know a lot of that has to do with… You are fairly secretive as a group.
Alvina: Well, the best thing is we’re the best kept secret, no?
Evelyn: Yes, exactly. It’d be great if you’d tell our listeners a little bit about Wilmington Trust and the various services that get offered.
Alvina: Of course, I will be happy to. Wilmington Trust is a boutique wealth management firm. We were founded by the DuPont family in Wilmington, Delaware in 1903. Since then we’ve grown from what was basically a family office for the DuPont family taking care of all their private wealth management needs to the proper wealth management company that we are today. Eight years ago we were actually acquired by M&T bank, so we’re a part of the bigger M&T family. M&T is a community based bank that is listed in the Fortune 500 15 largest banks in the country. And so together with M&T we provide our clients with a range of private wealth management services, which if you boil down to it, really includes three things. One is asset management, right? So we manage and invest a lot of private wealth clients.
Second is fiduciary. We serve as trustee and executor to our clients who choose to set up trust or a foundation. And then third is in private banking with the balance sheet of our parent company M&T, we can also lend on the positive thinking side along the lines of everything we do, what is really core to our DNA so to speak and our culture is planning, which is the group I head up. So I head up the wall strategy group, which is a national team of Trusted Counsel lawyers, accountants, certified financial planner, and our job is to help clients with planning.
John: What type of client is best for private wealth services? Do you have a target client that you all focus on?
Alvina: Yeah, sure. So actually at Wilmington Trust, there are three market segments. We have the affluent segment. We have what we call US markets or high net worth. And then we’ve got family wealth, which is ultra high network. So we really do serve a range of clients on their private wealth needs. I would say that these are the guidelines, but generally speaking, one lower than a $3 million deductible accounts would fall into our affluent market segments where we service them through and then to security and the high net worth segment is anywhere with net worth of or investable assets from 3 million up to $20 million. And then anything about that will fall under our ultra high network or family wealth segment. So depending on a client’s particular needs and their complexity and their network, there will be a different range of services that would be available.
John: I think that’s why it’s harder to hear about Wilmington Trust. You have to hang out with people who at least have $3 million and above. It’s not like finding a Merrill Lynch advisor or something to that extent.
Alvina: I think that’s where, and I’ve worked at other places, two other financial institutions. Before that I was a practicing trust [inaudible 00:04:07] state’s attorney. But I think for the audience we’re thinking about proper wealth management firm, right? I think one of the core things one needs to ask is that not all types of wealth management firms are created equal, and they’re not for everybody, right? So depending on what your level of network, depending on what you need, there might be situations where Wilmington is perfect, and there might be situations where, whether the Merrill, that’s one you mentioned or somebody else might be better.
We’re a boutique, right? We do not have the thousands of advisors across the footprint because we serve a very targeted segment. We also do very much leading with planning, right? So we are founded by the DuPont family. We believe in planning. We believe in decades. Me and my team speaking decades. So I think depending on what your needs are, where you are. I know they were going to talk about business, the one in particular, where they are in the life cycle. We could be a really good fit, or there are sometimes that it just might not be for us.
John: I think it’s great, especially for this podcast, because a lot of business owners are looking for an exit that would land them solidly within your client profile. And of course, we’ve had many exits that we’ve partnered with Wilmington trust on, and it’s been a a fantastic experience. And of course it does change people’s lives, and they need to start thinking about different ways to plan what they might want to do with that money, and for a lot of people, I guess the back half of their life as well.
Alvina: Yeah. Yeah. And look, that’s actually why I got into the business, right? Because in law school, try to figure out what I want to do after law school and what kind of law I want to go into. And I find planning or estate planning to be incredibly rewarding because you are here to safeguard people’s assets, right? So for me, everyone’s talking about thinking alpha in the market, which is incredibly important. Like for us here, not only is that an important aspect, I think we also need to go get tax alpha, right? How do you protect what you’ve grown, whether it’s your business, whether it’s your investable accounts, how do you protect that? So to me, there’s nothing more honorable than helping an entrepreneur, first time generation [inaudible 00:06:07] to protect what they have so that it could be transitioned in the most protected manner and with tax advance, each of them matter to the next generation.
John: Well, speaking of taxes, we’ve had some interesting developments since… Last year they did the tax reform. I’m sure that played into your strategies a lot. What should business owners be considering from an estate planning perspective with respect to tax reform and how has that developed over the last year?
Alvina: It’s been, as you can imagine, extremely fun. Whenever Congress does something or change the tax code, [inaudible 00:06:40] the state’s attorney is perfectly giddy because it keeps ordering business, but in all seriousness, it’s been really fun because it was every tax law change. I think there’s incredible opportunity, right? I think from an estate planning perspective, and especially from a business owner perspective, probably the biggest news is in terms of the temporary increase in the federal estate tax exemption. And by that I mean as it is right now, in current law until year 2025, each US individual may give away as much as $11.4 million without any burden of an estate tax, gift tax, or generation-skipping tax. So if you’re married, that doubles the amount, so you’re looking at $22.8 million that you can give away completely transfer tax break.
This exemption is going to go away in 2025 unless Congress backs, right? It’s going to go back to a previous level to nearly half of what it was, which is around $5.9 Million. So if you’re a business owner, and you’re thinking about a potential sale, potentially transitioning the business to the next generation, now is the time to act, right? Because we have this incredible generous gift from Congress on this incredibly high exemption amount. It is the highest in history in the United States. And what I always tell clients is this, right? There’s a legislative shelf life. In 2025, the law automatically sunsets unless Congress does something. But I think there’s a political shelf life to this too, right? Because I think as we all learned from the last round of tax reform, anything can change with a stroke of a pen. So if a Democrat comes into power in the next election, right, it’s very likely this incredibly high exemption will go back to what it was before. So the time to act is definitely now.
Evelyn: I think that makes a lot of sense. I also think lots of private company owners do not actually realize that they can’t just automatically transfer ownership of companies to their kids without actually having a structure to do that. They don’t realize. They think, Oh well, why is there a tax event? But it’s important for them to actually understand that there absolutely is, and they need to seek ways to be able to avoid that or to find some sort of a way to at least put the tax out into the future.
Alvina: That’s right. That’s right. And I think also M&T also has an investment banking arm and from my colleagues in investment banking world, I’m also seeing that there is a lot more activities and M&A world because of tax reform. Where tax reform… number of changes in terms of the corporate tax rate, made a number of changes in terms of a patch or deduction that’s available for business owners if you fit within certain circumstances. So here because of more abundance in cash, so to speak in the business, my investment banking colleagues at M&T and seeing a lot more M&A activity. So as a result, a lot of business owners who might not have been thinking about it because they are now getting offers. So I’ll be the time to entertain them. So the idea of pre transaction planning, the idea of having structured done properly so you don’t miss the opportunity is ever more important.
John: In addition to the exemption. What are some other things they should be thinking about?
Alvina: The other thing that people should think about, especially why… I set up here in New York, so the ever presence of the New York state income tax right? And the very dramatically decrease of what is known as the salt deduction has really touched me personally and a lot of our clients up here. So you know the idea of not only asset allocation, that asset location is becoming more important. Meaning could you move to another state where there’s better income tax rate, and if you can’t move, could your assets move, right? Is it possible to set up a trust in an income tax earning state like a Delaware or Florida and be able to escape income taxation.
So mitigating income tax is another really, really big one. Protecting the value of one’s business is also really incredibly important. Both from a gift tax perspective for if you eventually do want to give or pass on the business to the next generation. But also from a risk mitigation standpoint, what I found is that a lot of business owners are so busy with their business that, and they’re taking risk every day with their business, that they’re not really protecting their downside, right? What if something happened to them prematurely? Are there enough cash in the business or a proper succession plan? And so that actually couples with the increase exemption. We’re seeing a lot of business owners start to think about that and using life insurance as a way to mitigate the risk on their business.
John: So when you take a client through these suggestions, who’s normally part of the team there? Are you all doing this work in house or is there trust in the state’s attorneys still have a valuable role to play here?
Alvina: Oh absolutely. It’s absolutely the latter. So the way it’s structure is that we are really complementary to the client assisting tax and legal advisor. So their accounts and their counsel with the trust and estates attorney, the M&A attorney, we really work hand in hand with them. We’re not in any way here to supplant any existing relationship. In fact, even though I’m a trustee on the state’s attorney by background training, because I work in a bank, I’m actually… me and my team actually do not get tax and legal advice. So think of us almost as a consultant, if you will. Clients often come to us via their financial advisor or via their investment banking advisor, and they come to us and say, “Hey, we’re thinking about exiting, what should we think about?” So my team and I would go in and lay out the overall groundwork, but at the end of the day, we absolutely partner with the trust and the state’s attorney, their accountants, to make sure that the plan that’s put in place is completely customized for the individual clients.
Evelyn: So Alvina, you talked a little bit about the benefit of taking advantage of exemptions and moving, and then basically the sunset that’s tied to that. Should business owners be concerned that an exemption might revert back since that occurs?
Alvina: That’s a great question. So I previously already talked about the legislative as well as political shelf life, right? So I do think yes, business owners should absolutely not feel like, well I could just wait, right? I could just wait. If the law changes in 2025, I’ll call you guys in November in 2025, right? It’s not really going to work.
Evelyn: But that’s typical.
Alvina: Oh yes indeed. And that’s happened in 2012 when we thought the exemption was going to go away. I don’t think I slept that Christmas. But the reality is to do it right and to do it well takes a lot of planning. It takes a lot of time, and these are really important decisions because for this to work the trust of which the vehicle that you transfer your business has to be a [inaudible 00:13:11] trust, meaning that once you started off there’s very little you can change, right?
In order for it to work to do the purpose for which we want it to do. I would say the earlier the better. Also, I think there’s also a business shelf life to it, right? Because look, if you’re planning to sell your business, right? I often get calls, like the day before the sale, or there’s a term sheet, and they say, “What can I do?” And the answer is not a whole lot because the whole point of pre-transaction planning is that if your business is worth X, and you think you could build it up to two X in a few years, you want to gift away the interest in the business today when the business is worth X. Because once it’s inside the trust, any future growth and appreciation and income earned will not be subject to the US state tax system and right now the highest rates are 40%, and if you are lucky enough to live in New York like I do, you’re looking at almost a total of 50% on the state tax on your business before it goes onto your children.
And this is on a business where you’ve been paying taxes all well, right, in terms of income earn or capital gain. So the earlier, the better because there is definitely not only a legislative shelf life, a political shelf life, but also a business cycle shelf life. So the best is when you’re thinking about a potential exit, even if you don’t know for sure that that’s definitely happening. And by the way, when I say exit, I mean it could be an IPO. It could be a strategic sale, right? Before you do that, I would really start assembling your team of trusted advisors, right? Your accountant, your lawyer, your financial advisor, and also your M&A advisor to really think through what are the right steps. So here at Wilmington trust, for example, we have a team of people who are all ex investment banker, and they help kind of think through how to build your business up from evaluation perspective to get the best value.
What’s the best structure? So you want to be having those conversations while you talking about ESD planning side because as you are building up value, you want to make sure that you’re transfer those interests and your business into a trough, right, of which there’s enough flexibility or account for future needs, but from a state tax perspective, it’s already of your state, this way when you and your advisors are working together to increase that business value for the ultimate sale, all of that increase in value, that appreciation that income earns is held inside trust.
Evelyn: Interesting. So then what other planning strategies do you suggest? I know that you’ve mentioned that there’s dynasty trusts and stuff. Can you talk us through that sort of planning?
Alvina: So far we have been using the term trust pretty loosely, right? As a singular vehicle. The reality is a trust can carried many different flavors, right? It can be an asset protection trust. It could be a dynasty trust, a generation skipping trust, depending on your needs and the purpose and the goal, it could be very different. But what I’m seeing now, especially given the increase in exemption, what is most popular is the so called dynasty trust. These are trusts that are set up in perpetuity, and there are some states in the country where you can set up a trust like that. So as a New Yorker, for example, I can’t sell one of these up in New York because New York has what’s called a rule against perpetuities.
Evelyn: I was going to say, what happened to the rule against perpetuities?
Alvina: It still exists. It’s funny because when you’re in law school, you’re property lawyer, property law professor I remember will say, “Oh, no one really needs to know this. You need to know this, the the law school exists.” Like the bar exam, and that’s it unless you’re in trust in the state, right, which is what I ended up going into, so I unfortunately know about the rule against perpetuity all too well. Now that said, if you’re in certain lucky states like Delaware, right? You don’t have to worry about the rule against perpetuity because in those states, your trust can literally last forever and ever and hence the word dynasty trusts.
So if you coupled that with the proper use of the gifting exemption, which again, is in an all time high of $11.4 million person, you couple that with what’s called also another layer of tax, which we didn’t talk about yet, which is the generation skipping tax. That’s the tax that gets hit when money goes to the grandchildren. It’s really powerful because you literally could have a trust that you put your business and trust them itself in a couple of years with a high evaluation that you want. And then the assets, faith in the trust, get invested not only for the benefit of your children, but for your grandchildren and great grandchildren. This is how dynastic wealth is built.
Evelyn: We have to work on this, John.
Alvina: And please hire us. I could help you.
John: Alvina, one of the things that we see a lot is with these business owners, a lot of them are control freaks. They love having… I don’t know if they love having control, but they need to have control a lot of times and for good reasons. And they’re entrepreneurs, and they’re used to it. That sometimes comes into conflict with the state planning where some of the concepts are that you are no longer in control of certain aspects of your wealth. Can you tell us a little bit about some strategies that people like that can consider?
Alvina: Sure. And John that’s a great question because that is the number one question I get from business owners, right? The reason they’ve been so successful is because they’ve had control over their business. So many of them say to me, “What you’re telling me makes a lot of sense. The numbers that you’re showing me about the potential tax savings is incredible. And I want that. But you are crazy if you think I’m to give up my baby even though I’m giving it up to a trust that benefits my family, and I love my children dearly, you are crazy if you think I’m going to give it up. I’m not giving up this baby for my other babies. Not happening.”
And I can certainly understand that. And so here I think is where advisors like us have to really do our job to educate our clients on what modern trust law is about. Gone are the days where you put money into a trust, and you give it to a corporate trustee, and you don’t know what is in it. You don’t know how to invest it, and you basically just get a check, and it’s a black box. That is no longer the reality, right? That might be a grandparent’s trust, but trusts, believe me, are cool again, right? And so with modern trust language, with modern statue, there are actually a lot of flexibility that we can build into the trust that give the client a level of flexibility and also a level of control.
Now they can’t have absolute control, right? Because if they have absolute control, then it’s not gonna work from a tax perspective or an asset protection purposes. But to give you an example of a way to build in flexibility and control is that in states like Delaware, they trust these duties to be bifurcated. Though historically, what does a trustee do? A trustee manages the assets, right? So if there happens to be a business, then they manage it. They also work on distribution or usage of the fund decision. And they also do administrative decision, keeping the books of directors with the trust, filing tax returns. Delaware was actually one of the first states which allows the trustee’s job to be bifurcated, meaning that you could have different individuals who holds the investment decision. You could have a different individual who holds the distribution position.
And then a different individual who holds the administrative decisions. And so in cases like this, and when I say individual, regard to be literally to like an individuals or to be an institution. So what we found very popular with a business owner is that they’re okay to give up control from a distribution perspective and from an administrative perspective, but they’re not okay with giving up control from an investment perspective. So in that case, it is possible to draft trust, and have to be done well and done then by seasoned professionals that know what they’re doing, but it is possible to do what’s called directed trust, which means that the investment decision, hence the investment decision on the business, right, is to control by the grant holder or the business owner. But the other responsibility of the trustee would then be either delegated to somebody else or you know, be given to somebody else.
And sometimes it could be more than one person. We have a lot of clients who say, “I really would feel like my spouse or my brother to be involved on my adult children, but I don’t want them to do the job independently because I recognize the value to hiring a professional, which you serve as co-trustee.” And the answer is absolutely, we could do that. So that’s a way I think that get the best of both worlds. The tax savings that we want at the tax planning. It gives us to a degree off of the asset protection aspect of a trust, but at the same time allow some flexibility and control to the business owner.
Evelyn: I think that actually does provide a lot of competence to a business owner. The whole idea that if that owner decides this is how I want to sell the business. I want to drag along the trust with me, then that structure will allow them to do that. Is that correct?
Alvina: Yeah. They call it, and oftentimes there’s not just one structure, right? Oftentimes, these trusts hold a interest in either a partnership or most often an LLC that in turn holds interest in the business. Most folks actually, when they give their interest in the business, bifurcated to voting and non-voting shares, right? So the degree of control comes in different forms. It can come in the form of the operating structure itself of the business, or it can come in the form of the holding company, or it can come in the form of the trust, which is at the top layer. So it really depends. But there are ways definitely where we can still give the business owner a degree of control without giving it so much control that it’s thought to defeat the purpose of which we set up the trust in the first place.
The other flexibility that we often see is in the use of a what’s called trust protector, which is again a new thing, relatively new thing of the modern trust drafting. So I mentioned earlier in the talk that these trusts, you need to be [inaudible 00:23:29] Once you set it up, there’s very few things you can change and that of course doesn’t really gel well with the business owners who want to be able to be adjusted easily to change. What if the tax law change? What if I changed my mind about who the beneficiaries going to be, what do I do? You’re telling me right now to set up a dynasty trust for grandchildren that are not even born yet. How could I possibly know what the terms would be? So here we could add in what’s called trust protector, which means that, think of it almost as like the patriarch or the matriarch of the trust, right?
Someone who is not in the day to day affair of the trust. That would be the trustee with someone who’s there. If you need to make a quick adjustment, different tax provision or take out a bad beneficiary that should no longer be a beneficiary of the trials. You can do that. And then again you have to be very careful about how you draft the trust and the way you exercise those power because you can’t really cross the line of complete control, but, in the trust that we are seeing, more and more trust, you have that extra role, which is the trust protector and the trust to account for any future changes.
John: Talking about business owners, just continuing on this whole theme of control, one of the reasons that people don’t transition enough, well, we talked about not doing estate planning, but then there’s also business transition as well. And similarly, they don’t do it because of control issues oftentimes, but you all at Wilmington Trust actually help with some business transition planning as well. What are some things that people can think about on that front?
Alvina: Sure, sure. So outside of the estate tax or the pre-transaction transfer, right, Trump was actually meant for so much more. I know we’ve talked a lot in this conversation about taxes, and that’s indeed on a lot of people’s minds, but a transition plan isn’t just about taxes, right? I mean, everyone wants to save money on taxes, but a transition plan also involves a lot of other things. For example, do you have the right governance in place, right? We often have business owners who are family businesses. So you might have a business owner where they have three children, one of whom is in the business and the other two are not. How do you figure out a way to transition the business? So that’s on the equity perspective like you treat your kids equally, but from a control perspective, you will want the person who has been in the business to have control because maybe the other two have no interest in the business whatsoever, right?
So you know, in terms of helping clients think through their operating agreement, how it’s gonna work, the governance, right? If there’s a board of director, how people vote, there are clients who are in business with a business partner. What happened to one of your business partners were to die? Are you really ready to be in business with the air? Sometimes a spouse or children. So is there an appropriate buy/sell agreement in place if one business partner were to become incapacitated or to pass. And if there is, where are you getting the cash? The body of the personnel. Is this an appropriate situation of where it might be life insurance would be a proper vehicle, all part of the plan. A lot of business owner might not want the transition to happen to individuals.
We have a lot of clients who are incredibly philanthropic, and they want either the vast majority of their stay, or even sometimes their business, to go to charity or their own private foundation. Well, there are specific rules against a private foundation holding active businesses. So we work through a lot of these non-tax issues with our clients because while oftentimes the first question is about tax, inevitably when it comes to finally putting together a plan and have something in place, it isn’t just tax driven. There’s all these other things too. The other thing I found to be very interesting, and this is something that since actually coming to Wilmington Trust, I really seen the power of it is in the area of financial planning or retirement planning. So now you might ask, “Well, wait a minute. You just told us your clients are pretty wealthy, right?
And they have some really successful business. Do they really need retirement plotting? There’ll be plenty fine.” But if you think about it, a business owner, if they were to give up through some of their business as part of the pre transaction planning into a trust of which they cannot be a beneficiary anymore, right? It will be their children or their spouses or grandchildren, whoever it might be, what are they gonna retire on if they were to sell the business? Inevitably, we have clients who say to us, “Okay, Alvina, I understand what you’re saying about this window of opportunity to give assets to a trust, but how do I know how much to give? If I gave up 50% of my business today and any future goals and appreciation is in that trust, that’s wonderful, right? From a tax planning perspective, but that only means I got 50% left. What do I do? Is that enough?”
And so as a visor, my own personal philosophy is I never want our clients to give away too much, too early. So this is where financial planning comes in. It’s not so much financial planning as, are you going to have enough money out of your 401K, it’s much more than that. It is, “Okay, let’s think this through. If you have a business, and it’s drawing X each year, in the expensive of Y, you’re thinking about moving to Florida out of New York in five years, so your tax rate is going to change. You have five different businesses, a vacation home, you’re paying for college, how much are you going to have realistically when the time comes, given all the fluctuating tax rate?
And if you were to remove, say 50% of your business now and take that off of the equation, how much are you going to have? And is this a number that you’re going to feel comfortable enough so that you can make that decision today to give off 50% of your business into our trust?” So we do a lot of that. We work extremely analytical here at Wilmington Trust. I think that numbers speak volumes. You could talk about these strategies all day long and the abstract, but without numbers reacting to it, it’s very hard for a business owner to make an educated decision.
So we do have a lot of clients who come to us and say, “I inherently understand what you’re trying to do, but I need help figuring out how much to give and what to give.” Because it might be their businesses, most of the times it is because that’s the most valuable or vastly appreciating asset they have, but sometimes they say, “I’m not quite ready to let this go, but I do have this pocket of marketable security”, or “I have this private investment. Is it better to give this away?” So we would help our clients think through all that.
Evelyn: Interesting. And that makes perfect sense because people also live a lot longer. And so if you’re making those choices fairly early on without really having a future determination of how much do I want for my own personal wealth? You need to be able to take those things into account.
Alvina: Absolutely. And wealth is relative, right? If you were to say to one person you have X dollar to live, they might say, “Oh my God, that’s plenty. That’s more money than I ever thought I would have.” And then other people might say, “Oh my gosh, no, I need to be able to have my boat and my jet and all this other things. That’s more of a given. Like how would I live.” I once had a client when I was in private practice. She’s a widow, and she was in her late 60s you know with a very nice apartment in Fifth Avenue in New York with a very beautiful vacation home. All paid for, no mortgage out in the Hamptons. Very sizable accounts, marketable securities account. There’s artwork everywhere. She’s probably worth $100 million, right? She’s literally looking at me like, how am I going to live?
And when you look at her expenses. You’re like, Hmm, I can see why you worry. Health care costs really high. It costs a lot of money to maintain a home in the Hamptons. When you go shopping, you don’t go shopping, you really go shopping, and your children depend on you. She has a lot of people around her that depend on her grace. So, again, it’s all relative, but to me, no matter what your number is, everyone has a different number. Until you see the number, you cannot make an educated decision about whether to take advantage of this increased exception. It’s a gift. You just simply can’t.
Evelyn: Right. That makes perfect sense. Alvina thank you so much for your insight. Are there any remarks you’d like to sum it up with?
Alvina: If I may just touch upon two things very quickly that we didn’t talk about. So one is on charitable planning, philanthropy. A lot of our clients are incredibly philanthropic. I mentioned a little bit earlier about clients who wish to maybe leave their businesses to a foundation, which doesn’t really work from a tax or foundation rules perspective. I would be remissed if I didn’t mention that there are many different strategies where a business owner might consider many different charitable trusts for example or using a private foundation or doing a [inaudible 00:32:39] to achieve there philanthropic as well as tax planning purposes. So this conversation about business succession planning and business owner is not unilateral. Oftentimes, a lot of businesses’ owners are following what Warren Buffet is doing, right?
I’m leaving X to my children. The rest is going to charity. So we also do a lot of that. And then I guess as a closing remark, I would just say with the potential sunset of the high exemption in 2025, we really want to, as a visor, get to our clients and get to them early and talk them through this. Business owners are incredibly busy. They are incredibly busy with their business, and I feel like it is an incumbent upon us as the visor to make sure we stay in front of them, right, because we get a lot of, yeah, yeah, yeah I know, I know, I know, right? But we can’t give up. We got to keep doing it.
It’s our job to stay in front of them, to get them to do what they know inherently they have to do. And in order to do that, we must have a complete picture of their needs and the future goal, so that we’re not only helping them with their financial goals, but also helping them with their over life goals and wealth goals. So I guess my leaving messages do plan, plan early and don’t give up. If your business owners are saying, “Yeah, yeah, yeah, I’ve got it. We’ll talk about it later.” You gotta just keep at it. That is our job.
Evelyn: That’s perfect.
John: Alvina. Yes. Thank you for joining us. This has been a great discussion. We certainly appreciate all the insight. If people want to get in touch with you, where should they go?
Alvina: They should probably reach out to their local wealth advisor Wilmington Trust. We are located in every major metropolitan area, so we have local team on the ground and local wealth strategists who help them with all of the wealth planning needs. So if anyone’s interested in talking about any of the strategy, I would go to Wilmingtontrust.com, go to your local office or your local advisor, and they would know how to get in touch with somebody on my team.
John: Perfect. Thanks for joining us.
Alvina: All right, great. Thank you so much for having me.
Evelyn: Thanks so much, Alvina.
Alvina: Okay, bye.
Evelyn: Bye now.
Speaker 1: This has been In Process: Conversations about Business in the 21st Century with Evelyn Ashley and John Monahon, presented by Trusted Counsel, a corporate and intellectual property law firm. Are you interested in being a guest on our show? Email our show producers at In Process at trusted-council.com. For more information on Trusted Counsel, please visit trusted-counsel.com.
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