Helping You Manage the business success you’ve built

Clients:

Dave, a 60-year-old former business owner, and his wife, Sharon

Challenges:

Dave was two years past the sale of his small business. At 60 years old, he didn’t want to start a new company. He had a good understanding of investments and wanted to be very involved in the process. His wife, however, had no desire to be involved with investing.

Because the business was successful, Dave was able to fund the couple’s IRAs and SEP accounts and pay off their debt. But as a small business owner, he had no pension and did not want to start drawing Social Security until he reached age 66. He was also concerned with market risk and the low interest rate environment since all his retirement income will need to come from accumulated assets. He was very concerned about his wife if something should happen to him, considering her lack of understanding of their financial situation.

Potential course of action:

First, we would gain a complete understanding of the couple’s financial situation. We then would have thorough discussions to determine their needs, wants and wishes. Using Goal Planning & Monitoring software, we would create a comprehensive financial plan that would help determine whether their financial resources were adequate to fund the couple’s goals.

As we would with a business to manage investments and liquidity, we would implement a core-and-satellite investment approach. We first provide for cash flow with a “satellite” portfolio made up of one-, two-, three-, four- and five-year CDs that were the amount of income the couple would need to live on in retirement. Each year a CD matured, they would spend all the interest and principal held in that CD.

We would place the rest of the money into a “core” portfolio. Each year, any dividends and/or gains generated from this portfolio would then be invested into a CD to backfill the maturing CD from the “satellite” portfolio. As time progresses, we will keep adding “rungs” to the ladder of the satellite investment portfolio through this method.

By taking this approach, the couple will not directly withdraw a dollar out of the core investment portfolio and, because of the five-year laddering of the CDs, will not be forced to sell holdings in a down market.

By engaging Sharon in the goal planning process and encouraging her input on determining their needs, wants and wishes, she could gain confidence and understanding of how her money would be working for her and that she could rely on us as a resource in the future.

This material is hypothetical in nature and not intended for use as investment advice. It does not guarantee the attainment of your retirement goals. Individual results will vary. There is no assurance that any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss. Asset allocation and diversification do not ensure a profit or protect against a loss. Past performance is not indicative of future results.

*The projections or other information generated by Goal Planning & Monitoring regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Goal Planning & Monitoring results may vary with each use and over time.

Client:

Peter Frost, full owner of a 25-year-old automotive parts and electronics distributor

Challenges:

An earthquake and tsunami in Japan disrupted the company’s supply chain, causing a 30% reduction in annual revenues. The firm had a net loss for the first time in history. When the company evaluated adding supply chain and other enterprise risk coverages to their commercial insurance program, the cost seemed prohibitive given the low likelihood of an event. The use it or lose it approach of traditional insurance wasn’t an effective solution.

Additionally, with Peter in his mid-50s and his son, John, joining the company, Peter realized that the eventual transfer of his company to his children was going to trigger significant estate taxes.

Goals:

• To provide a tax-efficient funding mechanism to stabilize revenue during unlikely but high-cost events. The solution could not be use it or lose it. The funds had to remain available for an event but could not be lost without a claim.
• Minimize the tax liability when the business is transferred to the next generation.

Potential course of action:

We would recommend that Peter establish a captive insurance company to provide enterprise insurance policies including supply chain, cyber risk, and directors and officers. The new insurance company would be owned by his two children, John and Karen.

The business would make annual tax-deductible premium payments to the captive insurance company and would file claims as necessary if the business experiences losses. Because of the structure, the captive insurance company isn’t required to recognize the premium payments as taxable income. It will pay operating expenses and claims (if any) as they are presented. The surplus after the captive insurance company pays claims and expenses would be invested and continue to compound.

The structure of the captive insurance company would also allow Peter’s children, John and Karen, to eventually use any surplus to purchase Peter’s company shares, potentially facilitating a tax-efficient transfer of the business to the next generation.

This case study is for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.