Preserve Your Wealth

Last updated on May 13th, 2019 at 02:36 pm

If successful entrepreneurs do not take the time to create a plan to pass along their wealth, the government will do it for them. Effective planning can help entrepreneurs pass greater portions of their net worth to family members or charities, rather than the government. In this special report, entrepreneurs also will learn how to establish family foundations and minimize their tax exposures.

It’s all too easy for entrepreneurs to focus so much of their energies on growing their companies that they procrastinate about forming plans to manage their personal wealth. Sound investment strategies such as diversifying a portfolio and ensuring adequate cash flow upon retirement are important tactics to grow net worth and should not be postponed.

In a 2003 study, the Boston College Center on Wealth and Philanthropy estimated that about $41 trillion in personal wealth will be transferred through private hands until the year 2052, as the baby boomer generation ages and passes its wealth to its children, grandchildren and other family members.

The consequences for not planning an estate transfer can include higher estate taxes and having money dispersed in unintended ways.

For business owners, a lack of planning could cause problems that necessitate the sale of the company, taking it out of family hands.

Current Internal Revenue Service code states that the federal estate tax kicks in when a person’s estate is worth $2 million or more when they die.

However, the estate tax can be avoided through charitable giving and giving money to heirs before death – either through a $1 million lifetime gift tax-free allowance or a $12,000 annual gift allowance.

"I often times think that business owners become so successful and their head is down, that they need to step back and think about their business. And they need to think about their own retirement. Asset protection has become so critical over the past four or five years, and there are so many more avenues to protect those today," said Mark Benskin, vice president of wealth management with Ozaukee Bank.

"Wealth management is a holistic approach," said David Spano, president of Brookfield-based Annex Wealth Management.

Many high net worth individuals haven’t started planning to transfer their assets to other people because it is difficult to imagine life going on after their deaths.

"People will spend 20, 30 or 40 years growing a net worth, creating a tangible estate," said William Kalmer, president of William J. Kalmer CLU Ltd., a downtown Milwaukee insurance sales and consultation agency. "But they won’t spend five hours talking about strategies to preserve it, to pass on and manage it."

Effective wealth transfer and estate planning is crucial because of the consequences for not planning, he said.

"It’s important to realize that you have three choices, three entities to which your assets will pass after your death," Kalmer said. "You can pick two of the three. They’re your family, the government and charity. If you choose to abandon that choice, the government will make your choice for you. And who do you think they will favor?"

Effective wealth transfer planning falls into three phases, said Jennifer D’Amato, an attorney with Milwaukee law firm Reinhard Boerner Van Duren S.C.

The first phase involves structuring the client’s assets to maximize their tax exemptions.

"The big mistake is hoarding exemptions," D’Amato said. "It’s worth more today than it will be when you die. It’s one of the most valuable commodities a wealthy person has."

Clients then need to find the right mechanism to transfer their assets, whether through outright gifting, trusts, family limited partnerships or other vehicles.

The final step is identifying the spouse, family members or charity the client wants the assets to go to.

"It’s definitely something you do for your family," D’Amato said. "It’s like you try to not leave huge messes for your family when you’re gone."

For business owners, active estate planning is crucial because they typically have between 75 and 90 percent of their net worth tied up in their companies, said Jane Ann Schiltz, vice president of business markets for Milwaukee-based Northwestern Mutual Life Insurance Co. Inc..

"For most small business owners, (the business) is a big chunk of who they are," she said. "If they want it to go to their children, and that’s the ultimate goal, then we design a plan today that is flexible and gives them choices in the future and helps accomplish that goal."

When there are several children, and some are not interested in the family business, planning becomes even more important, Schiltz said. By properly planning through insurance policies or buy-sell agreements, children who are not going to inherit the business can be assured an equitable inheritance.

Because planning to protect, grow and pass on one’s personal wealth can be a detailed and time-consuming process, starting early in life is advantageous, Schiltz said.

"There is no time like the present to start," she said. "It’s not something I would want to wait to do. I want to develop that plan when (the owner) is in their 40s or 50s, not when they’re in their 60s or 70s."

Taking the time to plan out a wealth management and growth strategy can allow a high net worth individual the opportunity to involve their family in financial decisions before their death. Such opportunities can both educate family members and create better family connections, said Ken Evason, president and chief executive officer of Wauwatosa-based Jacobus Wealth Management Inc., especially when families have created a family limited partnership (FLPs) or family limited liability corporation (LLC) to transfer money from one generation to another.

Both FLPs and family LLCs allow families to transfer amounts of money and property to children through the partnership or LLC over time. In both types of vehicles, family members are able to have voting powers, making decisions on how to invest and give gifts together.

"It’s a way to get families involved in investing and gift giving," Evason said.

Gifting pools of money to children and grandchildren, whether in one large sum or smaller disbursements, gives families similar opportunities, said Brion Collins, president of Delafield-based Integrated Financial Solutions LLC.

"The concept is one of helping someone see that all of the talks and conversations are not about after you’re dead," Collins said. "Someone wants to give their grandkids some of that joy now, when they’re 30 and they’ve got three kids in private school and they’re trying to pay a mortgage and take a family vacation every year. Sometimes that’s part of the strategy that gets missed. It’s not just about after they’re gone, it’s about today and tomorrow."

Diversified Investments

A sound, diverse investment strategy is necessary to provide assets to pass on to family members or charities.

"It’s been said that diversification is the only free lunch in investing," said Cleary GullInc. senior vice president Robert Warner. "You have different investments of different classes, whether those are cash, bonds or sub-asset classes like large cap or small cap. Historically there are many times when they perform differently or run off-cycle."

The off-cycle running, more often called correlation, allows a diversified investor to minimize risk to their portfolio while maximizing long-term growth.

"What diversification does is limit the ups and downs without necessarily dampening that upward slope, the long-term return, thereby keeping the investor in the saddle long enough so they can get market returns," Warner said. "By diversifying, you stand a much greater chance of being able to stay invested when you have a portfolio that’s not swinging about wildly."

Charitable Giving and Foundations

Giving to charity, either as outright donations, charitable foundations, trusts or other vehicles, can also defray taxes.

"There is an income tax deduction for immediate gifts," said Julie Enloe, senior vice president at Jacobus Wealth Management Inc. "And it eliminates some of the estate tax down the road."

Long-term charitable giving can be ensured by establishing family foundations, which generally invest pools of money and give away the returns every year. Family foundations allow family members to vote on which charities they’d like to give to each year. Funds donated to the foundation by family members are tax deductible, Enloe said. It also takes funds out of an estate, potentially creating a lower estate tax exposure.

Life Insurance Policies

Life insurance can be a key part of a family’s wealth preservation planning. Aside from providing cash at the death of the policyholder, the policies can also be planned to offset estate taxes, passing as much of the family’s wealth to the next generation as possible.

"The purpose of having life insurance is to pay estate taxes at a discount," said John Loew, an attorney who practices law in conjunction with Annex Wealth Management.

A life insurance policy, when paid out, can be a sort of glue that keeps an estate together, said William Kalmer, president of William J. Kalmer CLU Ltd.

"Life insurance is a unique product that guarantees delivery of a known sum of cash, income tax free, at an undetermined point in the future," Kalmer said. "You have a choice. Would you prefer to pre-pay your estate tax at a 2 percent rate each year with a contractual assurance that if you only paid 2 percent and you died, the full estate tax would be paid pre-tax?"


Many different types of trusts can be created, but the goals are generally the same – to pass assets from an individual or family to other family members or a charity.

When a trust is created, the parties that are putting money into it can set conditions under which trustees receive money. Those can include payouts at different ages, payouts for educational achievement or rewards for accomplishments.

In recent years, there has been a growing interest in lifetime trusts, designed to keep money in the trust during the life of the individual, said Robert Wagner, senior vice president at Cleary Gull Inc.

"This can give investment control and protects the money from the children’s creditors or ex-spouses," Wagner said. "The trust is an entity. You create it."

How much control will be retained after a trust is created needs to be considered, said Tim Steffen, senior financial planner with Robert W. Baird & Co. Inc. When a trust is created, the creator can direct when and how money will be given out in the future. But once the trust is created, money cannot be taken out of it.

"Irrevocable is a key word if you want to move (the assets) out of your estate," Steffen said. "The key is you have no control (once the trust is created) and you can’t take the money back. You may decide that you only want to give the money at death, and in that case you may have to pay estate taxes."

Other Tax Strategies

One thing business owners can do to understand their estate tax liability is to have an appraisal of the company, said Grace Allison, tax counsel of Northern Trust Corp.

"It points out, ‘Is this what they had in mind? Is this doing what it needs to do? Are expectations being met? Do we need further planning?’" she said.

Many states, including Wisconsin, also have their own estate taxes, which should be examined. Depending on the level of taxation, similar strategies to minimize federal estate taxes could be taken, she said.

"If you have assets around the country, they can be taxed in other states when you die," Allison said. "You should figure out where (your assets) are and where you want to be a resident of when you die. When you have your documents drawn, they should be done by someone who is familiar with the law of the state (that you have properties in)."

Long-term Care Insurance

Long-term care insurance can help protect an estate by paying for long-term care in a nursing home, assisted care facility or in-home visitation. Because of the high costs of long term care, it can totally deplete an estate.

"It has a critical role (in wealth preservation)," said William Kalmer, president of William J. Kalmer CLU Ltd. "It can substitute for the diminution of the high net worth you’ve worked so hard to create. You didn’t work so hard to see it go down the rat hole."

Few people have purchased long-term care insurance, but many will have to pay for long-term care.

"The probability of a claim on your homeowner’s policy is one in 1,500," Kalmer said. "The probability of a claim on long term care is one in two."

Gifts to family members

Giving money away can eliminate or reduce estate taxes.

"If the estate is of a size that you are confident it could keep

you comfortable for the rest of your life, then giving is appropriate," said Cindy Storm Fischer, certified financial planner with Annex Wealth Management.

Families are able to give away large chunks of money to children or other family members over time to lower their estate below the $2 million threshold for the IRS’ estate tax.

An individual can give away up to $12,000 per person, tax free per year.

The tax-exempt structure allows a person to give up to $1 million, per person, over the course of their lives. For some donors, giving $1 million away in a lump sum to a trust, of which their child is a beneficiary, could make the most sense, said Jennifer D’Amato, an attorney with Reinhart Boerner Van Dueren S.C.

Giving the money to a trust when a parent is still in their 40s or 50s could be advantageous because the large lump sum could be taken out of a parent’s estate and will be able to generate interest for a long time, D’Amato said. That allows the money to grow for years before it is drawn upon.

"For a lot of my clients, they want to get the kids taken care of early," she said. "Then they can leave their estate to charity."

Family partnerships

Family limited partnerships (FLPs) are usually created by affluent families to have a consolidated pool of wealth that is controlled and used by family members. FLPs are allowed to hire an outside professional to manage them, and also allow for the eventual transfer of funds to children, said Julie Enloe, senior vice president of Jacobus Wealth Management Inc.

"Most successful families have a family limited partnership," she said.

In recent years, some families have established their own limited liability corporations as vehicles for wealth preservation, growth and eventual transfer to the next generation, Enloe said. The main difference between FLPs and family LLCs is that under a FLP, there needs to be one person named as general partner. That person is exposed to liability.

Under the family LLC, each person shares a limited liability, reducing the amount of risk in the event of a lawsuit.

"The LLC is better than a trust at protecting you from a creditor or ex-spouse," Enloe said. "The only trust that offers that level of protection is a dynasty trust, which goes on in perpetuity. Very few people actually use dynasty trusts."

Charitable Giving an Alternative to Taxes

The Greater Milwaukee Foundation was established in Milwaukee in 1915 with the mission to manage permanent endowment funds to benefit charity and to tailor each fund to the interests of its individual donor. Located at 1020 N. Broadway, the foundation currently manages $430 million from about 1,000 separate funds that benefit different charitable groups and interests.

The Greater Milwaukee Foundation created five investment pools with the advice of its investment committee of volunteer financial managers and, as a result, many of the funds managed by the foundation are much larger than when the donor started and have given out more money than was in the initial gift.

The Emil Blatz Fund, for example, was created in 1946 with an initial gift of $100,000 to go toward scholarships. Since 1946, the fund has generated $571,600 in scholarships and the current fund value is $505,000.

Doug Jansson, president of the Greater Milwaukee Foundation, recently was interviewed by Small Business Times reporter Elizabeth Geldermann. The following are excerpts from that interview.

SBT: How can charitable giving help preserve one’s wealth?

Jansson: "Sometimes the most difficult decision anybody with wealth has to make is how much to leave their kids, if they have kids. How much is enough and how much is too much?

"For those who decide that they have sufficient wealth but they don’t want to leave everything to their kids, then they only really have two choices: paying the taxes to the IRS when they die or leaving some portion of their estate to charity. Blessedly, a lot of people in Milwaukee choose to do something charitable with a portion of their estate.

"The Greater Milwaukee Foundation is basically managing permanent endowment funds that most donors want to continue in perpetuity. Our role is to shepherd those funds in a way that they grow at least as fast as the rate of inflation, while taking off grant dollars every year to support the charitable programs that the donors want to support."

SBT: Does the Greater Milwaukee Foundation advise donors on where to give their money?

Jansson: "We surveyed our donors last year and about 60 percent of our living donors have an interest in getting information from us about programs that fit their particular charitable interests. So part of our job here is to find really great programs, help donors who have a similar interest take a look at those programs and see if they are willing to support them."

SBT: How are donations made from each fund?

Jansson: "With most funds (at the Greater Milwaukee Foundation), the donor spends roughly five percent of market value per year for grants from that fund. Since we are getting an eight to nine percent return, historically, that allows the fund to grow with inflation.

"But some of our donors also want to spend more than that and be adding to their fund periodically. In fact, 30 percent of our funds are pretty unrestricted and the other 70 percent are either donor directed or donor advised. Donor directed is when the donor is typically deceased and the donor had told us to support these particular agencies in perpetuity for the fund. We have about 500 living donors who actively recommend distributions from their fund every year. Sixty percent of the living donors are interested in having our help in finding great projects to support."

SBT: How can an individual set up a fund with the Greater Milwaukee Foundation?

Jansson: "It is really simple here because, unlike a private foundation, all they have to do is sign a gift agreement that spells out the name of the fund, which investment pool they want us to use and what the purpose of the fund is.

"If it is a donor advised fund, the individuals tell us who the advisors of the fund are and if they want their kids to be successor advisors. Typically, the minimum for starting a fund is $25,000 and individuals do not have to go to the IRS to get approval like they would with a private foundation, it is really very simple. I think the average donor could set up a fund in a half an hour."

SBT: What are some of the tax advantages for charitable giving?

Jansson: "The biggest unknown question remains the estate tax, particularly for people with substantial assets. The estate tax is a continued issue because theoretically it is supposed to go away in 2010 and then be reinstated in 2011. It is a very progressive tax and individuals can get into the 60 percent bracket very quickly.

"There are all kinds of ways for good tax planning that can help deal with it but at the end of the day, the only way you fully escape it is if you do something charitable because that is a direct offset to the larger estate tax you pay."

SBT: Are there trends in charitable giving that the Greater Milwaukee Foundation is seeing or preparing for in the future?

Jansson: "I think the biggest trend is the transfer of wealth that is taking place in this country. We have a growing population of people over the age of 60 who have accumulated a lot of wealth over their lifetime. The big unknown question is how much of that wealth transfer will go to kids and how much will go to charity.

"Another trend is the growth of donor advised funds. They are the fastest growing charitable vehicle in philanthropy hands down.

"A very important trend is that for a lot of people now, their major wealth is going to be in their IRAs and 401(k)s, their retirement assets. The retirement assets are growing astronomically and, up until now, if individuals try to leave those assets to their kids, the assets are double taxed. They are the most heavily taxed assets in anyone’s estate because they weren’t taxed during their lifetime.

"Under current law, when individuals die and try to leave whatever is left in their IRA or 401(k) to their kids, if they are subject to the estate tax, they first pay the estate tax, which can be up to 60 percent and higher, and then their kids pay ordinary income tax on it. So let’s say they are in the 30 percent bracket. They just lost 90 percent. Ninety cents on the dollar gets taxed away before the kids get any money.

"I have to say in terms of wealth preservation this is the No. 1 issue people ought to look at. I don’t think there is a person living who would want to see 90 cents on the dollar go to taxes."

SBT: Is there any way to avoid this scenario?

Jansson: "The simplest thing to do for individuals is to name their spouse as the beneficiary of the IRA or 401(k) and charity as the second beneficiary. Then the IRA or 401(k) passes outside of the individual’s estate completely. It does not even go to the estate. It automatically goes to charity."

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