Protecting Your Business’s Future: The Critical Role of Buy/Sell Agreements
For business owners, the importance of buy/sell agreements cannot be overstated. These contracts are designed to protect both the business and its owners by setting clear guidelines for ownership transitions in case of unforeseen events such as death, disability, or retirement. Without such an agreement, businesses can face severe disruptions, leading to internal disputes or financial strain.
A buy/sell agreement helps ensure that ownership changes are handled smoothly by defining how shares will be sold and at what price. More importantly, it prevents the business from falling into the hands of unintended parties, like an owner’s ex-spouse or an outsider who could negatively impact the company’s operations.
By incorporating key provisions such as purchase price determination and funding mechanisms, buy/sell agreements give businesses a solid foundation for navigating ownership transitions, ultimately protecting their long-term success.
Business owners should strongly consider buy-sell agreements to safeguard the interests of both the business and its owners. These agreements are invaluable in setting clear guidelines for ownership transitions in various situations, from unforeseen events to changes in business dynamics. They typically cover:
Regulation of the owners' relationships
Management of the business
Transfer of ownership interests
Privileges and protections for owners
Buy/sell agreements help mitigate risk by preparing for unexpected events, ensuring business continuity, and avoiding costly disputes that can arise without proper planning. Let’s dive into the key components of buy-sell agreements, triggering events, and methods for determining a purchase price.
Triggering Events in Buy/Sell Agreements
Buy/sell agreements are activated by specific "triggering events" that require the sale or transfer of an ownership interest. These events typically fall into three categories, each representing a potential risk to the business:
Third-Party Sale Triggers
Business owners are often concerned about a potential sale to outsiders, as a new owner could disrupt the company’s decision-making process. To prevent unwanted transfers, such as shares falling into the hands of an ex-spouse following a divorce or creditors following bankruptcy, buy/sell agreements often include protections against third-party sales.
Owner Viability Triggers
An owner's physical or mental incapacity can impact the smooth operation of a business. Buy/sell agreements ensure that the company has a plan in place to manage ownership transitions in the case of death or disability. In many cases, the agreement may also outline the use of life or disability insurance as funding mechanisms for the buyout.
Relationship Severance Triggers
When an owner leaves the company, whether through resignation, retirement, or termination, it can create complications for the remaining owners. A buy/sell agreement mitigates this risk by defining the terms for how shares will be handled, preventing a former owner from joining a competitor or disrupting the company's future.
Key Provisions in Buy/Sell Agreements
A well-structured buy/sell agreement should include provisions that address potential challenges and outline clear solutions. These provisions help ensure a smooth ownership transition:
Purchase Price Determination
Methods for determining the purchase price can vary. Common approaches include:
Fixed price (e.g., book value)
Agreed-upon formula (e.g., multiple of earnings)
Agreed-upon methodology (e.g., market-based)
Third-party appraisal by a qualified business appraiser
Restrictions on Transferability & Rights of First Refusal
To protect existing owners' interests, buy/sell agreements may restrict the transferability of shares. This provision ensures that owners cannot sell their shares to outsiders without first offering them to other owners or the business itself.
Employment & Non-Compete Clauses
These provisions help protect the business from former owners who may attempt to start a competing company after leaving. The agreement can restrict such actions, safeguarding the company's market position.
Call & Put Options
Call and put options allow owners to buy or sell shares at a predetermined price, giving them control over the timing and terms of ownership changes.
Funding & Terms of Purchase
Buy/sell agreements often specify how the buyout will be funded, such as through insurance proceeds, company profits, or loans. This ensures the transaction is financially manageable for all parties involved.
Types of Buy/Sell Agreements
There are several types of buy/sell agreements, each with its own advantages depending on the business structure and ownership:
Cross-Purchase Agreements
In a cross-purchase agreement, individual owners purchase life insurance policies on each other. Upon a triggering event, the remaining owners buy out the departing owner’s shares.
Pros: Owners maintain control over their shares; favorable tax treatment for surviving owners.
Cons: Becomes complicated with multiple owners due to the number of policies required.
Entity-Purchase Agreements (Stock Redemption)
In this arrangement, the business itself buys the departing owner’s shares, using a single insurance policy on each owner.
I’ll be discussing this in greater detail next month as the Supreme Court has just issued a ruling that affects how entity purchases are taxed moving forward.
Combination of Third-Party & Business Purchase Arrangements
This hybrid address both cross-purchase and redemption arrangements and may provide right of first refusal provisions for the remaining owners and the business.
Pros: Offers flexibility to decide at the time of the event; suitable for changing business circumstances.
Cons: More complex to structure and manage due to the number of options available.
More on Methods to Determine the Purchase Price
Valuing a business for a buy/sell agreement is essential and can be approached in several ways:
Fixed Price
A simple approach where the owners agree on a fixed price for the shares. However, this method may become outdated quickly if not regularly updated to reflect changes in business value.
Agreed-Upon Formula (e.g., Book Value or Multiple of Earnings)
Formulas offer a straightforward method of valuation, such as using a multiple of the company's earnings. This method is low-cost but can oversimplify the valuation process, potentially leading to inaccuracies.
Agreed-Upon Methodology (Market-Derived)
This method employs an agreed-upon market-based valuation approach to calculate the price. It provides more accurate results than formulas, particularly for businesses that undergo rapid changes in value.
Appraisal by a Qualified Business Appraiser
An appraisal performed by a third-party expert can ensure an accurate and fair valuation. While this is often the most reliable method, it can be time-consuming and expensive.
A well-crafted buy/sell agreement is crucial for any business with multiple owners. It provides a clear plan for ownership transitions, helps protect against unexpected events, and ensures fairness for all parties. Whether you opt for a cross-purchase, entity-purchase, or a combination of both, having a buy/sell agreement in place will help secure the future of your business and avoid costly disputes.
It’s essential for business owners to work closely with legal and financial professionals to tailor the agreement to their specific needs, ensuring it is regularly updated as the business grows and changes.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Financial Goal Setting: 5 Simple Steps for Success
I want to make my case for why goal setting matters for your financial picture. A study by Gail Matthews at Dominican University showed the benefits of goal setting, specifically the advantages of having written goals with accountability. Feel free to check out the study yourself, but she found that having written goals gave people a 33% higher chance of success compared to those with unwritten goals. Here are 5 steps to help guide you through your financial goal-setting and give you more confidence in your financial plan.
Step 1: Define Specific Goals
I got my bachelor’s degree in exercise science, and in my program, every class emphasized goal setting. Whether discussing exercise and nutrition or personal finance, achieving a goal must be done with strategy in mind. The strategy I find the most effective in goal setting is called SMART goals. SMART stands for specific, measurable, attainable, relevant, and time-bound. By being specific, you can track progress and know when you’ve achieved your goals. For example, “I am going to invest 5% of my monthly income into a Roth IRA for the next year”.
Specific: Investing into a Roth IRA
Measurable: 5% of monthly income
Attainable: 5% is a manageable contribution
Relevant: Relevant for someone starting to invest
Time-bound: The next year
Step 2: Prioritize Your Goals
The reality is we can’t focus on a bunch of goals at one time. When we try to accomplish too many goals at once, they all suffer, hurting our chance of accomplishing the most important ones. I recommend prioritizing your list of SMART goals down to your top 3. This could be due to urgency or importance. Examples include creating a budget or maxing out your IRA contribution for the year. Jot down all the goals, but don’t set the expectation that you can do them all at once.
If your goal seems too big, break it down into a few smaller goals that will help you see the progress quicker. For example, break down a goal to pay off all debt into paying off credit card debt first, then student loans, and then car loans. This way, you break down a goal that would take 3 years, allowing you to check off one goal each year, making it more manageable.
Step 3: Create A Plan and Track Progress
Now that you’ve established your SMART goals and broken them down by priority, the rubber can hit the road. There are multiple ways in which this can be done well, so find what works for you and stick with it. Research shows that written goals with accountability give you the highest chance for success. Whether you write your goals in a journal, your phone notes, or an app, the important part is that you do it.
Step 4: Use Goals to Cultivate Consistency
This point could be summed up if you read the book “Atomic Habits” by James Clear. If you’re interested, I can’t recommend that book enough. Clear makes the point that small habits that are successfully implemented over time lead to major changes. Essentially, it is easier to make three small changes than to make one major change. This is where accountability comes into play.
If you’re married, you have a built-in accountability partner. One that will likely share the same goals as you. If you’re single, find a trusted friend or family member who can help keep you on track with your goals over time. The beauty of financial goals is that these individual goals often turn into habits that can be automated. In my earlier example of putting 5% of your monthly income into a Roth IRA, by doing this, you build a habit that can be repeated year on year with minimal effort.
Step 5: Learn from Setbacks and Adjust
News Flash: Setbacks will happen for everyone. Nobody is perfectly consistent, and a lack of consistency will lead to setbacks. I don’t say this to discourage you, but hopefully to encourage you. A setback does not equal failure when it comes to goal setting. By readjusting instead of giving up, you give yourself a chance to still be successful. Your financial life is a constantly changing picture, and your goals should be no different. Having goals in place, even after adjusting for unforeseen circumstances, will still put you in a better position than if you had never set the goals to begin with.
Goal setting is an incredibly important way to implement changes to your financial picture. It is how you intentionally go from getting out of debt to saving for retirement and having a bulletproof retirement plan. The beauty of goal setting is that it benefits everyone from the 18-year-old college student to the 72-year-old retiree and everyone in between. Use these steps to sit down and see the benefits for yourself.
References
https://www.dominican.edu/sites/default/files/2020-02/gailmatthews-harvard-goals-researchsummary.pdf
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Next Avenue Feature: Degrees of Difficulty
Ben Lex was recently featured in a Next Avenue article titled “Degrees of Difficulty.”
In it, he discusses smart financial strategies for approaching a spouse returning to school. Check out Ben’s insights—they’re great tips for navigating your financial life with advanced education.
Financial Planning Feature: Back-to-school is a reminder for financial advisors to review clients' educational savings goals
Andrew Van Alstyne had the privilege to be featured in Financial Planning, where he shares insights on the importance of revisiting educational savings strategies during the back-to-school season.
Andrew emphasizes the need for financial advisors to help clients stay on track with their educational savings goals by regularly reviewing and adjusting their college savings plans.
Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Creating an Impactful Transfer of Wealth: Leaving Blessings, Not Burdens with Simple Strategies
Passing on wealth to the next generation is more than just managing financial assets—it's about ensuring your values, wisdom, and legacy endure. This article explores simple strategies to transfer both financial and qualitative capital, helping you create a lasting legacy for your family.
Passing on wealth to the next generation is a crucial aspect of financial planning, and doing so in a way that minimizes tax implications is a priority for many families. The key lies in finding the balance between effective and straightforward while avoiding unnecessary complexity. There are practical methods available that can simplify the process for your family, regardless of your net worth. In this article, we’ll explore a range of strategies, including the family bank philosophy which is suitable for various net worth levels if you look beyond the financial impact. To that point, we’ll discuss the importance of passing on lasting philosophies and memories to your heirs, ensuring that the wealth transfer is not just about financial capital but also about the qualitative capital such as the values and wisdom that have guided your journey. By integrating these approaches, you can create a meaningful legacy that extends beyond mere monetary value.
Understanding the Lifetime Gift Tax Exclusion
The lifetime gift tax exemption can be a crucial element in estate planning. As of 2024, the exclusion allows individuals to gift up to $13.61 million over their lifetime without incurring federal gift taxes. For those with a net worth below this threshold, complex legal structures usually prove unnecessary without additional extenuating circumstances. Simpler strategies can effectively transfer wealth while minimizing tax implications. However, even for those exceeding this limit, the preference should still lean towards simplicity. Overly complex legal structures can create additional burdens and complexities for both the givers and the recipients. Understanding the implications of the lifetime gift tax exclusion can help guide more straightforward, yet effective, wealth transfer strategies.
Simple Wealth Transfer Strategies
Several simple strategies can facilitate the transfer of wealth while minimizing tax burdens:
Annual Gift Exclusion
The annual gift exclusion allows individuals to gift up to $18,000 as of 2024 per recipient per year without affecting the lifetime exclusion. This strategy effectively distributes wealth gradually over time and can be particularly beneficial for families looking to support multiple heirs.
529 Education Savings Plans
Another popular option is 529 education savings plans, which offer tax-free growth and withdrawals for qualified education expenses. You can contribute up to the annual exclusion amount each year or, contribute up to five years worth ($90,000 in 2024), and then account for it on tax form 709 over the following five years without triggering the need for the lifetime exemption. An added benefit after the passing of Secure Act 2.0 is up to $35,000 can be converted to a Roth IRA if not used for education expenses.
Direct Payments for Medical and Educational Expenses
Making direct payments for someone’s medical and educational expenses is another simple and tax-efficient strategy to transfer wealth. Payments made directly to the service providers are not considered taxable gifts, allowing you to provide substantial financial support without affecting your gift tax exclusion amounts. While this doesn’t directly contribute to an immediate accumulation of wealth, by eliminating debt, you are essentially removing the single largest barrier for Americans to build wealth of their own.
Donor-Advised Funds (DAFs)
A donor-advised fund is a charitable giving vehicle that allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. While this strategy primarily focuses on charitable giving, it can also help reduce your taxable estate and involve your family in philanthropic activities.
Roth IRA Conversions
Converting a traditional IRA to a Roth IRA can be an effective strategy for wealth transfer. Although taxes are paid at the time of conversion, the Roth IRA grows tax-free, and withdrawals are tax-free for the beneficiaries. This strategy can be particularly advantageous if you expect your heirs to be in a higher tax bracket in the future.
The Family Bank
The family bank concept is a versatile tool for wealth transfer that can be adapted to various net worth brackets. Essentially, a family bank is an informal arrangement where family members can borrow funds at low or no interest rates, providing a flexible way to transfer wealth within the family.
How the Family Bank Works
The family bank can facilitate smaller loans for education, business startups, or home purchases, all while maintaining control and oversight within the family unit. Higher net-worth families can use the family bank for more significant ventures, such as funding larger business investments or real estate acquisitions. This system allows wealth to stay within the family and be used to support each other’s financial growth.
The key to a successful family bank is implementing it with the right intentions. Clear communication and documented agreements are essential to ensure all family members understand the terms and expectations. This system fosters financial responsibility and cooperation within the family, making it a valuable tool for wealth transfer.
Passing on Qualitative Capital
While financial capital management is important, it should be looked at as merely a tool. Passing on other forms of capital creates a lasting legacy that will allow your family to retain its prosperity longer than the statistical average of three generations. Heirs who understand the values and principles that guide your wealth accumulation are better equipped to manage and grow that wealth responsibly.
There are five forms of capital in addition to financial forms your family should work to build:
Social – a dedication to positively shaping the community which they are a part of.
Structural – having a deep understanding of all the family’s doings and the ability to navigate it effectively.
Family Relationship - the ability to engage and support members of the family across generations.
Legacy – the family brand, what makes the family unique and gives all members a sense of pride.
Human - individual family members’ physical and emotional health, as well as their ability to learn, grow, and adapt.
Family traditions, stories, and personal experiences should be shared through regular family meetings, written memoirs, or video recordings. These practices help instill a sense of history and continuity, reinforcing the family's core values and philosophies.
Creating a family mission statement can also be a powerful tool. This statement outlines the family's shared values, goals, and vision for the future, providing a guiding framework for decision-making and wealth management.
Ultimately, the goal is to ensure that heirs understand the intent behind the wealth transfer. When they see that it comes from a place of love and care, they are more likely to appreciate and responsibly manage the assets they receive. This holistic approach to wealth transfer ensures that both financial and non-financial legacies are preserved.
The true essence of passing on wealth is to create a blessing, not a burden for loved ones to enjoy. By prioritizing simplicity and intentionality, you ensure your heirs receive not just financial assets but also the values, wisdom, and love that guided your journey. Whether through the family bank concept or starting off more simply by sharing cherished traditions and philosophies, the goal is to foster a legacy of care and responsibility. When wealth transfer is instilled with these emotional aspects, it becomes a source of inspiration and support, helping your heirs thrive and carry forward the family’s principles and memories.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Couples Synergy Podcast: Money Matters for Couples
Andrew Van Alstyne had the privilege to be featured on the
Couples Synergy Podcast with Dr. Ray & Jean Kadkhodaian.
Andrew recently joined Dr. Ray and Jean Kadkhodaian on the Couples Synergy Podcast for episode 321, "Money Matters for Couples." In this conversation, they explore the complexities couples face when managing finances together, highlighting the significance of open communication and mutual understanding. The episode offers practical advice on aligning financial goals and emphasizes the importance of collaboration in building a secure financial future together. Discover how adopting these strategies can strengthen relationships and set the stage for long-term financial stability.
Click the Links Below to Watch or Listen to the Full Episode:
Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Fox Business Feature: Financial experts reveal how Americans can prepare for the possibility of a recession
Andrew Van Alstyne had the privilege to be featured in Fox Business to talk to readers about best practices in preparing for times of economic uncertainty.
Andrew discusses the importance of a fully funded emergency fund along with addressing liquidity concerns in volitile times.
Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Beyond The Paycheck Podcast with Paula Christine: Transforming Life Through Financial Literacy
Andrew Van Alstyne had the privilege to be featured on the
Beyond The Paycheck Podcast with Paula Christine.
Andrew recently had the opportunity to join Paula Christine on the Beyond The Paycheck Podcast. In this episode, they discuss the everyday challenges many face when stepping into adulthood and the common hesitation parents experience in teaching financial principles to their children. Discover the importance of early financial education and how instilling good money habits in children can pave the way toward a financially secure and fulfilling future
Click the Links Below to Watch or Listen to the Full Episode:
Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Financial Freedom Podcast with Dr. Christopher Loo: Mastering Generational Wealth
Andrew Van Alstyne had the privilege to be featured on the
Financial Freedom Podcast with Dr. Christopher Loo.
Andrew recently had the opportunity to join Dr. Christopher Loo on the Financial Freedom Podcast. In this episode, they explore the crucial topic of generational wealth and how to effectively manage and transfer wealth across generations.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Net Worth Tracking: The Underutilized Financial Tool
When it comes to tracking finances, budgeting is likely what you think of, and rightly so. Budgeting continues to be the best method for establishing your monthly income and expenses to ensure you are on track. What I am suggesting is not a replacement for budgeting but a complement to it. Tracking your net worth allows you to see progress across your financial picture over the long term. Let’s dive into this underutilized tracking method that can significantly impact your financial outlook.
How to Figure Out Your Net Worth
The first step in calculating your net worth is understanding the necessary information. You can think of net worth as a mathematical equation. The equation goes: Assets - Liabilities = Net Worth. To break it down even further, I will often explain net worth as the difference between what you own and what you owe. What you own (assets) would consist of your home, vehicles, investments, money in the bank, and other tangible goods. What you owe (liabilities) would be any home loan, auto loan, student loan, or other consumer debt.
There is no shortage of methods for tracking net worth, so the best method will ultimately be what works for you. There are plenty of Net Worth Calculators on the internet, but I like to use the Schwab Net Worth Calculator. Others may prefer to create their own spreadsheet. Both methods are great ways to calculate and track your net worth.
How Often to Track
Once you know what comprises the net worth statement, you need to figure out how often you will track it. This is a preferential component, but the most effective frequency is calculating and recording your net worth every year. Because of fluctuations in cash flow and investment performance, tracking on a monthly or quarterly basis would not have much benefit. Doing this yearly makes the most sense because enough time has passed to see legitimate progress. Many people do an end-of-year financial review, and adding this into that process can be simple.
The other reason I like the year mark for calculation is that net worth is intended to complement your budget. Your monthly budget ultimately leads to the progress you see in your net worth statement. It takes the monthly victory of following your budget and shows you a more substantial victory by compounding those smaller wins over the course of a year.
The Benefits of Tracking
All this information is excellent, but why do it? Where does the benefit actually come into play with tracking net worth? The main advantage lies in the bird' s-eye view of your financial well-being. It provides you with context on financial components that your monthly budget doesn’t take into account. Seeing overall liabilities go down and, in turn, watching your asset total rise over the years can be an excellent encouragement to stay the course.
The final benefit of net worth tracking is its opportunity to measure success based on your progress instead of basing it on others. No two people have the same financial picture, so why compare to someone in an entirely different circumstance? Often, we can't help ourselves from it. But by tracking your net worth year after year, success is measured by your improvement from the last year and not by how your number stacks up to those around you.
The “Secret” to Growing Your Net Worth
The final question that often accompanies conversations about net worth is how to improve your number. Honestly, it’s pretty simple, and the answer isn’t anything groundbreaking—consistent effort. By being consistent over time, you allow compounding growth to occur. Not just when it comes to your money compounding but also the good habits associated with money management. Much of this comes back to the foundational principles I discuss in my article, “Mastering Your Money: Budgeting Essentials and When You Need Them.” The “secret” to improving your net worth is consistent effort over a long enough period.
Final Thoughts
Net Worth tracking doesn’t have to be very time-consuming, especially if it is done only once a year. Taking an extra 30 minutes at the end of each year to calculate your net worth may quickly become your favorite way of tracking financial progress. Remember, this is not intended to replace your monthly budget. If done properly, your net worth statement will be an amplified version of your monthly efforts and diligence.
References
https://www.schwabmoneywise.com/net-worth-calculator
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
The Power of a Family Bank
Discover the power of a family bank: transform your wealth management. Many American families face the challenge of preserving and growing their wealth across generations. The concept of a family bank offers a robust solution, providing a structured system to manage and utilize family wealth effectively.
Many American families often face the challenge of preserving and growing their wealth across generations. The concept of a family bank offers a robust solution, providing a structured system to manage and utilize family wealth effectively. Drawing inspiration from Emily Griffiths-Hamilton's "Build Your Family Bank" and James E. Hughes Jr.'s "Family Wealth," this guide introduces you to the philosophy and logic behind creating a family bank. Let us explore how this powerful strategy can transform your wealth management approach.
Initial Steps to Establish Your Family Bank
Establish Leadership and Oversight
Set up a governance framework with clear roles and responsibilities. Typically, this involves a family council or board of directors that oversees the bank's operations, makes key lending decisions, and enforces policies. A structured governance system ensures transparency, accountability, and consistent decision-making.
Develop Lending Policies
Set transparent lending policies, including who can borrow, for what purposes, interest rates, and repayment terms. Incorporate the Applicable Federal Rate (AFR) to ensure compliance with tax regulations of family loans. Family members should submit business proposals to acquire loans, fostering a professional and disciplined approach to borrowing.
Implement Family Financial Education Programs
Provide ongoing financial education to family members through family summits or retreats, educational resources, and mentorship programs with individuals outside of the family. These initiatives should be specifically tailored to different age groups and financial literacy levels, ensuring that everyone can learn and grow at the life stage they are in.
Continuous Improvement
Regularly evaluate the performance of the family bank, reviewing loan impacts, financial health, and policy adherence. This ongoing assessment allows for timely adjustments, ensuring the bank remains effective and aligned with its goals. An idea format for these meeting is at an annual family retreat.
Benefits of a Family Bank
Wealth Preservation
A family bank helps preserve wealth by keeping financial resources within the family, reducing reliance on external financial institutions, and retaining interest payments within the family circle. This internal circulation of funds strengthens the family's financial base.
Fostering Innovation
Family banks can be a crucial source of funding for entrepreneurial ventures. By providing capital to family members with innovative ideas, the family bank fosters a culture of entrepreneurship and business growth, encouraging family members to pursue their ambitions with the support of the family. This also improves the overall competencies of the family as they gain knowledge in these new ventures.
Strengthened Family Bonds
The collaborative nature of a family bank strengthens family bonds. By working together towards the overall health of the family and the family bank, family members develop deeper trust and cooperation, enhancing family unity.
Empowering Financial Decision-Making of Future Generations
The educational aspect of a family bank improves financial literacy among family members. This knowledge equips them to make informed financial decisions and manage their resources effectively, contributing to their personal and professional success.
Shifting Future Growth Opportunities to Younger Generations
A family bank allows for the strategic shift of financial risk to younger generations who are better positioned to manage it. This can include funding new ventures or investments, enabling older generations to safeguard the growth of their wealth while empowering younger members to take calculated risks.
Special Considerations
While a family bank offers numerous benefits, it also comes with potential risks and downsides that need careful management:
Family Dynamics
Managing financial relationships within a family can lead to conflicts, especially if there are disagreements over lending decisions or repayment issues. Establish clear policies and dispute resolution mechanisms through a family board comprised of multiple family members in addition to outside advisors to address conflicts promptly and fairly. In addition to the board, regular family meetings and transparent communication can also help in mitigating misunderstandings.
Risk of Family Loan Defaults
There is always a risk that family members may default on loans, which could strain family relationships as well as the bank's financial health. Implementing a family investment policy statement for lending policies in addition to requiring detailed business proposals for loans by all family members. The family should also establish plans for how they would like to manage defaults should they occur.
Governance Challenges
Ensuring effective governance can be challenging, particularly if family members lack the necessary experience or commitment. Create a strong governance structure with experienced members and include external advisors that have the family’s best interest at heart.
Maintaining Financial Discipline
Ensuring that all family members adhere to the established policies and guidelines can be difficult as a family grows and evolves. Continuously work to ensure family policies are being enforced consistently and conduct regular audits. Foster a culture of accountability through transparent reporting and setting clear consequences for policy breaches. This may include excluding family members from use of the family bank.
The Rockefeller Centre in New York City
A Real-Life Example of a Successful Family Bank
The Rockefeller family has long used family banking principles to preserve their wealth across generations. By focusing on stewardship and long-term planning, they have maintained their financial legacy. The Rockefellers emphasize financial education and mutual support, ensuring that each generation is equipped to manage and grow the family’s wealth. Their family bank supports entrepreneurial ventures, philanthropic efforts, and educational initiatives, reflecting their values and long-term vision.
Creating a family bank can be a transformative strategy for individuals looking to manage and preserve their wealth for future generations. By fostering a family-wide view of financial stewardship, education, and mutual support, a family bank can not only secure a financial legacy but also promote family unity and fiscal discipline. I hope this guide has provided you with valuable insights into the power and potential of a family bank. If you have any questions or would like assistance in establishing your own family bank, it would be an honor to help you.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Legacy Planning(c), A Resource Library: The 5 Pillars of Capital For Your Legacy
Andrew Van Alstyne had the privilege to be featured on the
Legacy Planning(c), A Resource Library’s Podcast with Angelina Carleton.
Andrew and Angelina discuss that while most families seek out management of their financial capital, it is important to remember financial capital is merely a tool that should be used to grow the qualitative forms of capital within the family.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Wealthtender Ask an Advisor Feature: Is $5.5 Million the Magic Number to Retire Comfortably and Pass Wealth to Your Children?
Andrew Van Alstyne had the privilege to be featured in Wealthtender’s “Ask an Advisor” for how much money is needed for retirement.
Andrew discusses that it is important to focus what you want retirement to look like when calculating the amount you’ll need. He also discusses a different way of thinking as to how to leave a legacy to your loved ones while still alive.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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The Power of Backdoor Roth for Sales Professionals
Sales Professionals are constantly trying to figure out how to gain an extra edge over their competitors and better position themselves for customers. This should extend to navigating their financial picture and creating a solid retirement plan. Here’s where the backdoor Roth IRA enters the picture. While this financial planning strategy is open to many high-income professionals, it is uniquely advantageous for professionals with a variable income. While this approach doesn’t make sense for all high-income earners, it is worth keeping in your back pocket for when the time is right. In this post, we dive into this strategy, how it is utilized, and who should and shouldn't consider using it.
What is a backdoor Roth?
You may have heard of this strategy, but what exactly is it? A backdoor Roth IRA is not a type of account but rather a method to contribute to a Roth IRA even if your income exceeds the IRS income phase-out limits. You contribute to a traditional IRA with a contribution that is not tax deductible and then transfer those funds to a Roth IRA. Once completed, you can invest those funds within your Roth IRA, giving you access to the long-term tax advantage of a Roth IRA.
Why is it useful?
To understand why this is a beneficial strategy, we must first differentiate between a Roth IRA and a traditional IRA. Both are Individual Retirement Accounts (IRAs) used to invest money for retirement purposes. A traditional IRA has contributions that are tax-deductible in the year you contribute. When that money is pulled out in retirement, it is taxed at your regular income rate. Conversely, Roth IRA contributions aren’t tax deductible but grow tax-free. Withdrawals in retirement aren’t taxed, assuming you are 59 ½ or older and the account has been open for five years. The other perk of having Roth assets is the lack of required minimum distributions (RMDs), unlike traditional assets, which necessitate distributions starting at age 72, whether you desire them or not.
This strategy is useful for two groups of people. This isn’t a blanket recommendation for these groups, but if you fall into one of these groups, it may be worth considering. If you are a relatively young, high-income individual or household, a backdoor Roth might make sense since you have plenty of time for your investments to grow tax-free. The other category of people that should investigate this strategy would be someone who exceeds the income limits to contribute to a Roth and is anticipating their retirement income and tax bracket to be higher than their current income and tax bracket. However, it’s crucial to consult with an advisor for personalized analysis.
Should you utilize it?
The first criterion for this strategy is an income that exceeds the IRS phase-out limit to contribute to a Roth IRA directly. In 2024, the phase-out is from $146,000 to $161,000 for singles and heads of households. The phase-out for married couples filing jointly is between $230,000 to $240,000. These limits can change annually, making it important to check the IRS website for the current year's standards. If your income exceeds these limits, working with a financial advisor to ensure it is the most prudent strategy in that given year is critical. It is essential to proceed correctly; you should work with an advisor and CPA as you make this decision.
Who Shouldn’t Do This?
While there are numerous advantages to doing a backdoor Roth conversion, it is important to weigh the downsides. There can often be tax implications that come alongside a backdoor Roth that could ultimately make the strategy less attractive, especially if you cannot afford the taxes. The other consideration is your investment timeline. The shorter the investment horizon, the less likely a backdoor Roth is a wise strategy. This often comes into play for those late in their careers. While other circumstances make a backdoor Roth a less attractive option, these are the two primary considerations that a financial advisor and CPA should be able to help you work through.
Final Thoughts
It's important to remember that the decision to use this strategy is not a one-time event. It's a discussion you should have with your financial advisor and CPA to ensure it's still the best approach for you. This strategy is not a one-size-fits-all solution and should be carefully analyzed before considering it. When used correctly, it can be one of the most powerful tools in your financial planning arsenal. Feel free to reach out if you need clarification on whether this approach is right for you.
References
https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Wealthtender Ask an Advisor Feature: How Can a 24-Year-Old Married Couple Strike a Balance Between Short-Term Saving and Long-Term Financial Security?
Andrew Van Alstyne had the privilege to be featured in Wealthtender’s “Ask an Advisor” for what to focus on financially as a young couple.
Andrew discusses the importance of planning ahead for major life events, communicating with your spouse, and optimizing your savings strategy to be tax efficient.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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KAJ Masterclass Live: Managing Multi-Generational Wealth
Andrew Van Alstyne had the privilege to be featured on the
KAJ Masterclass Live Podcast.
Andrew discusses the importance of early discussions amongst family members to instill financial literacy. Andrew also shares his insights on how these open discussions can prevent financial under-preparedness. He also talks about the role of including all family members in wealth management, the benefits of starting inter-generational wealth transfers before death, and how to overcome the tension of talking about money in families with difficult financial histories.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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MSN Ask an Advisor Feature: What steps can a couple in their early forties with tweens take to balance saving for retirement and funding their children’s education?
Andrew Van Alstyne had the privilege to be featured in MSN to talk to readers about saving for both your children’s education and for retirement.
Andrew discusses the importance of setting goals and priorities while remaining adaptable to the variabilities that life may bring you.
Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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The Importance of Filing Estimated Quarterly Taxes
Learn why filing estimated quarterly taxes is crucial for avoiding IRS penalties, managing cash flow, and ensuring financial predictability. Our comprehensive guide provides key dates, steps to estimate what you owe, and expert tips for entrepreneurs, investors, and high-net-worth individuals.
Navigating the tax landscape is a critical aspect of financial planning for many. One crucial component of this landscape can be the filing of estimated quarterly taxes. Unlike employees who have taxes withheld from their paychecks, individuals who generate income through self-employment, investments, or other non-traditional means must take responsibility for calculating and paying their taxes in installments throughout the year. Here, we’ll discuss the importance of filing estimated quarterly taxes, key filing dates, how to properly estimate what you owe, as well as other essential considerations.
Why Estimated Quarterly Taxes Matter
Paying estimated quarterly taxes is vital for several reasons:
Avoiding Penalties:
The IRS requires taxpayers to pay their taxes as they earn income. Failing to pay enough in estimated taxes can result in significant penalties and interest charges when taxes are filed at the end of the year. By making quarterly estimated payments, you can avoid these late fees entirely. This proactive approach helps maintain financial stability and compliance with tax laws.
Cash Flow Management:
Regularly paying taxes throughout the year helps manage cash flow, preventing a large, and usually unexpected, tax bill at the end of the year. For most, this means avoiding a sudden drain on resources that could impact other financial goals.
Financial Predictability:
Quarterly tax payments provide a clearer picture of your financial health throughout the year. By aligning your tax payments with your income streams, you can make more informed decisions about budgeting, investments, and business expenditures.
Key Filing Dates
The IRS has set specific deadlines for paying estimated quarterly taxes:
First Quarter: April 15
Second Quarter: June 15
Third Quarter: September 15
Fourth Quarter: January 15 of the following year
Please be mindful that if the due date falls on a weekend or holiday, the deadline is extended to the next business day. Missing these deadlines can trigger late payment penalties, so it’s crucial to mark your calendar and set reminders.
It is important to note that these quarterly dates are not aligned with traditional fiscal calendars. The second and third quarters were adjusted in the 1960s to align with the Congressional budget year which starts on October 1. This timing allows the government to receive an additional quarter of tax payments before the new fiscal year begins.
Estimating What You Owe
Accurately estimating your quarterly taxes involves a few key steps:
Calculate Your Expected Income:
Estimate your total income for the year from all sources, including self-employment, investments, rental properties, and any other income streams. This estimate should be as accurate as possible to avoid underpayment or overpayment.
Deduct Allowable Expenses:
Identify and subtract any business expenses and deductions for which you are eligible. This might include costs related to operating your business, such as supplies, travel, and home office expenses. Ensure you keep detailed records and receipts to substantiate your deductions.
Subtract your deductions from your total income to get your taxable income.
Special Considerations
Safe Harbor Rule:
To avoid underpayment penalties, the IRS provides a "safe harbor" rule. If you pay at least 90% of your current year’s tax liability or 100% of the previous year’s liability (110% for high-income earners), you can avoid penalties. This rule provides a buffer for taxpayers whose income might vary year-to-year, offering some peace of mind.
Income Fluctuations:
For individuals with fluctuating incomes, such as seasonal businesses or commission-based earners, it may be beneficial to use the annualized income installment method. This method allows you to pay estimated taxes based on the actual income earned during each quarter. This approach can help ensure that your tax payments more accurately reflect your income patterns.
Given the complexities of estimating taxes, especially for those with diverse income streams, consulting a tax professional or financial advisor can provide valuable insights and help ensure accuracy. A professional can also help you identify potential deductions and tax-saving strategies, keeping you compliant with tax regulations while optimizing your tax liability.
Filing estimated quarterly taxes is a critical responsibility for many entrepreneurs, small business owners, and high-net-worth families. By understanding the importance of timely and accurate payments, knowing the key filing dates, properly estimating what you owe, and utilizing available resources, you can avoid penalties, manage your cash flow more effectively, and maintain control over your financial future.
Filing estimated quarterly taxes does not have to be a daunting task. With careful planning and the right approach, you can stay ahead of your tax obligations and focus on what you do best— growing your business and managing your wealth.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Money Talk with Skyler Fleming: How Family Conversations Shield You from Financial Under-Preparedness
Andrew Van Alstyne had the privilege to be featured on the
Money Talk with Skyler Fleming Podcast.
Andrew discusses the importance of family conversations in financial planning. Andrew also shares his insights on how open discussions can prevent financial under-preparedness. He also talks about the role of including all family members in wealth management, the benefits of inter-generational wealth transfers, and how to overcome the tension of talking about money in families with difficult financial histories.
Click the Links Below to Watch or Listen to the Full Episode:
Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
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Sales Gravy Podcast Feature: Personal Finance Strategies for Sales Professionals
Ben Lex had the privilege to be featured on the Sales Gravy Podcast.
Ben discusses the importance of personal financial well-being for sales professionals and how to improve their current circumstances with their variable income.
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Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
Recent Articles Written by Ben
A cash balance plan helps business owners save more for retirement while lowering taxes. With higher contribution limits than a 401(k) and tax-deferred growth, these plans offer major financial advantages. Employers fund the plan, providing stable benefits for employees. While they require annual contributions and administration, the tax savings and wealth-building potential make them a smart choice for high-income professionals.