Success Stories
Featured Success Stories
Jason
Age: 43
Objective
Organize cash flows in a manner that supports personal and business needs.
The Situation
Jason's garden products company was successful by most any measure. Revenues and profits were growing, and even though he was reinvesting into new products & expansion initiatives, cash was still accumulating in his business accounts. So why did Jason feel like he was living paycheck to paycheck? He had very little cash in his household bank accounts, felt behind on his retirement and college savings, and even carried a balance on his credit cards. Jason had plenty of cash sitting in the business and was comfortable paying himself more. He needed a plan for taking it out in a tax conscious manner.
The Strategy
Jason's company was organized as an S-Corporation, which means that Jason takes a w-2 salary from the company in addition to profit distributions. Even though the business was making over half a million dollars each year, Jason was only paying himself $10,000 per month. This was barely enough to cover his family's monthly expenses, leading to his cash flow problems.
To start, we analyzed Jason's family's monthly spending needs by building a household profit and loss statement. We reviewed all the cash coming into and out of their household over the last three months, and advised them to target an emergency fund of $75,000 in cash on hand at all times. We then coordinated with Jason's CPA, and agreed that he should increase his salary to satisfy IRS reasonable compensation rules. It also was enough to cover their monthly household needs after taxes.
Then we discussed Jason's growth initiatives in more detail and reviewed the income statement and statement of cash flows for Jason's business. We agreed that three months' worth of operating expenses was a sufficient level of working capital to leave in the business, and added to that the total cost of upcoming equipment purchases needed for his expansion.
After setting aside business cash to cover three months' of operating expenses and his upcoming purchases, Jason still had more cash in the business than he needed. In order to avoid payroll taxes, Jason decided to take the money out as a profit distribution. He transferred the cash to his household bank account, and had enough to pay off his credit cards, fund his $75,000 emergency fund, and cut the balance of his HELOC in half.
The Results
Not only was Jason able to put an emergency fund together and knock down his debts, he now has more than enough cash coming into his household on a monthly basis. He and his wise are able to cover their expenses and contribute to retirement accounts and each of their kids' 529 college savings plans.
He also has a framework for handling business cash going forward. On top of the w-2 compensation he pays himself each month, he now has confidence surrounding how much cash the business needs to operate and grow. On a quarterly basis he reviews the business bank account balances and takes out anything in excess of the business's cash needs. Each time this happens he and his wife decide whether to contribute more to their investments, pad the kids' college savings accounts, or pay down debt faster.
Ray and Linda
Ages: 65 & 63
Objective
Transition smoothly into retirement, minimize taxation on their savings, maximize the bequest to their kids & several charitable organizations.
The Situation
Ray was a partner in a successful real estate firm, and was approaching the retirement date specified in his buy/sell agreement. Ray was confident he had plenty of resources to fund a comfortable retirement, but he was very concerned about taxation. He’d accumulated substantial savings in the company 401(k) plan, and would trigger income streams from deferred compensation and deferred sales payments once he left. Ray and his wife Charlotte needed help reducing the tax bite, both now and in the future.
The Strategy
By virtue of Ray’s deferred compensation & deferred sales agreements he and Linda would remain in a very high tax bracket for a few years after Ray’s retirement. Since they sorely needed tax deductions in these years, we set up a donor advised fund. This allowed them to make contributions and claim substantial deductions in their high income / high tax bracket years, and then trigger distributions to their charities of choice later on.
Additionally, Ray & Linda held a large portion of their portfolio in taxable corporate bonds. Given that they’d likely remain in a high tax bracket for the foreseeable future, we replaced these holdings with municipal bonds that produced tax free interest. Since the municipal bonds had a similar credit rating this change maintained a similar risk exposure in their portfolio.
Ray & Linda also happened to live in a state with an estate tax threshold of $1 million per person ($2 million combined). Since Ray & Linda’s combined estate exceeded this amount by quite a bit, the state’s estate tax would take a large chunk from their kids’ inheritance. To reduce this liability we worked with Ray & Linda’s attorneys to set up a series of trusts. Ray & Linda then placed assets inside the trusts to shield the future growth of some of their investments from estate taxation.
The Results
On top of this, once Ray & Linda turned 72 they were required to begin distributing money from their retirement savings. We were able to direct these distributions to charitable causes via Qualified Charitable Distributions, which helped to reduce taxable income from that point forward.
Ray & Linda were never in doubt about their ability to retire. But with some thoughtful planning we were able to dramatically reduce the amount they’ll pay in taxes - now, throughout their retirement, and after their death.
Amanda
Age: 58
Objective
Convert her biggest asset into a retirement income stream while retaining job continuity for her employees and minimizing taxes on the sale of the business.
The Situation
Amanda had built her successful veterinary practice from the ground up. It was hard, but she grew the practice to a staff of 8, with enough cash flow to afford a very nice lifestyle. But the years had worn on Amanda. Stressors from the business started to layer on top of one another, and she soon realized she was losing the passion she had when she started the business two decades before. As the stress began to impact her health she knew she needed a change, but didn’t know where to start.
The Strategy
We started by exploring what was most important to Amanda and what she really wanted from her resources. While her love for animals never waned, her love for her career did. She realized that it was time to transition away from the business, but was concerned about her employees’ jobs if she sold to a competitor or private equity firm.
Once Amanda knew it was time for her to sell the business, we built a retirement plan that quantified exactly what she needed from the sale of her business to live comfortably for the rest of her life. This plan included distributions to support her need to travel and see family, as well as fund health insurance costs until she turned 65 and later once she enrolled in Medicare.
Since she had saved diligently in her practice’s 401k plan, we also mapped out an income plan that incorporated strategic Roth conversions. She’d be giving up an income stream by selling the practice, and would most likely fall into a lower tax bracket. That being the case, she had a great opportunity to convert her retirement savings to tax free Roth accounts, providing substantial long term tax savings.
The Results
We then worked with her attorney and CPA to clean up the business’s books, remove her personal expenses from the P&L, and prepare to put the practice on the market.
When the offers started to come in, an experienced private equity firm with national presence posted the highest initial bid. They were willing to secure the employees’ jobs for a short period of time, and Amanda proceeded to close the transaction several months later.
We put her investment and retirement plan to work, and set aside ample cash for Amanda to pay tax on the transaction. The rest was invested according to plan, and we continue to convert her retirement savings to Roth accounts in years Amanda remains in lower tax brackets.
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