The Three Circles of Wealth – The Common Denominator
Every business owner I have ever met says they are “So busy being successful, they don’t have time to evaluate the impact of legislative change on their personal planning.” The tyranny of the urgent overcomes their ability and energy to deal with their personal affairs as forward thinkers. Another frustration occurs if they have taken the time to do planning. The effort and emotional energy as well as the financial resources are staggering to them. But again, legislative changes have come along and rendered much of what they did in the past, obsolete. They once had a plan by design, but now through time and erosion due to these changes, their plan became one by default.
Another common denominator is every business owner is trying to manage their Three Circles of Wealth. I call these circles – Wealth Accumulation, Wealth Succession, and Wealth Preservation. The three circles comprise many tools and the cost can be significant to implement and maintain them. But the “too busy” problem and the velocity of change renders many of these choices ineffective and inefficient. Systemic barriers are erected to prevent the circles from being efficient and effective.
Wealth Accumulation–In this circle we see investment vehicles designed to preserve and grow assets. The most common tools are retirement plans for the owner. These plans usually include employees to meet specific tax rules. In addition, most owners have purchased some real estate, often for the business. In some cases they have purchased a vacation home and perhaps have built a stock portfolio, which often is underperforming the markets.
Wealth Succession–This circle refers to the continuity of the business. Owners usually have some type of buy and sell agreement to make sure their family gets some value if they die. If they have partners or perhaps a key person, the buy-sell will include them. Many times the plan is funded with term life insurance. In some cases, they may have looked at an ESOP as a way to extract capital from the company. There may be some type of executive compensation plan for top employees. And in some cases, they may have sold stock to one or two key employees as a way to tie them to the company for the long run. These are all viable strategies.
Wealth Preservation–This final circle protects the value of the business owner’s estate from forced liquidation at death to pay estate taxes. And while in a community property state, the payment of taxes can be postponed until both spouses die; the magnitude of the problem can be devastating to the estate. There are over 400 planning tools which can be used to eliminate or avoid estate taxes entirely.
Here is the Systemic Problem – These circles operate independently and there is often no coordination of thinking being employed. As a result, inefficiencies occur and money is often wasted.
