Preserving Your Wealth: 4 Wealth Planning Questions You Need to Answer

The ability to ask and answer the 4 essential wealth planning questions below can have a significant impact on you and your family’s near- and long-term financial health, as well as the legacy you leave for future generations.

1. What can I do when I have significant wealth in my company’s stock but need immediate liquidity? An executive who wishes to sell company stock must weigh the personal benefits from doing so against a possible negative impact on public perception and share price. Regulatory restrictions and corporate ownership policies further complicate the diversification process for executives—especially if they are insiders.

Executives in this situation should consider the following options:

• Selling company stock or exercising options during an open window period
• Implementing a 10(b)5-1 plan which will allow for the sale of shares even during blackout periods. A 10(b)5-1 plan that incorporates a wealth transfer or charitable strategy allows for a Form 5 filing at the end of the year instead of a Form 4 two days subsequent to the sale.
• Borrowing against a reasonable amount of company stock if permitted
• Diversifying out of company stock through a charitable remainder trust which can circumvent capital gains tax and provide an income stream

2. Should I defer compensation and, if so, when and how? Often executives are offered the opportunity to defer compensation, especially in light of recent reductions or eliminations of company-provided retirement vehicles. Salary and fixed bonuses must be deferred by December 31st of the year before they are earned. Performance-based compensation must be deferred by June 30th of the year in which the performance takes place.

Deferring compensation could result in significant long-term tax savings. However, a decision to defer will hinge on 6 key factors:

1) Liquidity needs
2) Length of deferral
3) Residency at time of distributions
4) Company match
5) Investment alternatives available in the plan
6) Long-term credit risk of the company

3. Where do I want to live? Many decisions an executive will face depend in large part on where he or she lives. Some states, such as Florida, do not have a personal income tax. Others, like California, impose state-level income taxes close to 13%. An executive’s residency impacts his or her investment portfolio, pension plan payout elections, and deferred compensation. Executives living in a high-tax jurisdiction may benefit from investing in municipal bonds issued by their home state. By moving to Florida, for instance, you may be able to reduce or eliminate state income taxes by electing to receive deferred compensation distributions in ten or more installments. That payment election provides that, for state income tax purposes, the deferred compensation payouts will be treated as income in the state of residence rather than the state where the income was originally earned.

4. Do I have the right insurance? An annual “insurance-checkup” is an important part of an executive’s financial planning. Since most company-provided insurance plans may be portable, but very expensive, executives can benefit from establishing their own coverage. For estate planning purposes, executives should consider reviewing second-to-die insurance held by an irrevocable insurance trust. The cost of the insurance is particularly reasonable since it is based on the younger and healthier spouse. Personal liability coverage should be reviewed as executives take on increased professional responsibilities such as company board positions.

The strategies discussed here often involve complex tax and legal issues. Your own attorney and other tax advisors can help you consider whether the ideas illustrated here are appropriate for your individual circumstances.