Bursts of Color - Personal Wealth Planning (Guest Interview)
Our co-investors at private wealth firm Mercer Advisors recently hosted a dinner for us with some startup founders in San Francisco. As we munched on appetizers, Jessica Caruso and Peter Gifford gave a short Q&A based on their considerable experience with personal wealth management for founders and other startup folks. They offered some great suggestions that apply to most of us, so I’m sharing those here via the interview notes below.
Of course the TL;DR is that we should all get our personal financial plans in order as soon as possible. By consulting with tax and financial professionals early in the startup journey, we can setup a number of things with big payoffs in the years to come.
What foundational plans should everyone have in place?
JC/PG: Start with a foundational estate plan including a revocable trust, will, financial power of attorney, healthcare power of attorney, and living will.
As a next step, you can also consider advanced techniques such as ILIT (life insurance), IDGT (gifts to children), SLAT (gifts between spouses), CRUT (gifts to charity with retained income), QPRT (for 1st or 2nd house) and other strategies to minimize estate tax.
How can I be most efficient in my tax planning?
JC/PG: Start early. Consider an 83(b) election for qualifying equity grants. Consider transferring equity to self-directed retirement plans, children, or other beneficiaries prior to a liquidation event (and while your price basis is still low). A family LLP or LLC can be used to take valuation discounts on transfers of equity prior to a liquidity event.
Establish a relationship with a CPA who will be able to work through the full life cycle of the business. Consider your entire net worth in your tax planning. We frequently see founders and owners focus primarily on their business, but tax planning within your investment portfolio, your real estate, and planning for state and local taxes is just as important.
Today most of my potential net worth is illiquid and tied up in my company. Can’t I just wait and deal with this if/when we become successful?
JC/PG: This is all the more reason to plan early, while your stock is still illiquid and valued at a lower price. If you wait until the stock is highly valued, it will often be too late to benefit from some of these moves. It’s also worth knowing that illiquid assets are considered part of your estate, so if you were to die unexpectedly, your heirs could be hit with a large estate tax bill, but without the cash to pay it off.
In the meantime, it’s also good to have a prudent investment strategy with your liquid assets that matches your financial plan, return goals, and risk tolerance. These will serve as a hedge to your startup equity and help provide confidence during both ups and downs.
What is a Family Office and for whom does that make sense?
JC/PG: A family office can provide a wide variety of consolidated services under one roof: estate planning, tax planning and prep, insurance, financial planning, investment management, and corporate trustee services. A family office could make sense if you are finding it difficult or time consuming to locate and manage these separate relationships, if multiple family members and/or business partners would benefit from using the same set of advisors, or if your estate plan involves multi-generational legacy planning.
Closing Thoughts
If you’d like to learn more about Mercer Advisors specifically, check out their website, or let me know if you would like an introduction
Related: past newsletter on Tax Planning for Founders