Retirement vehicles can be especially problematic for entrepreneurs who do not have the guidance of an employer or an employer’s selected plan to assist them in the process of finding the right retirement vehicle. Although defined benefit plans were once a critical element of the retirement landscape in the United States, these have fallen out of popularity in recent years because of the financial crisis.
Many people typically associated defined benefit plans with public sector employees as well and corporate pensions are becoming less and less available. Defined benefit plans, however, can make sense for at least one type of person; a small business owner and entrepreneur.
These pension plans are an ideal retirement vehicle, giving you a broad range of benefits that can help people to keep a larger share of their wealth and run more effective businesses. Many small business owners including high net worth individuals don’t have any kind of retirement plan in place, much less a pension plan. This means no 401(k), no IRA and no investments.
Small business owners tend to be laser-focused on growing their companies and unfortunately, what often gets overlooked in that process is coming up with a way to maximize retirement savings. Any small business owner that is generating more than $200,000 a year in income should consider setting up a pension plan even if they already use retirement vehicles such an IRA or 401(k). Pension plans have some significant benefits including:
Small business owners should be aware that annual administration fees can be high, particularly for retirement plans. Consulting with an estate planning lawyer to talk about the connection between your estate planning goals and your business and retirement intentions is extremely important. A successful entrepreneur or high net worth business owner would do well to consider how a pension plan can assist them with growing things and maximizing their retirement options.
Most entrepreneurs have the same idea; build their company and then sell it for big bucks.
But most owners who do that usually end up staying with the firm for a few years after the sale is consummated. What they don’t necessarily expect are the mixed feelings they have, according to an article in theNew York Times.
First, they may feel uncomfortable as a “soldier” rather than as a “general.”
Second, their strengths are often in starting up the company – making something from nothing.
Third, even if they are ready and willing to be a good soldier and carry on the work they started, they may feel uncomfortable in the new culture of the new bosses.
Fourth, they may not like the changes that are being made to their “baby.”
In many cases, the sellers find they cannot stay on as planned. Some are able to make the adjustment.
The article says owners who plan to sell their businesses but stay on should give some thought to whether that is likely to be a good idea. Basically, let the seller beware.
Owners of private companies often hope that the business they have built will benefit their families in the long term. No matter whether you plan to benefit your loved ones by selling the business upon your death and providing them with the proceeds, or passing the business itself on, there are certain steps you can take now that will minimize the tax burden when your business eventually changes hands. Anarticle in the Financial Post details some of these steps.
One of these steps is to provide for charitable donations in your will. Such donations are treated as gifts made in your last year of life, and therefore provide a credit on your final tax return. In the year of and immediately preceding your death, the charitable donation limit is 100%, rather than 75% in all other years.
There are also a multitude of trust arrangements you can set up in your will (testamentary trusts) as a tax-effective way to transfer business assets to your families. Testamentary trusts pay income tax at graduated rates as though it were an individual. Therefore, by creating a “new taxpayer” through the trust, you may provide your family with an annual tax savings. Moreover, your spouse will not have to pay capital gains tax on assets transferred from your will to a spousal trust.
For female entrepreneurs who juggle running a business as well as a family, it is often hard to find time to create an estate plan. However, as an article in Forbes discusses, not creating or updating an estate plan may create undesirable consequences for a female entrepreneur’s family after she passes.
The article suggests that female entrepreneurs take three simple steps to avoid leaving chaos for their families and business partners. Moreover, even if the female is responsible for managing the business and household finances, it is vital for her to make sure that her spouse — if any — has a working understanding of the finances.
One key area to focus on is ensuring that your business assets travel in the right direction. While many owners would like their ownership interest in the company to pass to their business partners, the laws of intestate succession — which dictate disposition of your assets if you die without a will — will most often pass your share to your spouse or children. One way to avoid this is to put in place a buy/sell agreement. Such agreements provide instructions for how shares will be sold or distributed if a partner dies or otherwise disposes of his shares.
It is also important to assemble and make sure that you and your family are familiar with your team of advisors, and to put mechanisms in place to protect your family assets.