Case Studies

Real-life case studies show examples of the financial planning and wealth management process and how others are making their financial dreams come true.

Case Study Chris Hodges

Case Study: Chris Hodges

Maintaining Full Value of Securities’ Net Unrealized Appreciation

At 55 years of age, Chris Hodges’ employer, MNA Corporation, has offered her an early retirement. Chris has accumulated $4 million in her company’s profit sharing plan, including $3 million in MNA stock. With 75 percent of the plan concentrated in MNA stock and a basis of $250,000, Chris wants to diversify her portfolio but knows that most withdrawals from a profit sharing plan are 100 percent taxable as ordinary income.

Since she is 55 and recently stopped working, Chris’s financial advisor lets her in on a little-known tax advantage. Chris can withdraw all of the MNA stock from the plan and pay income tax on only the plan’s basis in the stock. The difference between the plan’s basis in the stock and the fair market value of the stock is known as net unrealized appreciation (NUA) or Section 402(e) securities. NUA is taxed at capital gain tax rates, which are lower than ordinary income tax rates. Taking advantage of this provision means Chris can take the stock out of the plan and pay only $107,000 in taxes instead of the $1,279,000 she would have paid without the Section 402(e) election. At the conclusion of the transaction, Chris personally owns $3 million of MNA stock at a cost basis of $250,000.

In order to save even more in taxes and accomplish her diversification goal, Chris contributes the full $3 million in stock to a charitable remainder trust (CRT) to create a lifetime income stream. Since a CRT is a nontaxpaying entity, Chris donates the stock to the trust and the trust can sell the stock without incurring a tax liability, saving Chris $759,000 in immediate capital gain taxes. The CRT then invests the entire proceeds of the stock sale in a diversified portfolio that produces a lifetime cash flow for Chris. Additionally, Chris received an immediate tax deduction of $965,000, which can be used to offset Chris’s other taxable income. As an additional requirement to secure the Section 402(e) benefit, Chris must roll over the balance of her profit sharing plan into an IRA during the same year.

Chris’s new wealth management plan allows her to save a substantial amount in taxes, diversify her portfolio, receive a lifetime cash flow, and create a legacy by leaving money directly or indirectly to the charities she supports.

Michael and Katelyn Connor Case Study

Case Study: Michael and Katelyn Connor

Extra Deductions and Involving Heirs

Michael and Katelyn Connor’s adjusted gross income is projected to be $200,000. With a total net worth of $2 million, including qualified retirement accounts and other investments, the couple will be faced with a $43,000 income tax bill this year.

The Connors’ accountant recommends creating a Donor-Advised Fund (DAF) for charitable giving. By transferring $50,000 worth of appreciated securities to their DAF, Michael and Katelyn avoid the capital gain on the assets and can deduct the gift as a charitable deduction against their adjusted gross income.

Michael and Katelyn will use their new DAF to engage and educate their children about the importance of charitable giving. They include their children in the process of granting their funds and also allow them to make recommendations for a portion of the DAF’s annual distributions. The Connor children are named
as the successor grant advisors and will assume the grant making upon Michael and Katelyn’s passing. The $50,000 contribution to the DAF provides a $50,000 income tax deduction and is projected to provide a current income tax savings of $14,000. Michael and Katelyn also avoid $6,000 in state and federal capital gain taxes on the highly appreciated securities transferred to their DAF, realizing a total tax savings of $20,000.

Cast Study: Bob Roberts

Case Study: Bob Roberts

Optionality Creates Exit Options for Business Owners

When many business owners first think about their business futures, their first question is, “Whom am I going to sell this business to once it’s my time to leave it?” It makes sense for owners to ask this question first, since the answer to that question can guide how their futures look. But this is a backward way of shaping a plan.

Consider the short story of Bob Roberts:

Bob Roberts had had 40 years of success running his hometown disposal company. He was ready to sell to a third-party buyer who had approached him a year earlier. The buyer told Bob that they were willing to pay him $6 million for his business, which Bob thought was more than enough to last him through his retirement. Bob always wanted to sell to a big player and retire in style.

Not long before Bob was set to close the deal, he received startling news. The buyer planned to absorb Bob’s fleet of trucks and book of business and lay off 47 of his 50 employees. Bob cared far too much about his employees to let that happen. He demanded that the buyer keep his employees as a condition of the sale. The buyer refused, and Bob took the business off the market.

When Bob tried taking his business to market a few years later, he couldn’t find anyone who wanted to give him even half of the original offer. He had tainted the marketplace by taking his business off the market early, and he still felt the negative consequences. He found himself wishing that he’d taken the original offer and that he didn’t care so much about his employees.

In this example, Bob didn’t realize how important one of his values-based goals was because he never examined it. He dove headlong into pursuing what he thought was an ideal path. In reality, his ideal path was fraught with problems he could have avoided.

Optionality in Planning:

Optionality is “the value of additional optional investment opportunities available only after having made an initial investment.” In terms of planning for your business’ future, optionality means your ability to choose an ideal Exit Path while still having the option to pursue other paths as backups. The “initial investment” is setting your goals and determining your resources. The “additional optional investment opportunities” are the Exit Paths you give yourself options to choose from. This optionality is extremely important because your conditions, situations, and wants can change as you plan for a successful future.

To most business owners, choosing their ideal Exit Path is the result of planning. Because business owners are typically results-driven, it’s where they want to start. However, before pursuing a path, you should determine whether your chosen path can achieve your goals and whether you have the resources to pursue a given path. Doing so creates optionality.

Optionality is valuable in planning because it gives you the freedom to pursue your future business goals on your terms. Optionality cannot exist unless you know your goals and resources. Choosing an ideal path isn’t the end of planning: It’s the means to the end.

Generally, there are four paths you can take to continue the business after you leave it.

  1. Third-Party Sale
  2. Transfer to Employees or Management
  3. Transfer to Children
  4. Sale to an ESOP

Regardless of which path you choose, one thing is almost always true: It’s unwise to pursue a path unless you know what your ideals and resources are. For example, an owner who wants to exit their business in six months but sell to an insider will probably be unable to choose an ideal path at the outset. Only after weighing why they want what they want against how to get what they want can owners begin to seriously consider any path.

You may have ideas about what your ideal planning path might be. You may want to start the conversation there. But we encourage you to examine your goals and resources before committing fully to any given path. If you’d like to discuss how your ideal path lines up with your goals and resources, please contact us today.

Presented by Kris Maksimovich, AIF®, CRPC®, Global Wealth Advisors,, a Member of BEI’s International Network of Exit Planning Professionals™.

The information contained in this article is general in nature and is not legal, tax, or financial advice. For information regarding your particular situation, contact an attorney, or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax, or financial advice. In specific cases, clients should consult their legal, accounting, tax, or financial advisor. This article is not intended to give advice or to represent our firm as qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we always will work closely with you to help you gain access to the resources and professional advice that you need.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

 ©2019 BEI.

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