The Challenge:

Two partners managed a very successful manufacturing business in New Jersey.  When one of the partners decided to retire, the other partner bought him out.  Since they started the business, both owners had reinvested most of their capital back into the business.  This resulted in the Client having a very concentrated risk with almost 80% of his family’s net worth tied up in the business. 

With total control of the company, several additional duties, and managing the 60 employees company, it was becoming more difficult to balance his time in the business with his family time.  The children, now adults and on their own, expressed interest in making the company their future.  As a result, two of his three children currently work in the company. The Client’s primary goal was to have a plan to maximize any tax savings and start diversifying the family’s net worth by drawing on retained earnings, as well as have a succession plan to transition the business to his children.   

The Analysis:

During meetings with the Client and his CPA, we recognized the Client’s ability to maximize their retirement savings by implementing a Cash Balance Pension Plan paired with the existing 401(k) Profit Sharing Plan we had implemented when the business started.  We also consulted with the client to identify roles and responsibilities that were on his shoulders that should be delegated to others, including his children. However, during discussions with the Client, we learned that certain key staff were not performing up to the owner’s expectation and recommended he replace certain personnel with more qualified employees at competitive compensation. 

From further discussions with the Client, it was discovered that he had a general distrust for the financial markets.  Over a series of educational meetings, we were able to increase the client’s understanding of the risks and returns available by diversifying out of his business into financial markets. With the help of the CPA, we determined an amount of retained earnings to safely withdraw from the business and invest in the capital markets for the client’s future. 

The Recommendation:

After months of work with the Client, we implemented a Cash Balance Pension Plan and the client is sheltering over $400,000 per year for him and his wife.  The Client’s taxable income was significantly reduced, and as a result of diversifying his capital out of the business, the Client’s business represents about 50% of his net worth, resulting in a significant reduction of business risk.  Our work with the client resulted in a written career development plan and training to prepare his children for ownership in the business.  The Client appreciates the tax savings he has realized and the peace of mind knowing there is a process in place so he can focus on what matters most.