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How to nail your succession planning, and how that will change in the Biden era

  • Succession planning exists to ensure the smooth transfer of assets from generation to generation. 
  • There are pitfalls to be had from not planning properly, but also from over-planning, per two executives from Twinfocus, a multi-family office that oversees more than $6.8 billion in assets under advisement. 
  • Paul Karger and John Pantekidis told Business Insider that over-planning can backfire, and modeling is key to successful planning.
  • Regarding the Biden administration, Karger said it's expected to roll back the lifetime gift tax exemptions, and wealthy families looking to take full advantage of these should plan to do so before the end of 2020.
  • Visit Business Insider's homepage for more stories.

Succession planning exists to ensure the smooth transfer of assets from generation to generation. That's especially the case around a presidential election where regulations could dramatically change, as with a change-over from President Donald Trump to President-elect Joe Biden.

The tricky thing is that families can run into trouble not just from a lack of planning, but sometimes from over-planning, according to Paul Karger and John Pantekidis, managing partners at Twinfocus. Their multi-family office oversees more than $6.8 billion in total assets under advisement for a global client base of ultra-high-net worth individuals.

Karger said wealthy families and their advisers, as well as businesses, need to ask the right questions and put plans in place to prepare for the anticipated shifts that will likely occur with respect to income, estate, and business taxes — and that's definitely true ahead of a new presidential administration.

Time is of the essence before Biden takes office, Karger said, since most estate planning attorneys are going to be working around the clock through year end and it will be tough to get their time. Provided the President-elect's tax legislation passes, "It's very likely that any change to the exemption will be retroactive to cover all of the 2021 tax and calendar year, so moving quickly in the next few weeks is critical," Karger said.

The executives told Business Insider that the right, comprehensive wealth management strategy can give wealthy clients security even in turbulent times.

Over-planning can backfire

"Although it seems crazy, families can actually be too good at succession planning," Karger said, citing things like matriarchs or patriarchs giving away too much too soon, or families ineffectively coordinating what goes into trusts. 

Karger offered the example of a successful self-made entrepreneur he knows, who has a more than $100 million balance sheet. "He and his wife thought they were being proactive and inadvertently over-planned their wealth transfer, pushing assets down to their daughters too quickly," Karger said.

Then, the couple saw a few large investments "go sideways and they are now getting divorced and are in the process of dividing their assets." All of a sudden, the couple's daughters had more control of the family's balance sheet than their parents did individually.

Pantekidis said just a few bad investments and an unexpected divorce turned the balance sheet upside down, but it could just as easily be a child who gets into a car accident and has legal issues, or a child who gets divorced without a prenup.

"In that scenario, you could have ex son- or daughter-in-law that walks away with half the assets mom and dad transferred," he said. "We know families who believe they're being financially savvy by putting houses in their children's names. But what if that's the child who gets divorced? Their ex could own half of your house." 

If you're minded to make a big gift to your family, Karger said the Biden administration will almost certainly look to roll back the lifetime gift tax exemptions in early 2021, which had doubled under President Trump to $23.16 million for a married couple. Depending on the outcome of the Senate race, this could be cut in half or further as of January 1, according to Karger, assuming Biden can pass his proposed tax legislation, whic may be difficult under a Republican-led Senate. 

Being able to properly analyze your options, and modeling these options out, Pantekidis said, is the best way to guard against sudden wealth management mishaps, they said, and a holistic, total balance sheet approach is the best for that.

Be mindful of real estate 

There's a lot to consider when it comes to real estate planning, and it can differ strongly from family to family — especially depending on whether that real estate is an investment or a primary or secondary residence.

"We find that many times parents will overestimate how often properties will be used and how long their kids will want to use the properties," Pantekidis said. This is where modeling can help map out different scenarios, even very unlikely ones, he said.

And there's one succession planning strategy the pair feel strongly about — never put mom and dad's primary home in a trust. "We generally feel that your primary home should be your castle, where you always maintain complete control,"  Pantekidis said. "But surprisingly, there are many people who are getting advice to the contrary." 

Looking ahead into the Biden administration, Karger said he doesn't think historically low interest rates will change anytime soon. In that respect, he adds, the current climate creates a perfect storm for succession planning, one that good financial planners can navigate strategically.  

Value modeling and the right due diligence 

Pantekidis said mentality is perhaps the most important thing: Clients should look at at wealth structuring as a process instead of a transaction. Succession planning should be part of a family's ongoing lifestyle, constantly evolving as the family's needs, objectives, and estate change over time.

The only way to do this, he says, is to rely on a balance sheet that incorporates all assets, across generations, adding that due diligence for that, while it takes a significant amount of time, is the only way for families to get a bird's eye view of their estate and see how everything interacts. "Ultimately, this is what enables them to model for the near term or long term to prepare for various changes — planned or unforeseen — as part of the larger process," he said. 

With modeling at the heart of avoiding estate planning pitfalls, the practice allows for components from multiple cash flow streams to taxes, savings rates, and more to interact and become aligned with a family's financial goals. Built on "levers" that can be altered over time, Pantekidis says models achieve what families need, planning for the long-term and allowing for change along the way. 

For example, changes to succession planning may be necessary in the face of a Biden tax plan, where elements like philanthropic planning may be integrated alongside business, investment, and income tax planning. "This leads us to the conclusion that when looking at how a Biden tax plan may impact succession planning, you also have to talk about personal income, business, and philanthropic planning for ultra-high net worth families," Karger said.   

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