What You Can Do to Protect Your Fortune and Family Today As An Entrepreneur
It is abundantly clear that most of us have little understanding of how the coronavirus will impact our financial lives (let alone our actual lives and those of our family and friends). How far will the market drop? When will it recover? How many jobs will be furloughed or lost? Which industries will suffer significant and long-lasting downturns? What permanent changes will be embedded within the global and local landscape? Will people stop going to public or private events or even restaurants? What of the airline, cruise and hotel industries? How long will it take for our economy to recover, and in a time of trillions of dollars of debt, where and how will the U.S. government get the necessary capital to operate, let alone meet its existing debt obligations without initiating inflationary measures?
These are just a tiny fraction of the questions permeating the minds of wealth distributors on Wall Street.
We just don’t know what we don’t know.
It is precisely because we cannot predict what will happen that we need to focus our financial advisors to see through our lens, helping clients protect their wealth. Market risk in the time of coronavirus is unknown.
Today’s financial modeling must be viewed within the dimensions of a new calculous. To avoid calamity, we need to be unafraid to release our grasp of the familiar in exchange for adaptive, thoughtful and well-reasoned ideas.
To that end there are several powerful and proven ways that clients with means can safeguard their wealth in 2020—by statutorily reducing litigation exposure from the recession and by deeply reducing taxes on their taxable income – including both investment income and earnings from privately held business interests (corporations, LLC’s, partnerships, options, contracts, and other legal structures which derive revenues).
Cost savings, including tax reduction, is one of the few common-sense solutions that nearly every wealth holder can and must put into action today.
It is not uncommon for clients to save 6 to 8 figures in unnecessary tax each year through this type of planning, net of all fees, and better protect themselves and their families from a variety of risks.
There are many views on what types of planning work best. While some advocate for maximizing qualified plans and IRAs, others are rightly concerned that these government-regulated programs do not offer the capacity for substantial wealth to be transferred pretax. Worse still, they are the first and easiest assets for the government to confiscate if it needs additional tax revenue. Who amongst us believes the present tax rates on affluent Americans will actually drop when we retire? And when does it ever make sense to defer tax today into a higher bracket into the future, particularly when that bracket is unknown, unlimited, and will be determined by politicians who may not yet be elected in office?
This is an unacceptable gamble, and one that, even under the best conditions, affords only modest benefit.
Clients with more meaningful levels of income and affluence and access to today’s best advisors are looking elsewhere. One key opportunity is a series of advanced and highly customized private placement structures. Clients with means (including many well-known names on Wall Street and in the technology space) have been able to shift a meaningful portion of their current business interests, including operating companies, unicorn investments, real estate and intellectual property rights into structures that are notably more tax efficient and also provide higher levels of protection. It is not uncommon for clients to save 6 to 8 figures in unnecessary tax each year through this type of planning, net of all fees, and better protect themselves and their families from a variety of risks.
Read the full article here: https://csq.com/2020/04/bradley-barros-most-critical-risk-impacting-entrepreneurs-and-what-you-can-do-to-protect-your-fortune-family/#.YNH2LkJKg-Q
Watching Global Industries, 2020 into 2022
Often ignored by the news media are the business owners, real estate operators and developers, and professionals who maintain massive obligations to their lenders, investors, and remaining ranks of payroll. These Americans have been writing the checks to cover America’s debts (or at least the debt interest) but do not have a proportional level of support versus others.
It’s one thing to get a loan that helps cover payroll. But it’s quite another to meet one’s commercial mortgage obligations when 50% of their commercial tenants default on their lease payments.
The American public has not yet come to grips with the long-term devastation taking place in businesses across the country in the last year and into the next. Those affected in the early onslaught of 2020 include:
Southwest Airlines – negative 33%
Wynn resorts – negative 51%
United Airlines – negative 57%
Marriott – negative 48%
Disney negative 31%
Six Flags entertainment – negative 66%
It’s not only the entertainment and travel industries that were crippled. Retail has witnessed a significant list of bankruptcies, across the board. A small sampling of retailers and business categories include:
Mid level retail – Lucky brand jeans & Forever 21
Low level retail – JC Penney
Nutrition – GNC
High end retail – John Varvatos & Ann Taylor
Gourmet foods – Dean and DeLuca
Middle end foods – California pizza kitchen
Consider the revolutionary changes in industries ranging from tech to automobiles. Apple’s value literally doubled within the first year of Covid. Tesla, while selling less than 5% of the vehicles in the US marketplace, catapulted in value, exceeding the combined market capitalization of Toyota, Honda, and Volkswagen.
What’s happening?!
As always, Wall Street bets on the future value of stocks. So we must as well. As tech startups and industry giants attract investment, their need for capital is reduced. In an era where hundreds of billions of dollars have been sitting on the sidelines, many of these companies have nowhere to go but up. Their weak sisters have been pushed out of the plane without a parachute.
For sure, certain industries (e.g. airlines, cruise companies, and others) will survive because of capital infusion by the government, be direct or indirect through reduced taxes, reductions of other burdens, etc. But most businesses are doing just “ok” at best. If you make your living running one of these companies, you will either adapt to the new economy or you face the risk of perishing.
It’s Not What You Earn, It’s What You Keep
It’s been said before, “it’s not what you earn. It’s what you keep.” But I say it’s only what you keep that you’ve truly earned. As you build wealth there are a variety of hidden forces that suck the lifeblood of your savings.
Think about what it takes just to earn a receivable: the risk, the costs, the time, the headaches. Whether you are a serial entrepreneur, a professional or a PE investor, the dollars you actually collect are the most precious. Once in your bank account, it’s these dollars that get managed by professionals at investment firms.
When was the last time that you had an independent fee based advisor review your prospectuses? The major investment firms have high-level investment management teams who can do this. But if you don’t know who to ask, you certainly won’t receive when it comes to cost savings.
You need to quickly understand how to identify the hidden expenses in your portfolios. It’s likely that you need to work with an experienced professional advisor who is a fiduciary that can help you do this.
Let’s ponder the similarities of successfully surfing big waves and those of earning large business profits…
To earn your 2-3 hours on the beach in the morning, you need to go to bed early the night before your outing. You need to wake and get out the door before dawn. Drive to the beach, prep your board, plan your ascent into the sea, battle through the surf. And you do this for what? For the hope of catching a maybe a dozen good waves before 10:00 AM, if you’re lucky.
Depending on where you surf, the collective time on your board may only total five minutes. A dozen great rides may have lasted just four minutes in aggregate. Those four minutes took four hours of your time. You risked your ass, and you did it for the exhilaration of those four minutes.
Ask yourself, what does it cost you to put a million dollars in the bank every year? What’s your cost in effort and risk? Or the cost in time with people you love, and from doing other things you love? Think about how hard you work, and how much it hurts you when you fail.
Now think about that $30,000 fee on your million dollar portfolio, or that $300,000 fee on your $10 million portfolio. Did you really want to give a multi-million-dollar gift to an investment firm? Funny thing is, most of that money doesn’t even go to your trusted investment advisor. It gets retained by the financial institution.
You’ve had the battle for every penny, fighting the waves just to get out to sea and hope that your wave selection is spot on today.Then you did everything you could not to fall off the wave. So, it’s not just $30,000 that we’re talking about: it’s all of the effort, the blood, the sweat.
What does $30,000 or 3% mean, when it comes to an investment? Well, if you’re of the belief that your manager can earn you 10%, one would hope that your high priced investment manager could substantially outperform the market. She and her financial institution are getting paid $30,000 – but she’s at zero risk. You’re putting up all the money.
$30,000 or 3% can mean a lot on an annual investment of $1 million over 30 years. Assuming there’s an 8% annualized return, a 3% fee would mean that at the end of 30 years, that you’ve earned $432 million.
Compare that to a 1% fee. Take a guess at the difference. Is it $10 million more? How about $100 million more in wealth? Nope, the difference is nearly double. The investment with a 1% total cost structure will grow to $761 million.
Think about it a different way. Think about the money that the investment firm is keeping. It gets to keep 2%. What does their 2% grow to over thirty years on the same portfolio?
The growth is several hundred million dollars. Do you really love your investment management team that much?! How much work are they doing to earn those dollars? They didn’t hunt for it. They didn’t track it. They didn’t take risk for it. They didn’t bring it back to cook it.
You put up all of the capital. You risked your time to earn and collect a profit. You took 100% of the risk. They get to make money no matter what happens. Is that how you pay your employees? If you’re going to just give way your wealth, why not give it to them, or to charity, or to your loved ones?
It’s time to put an end to this loss. This is the first thing we can control and control it, you will. If you’re going to be a big wave surfer.
I know that there are some of you reading this that will say to themselves, “I get it. But I’m different. My investment management team earns that fee. They consistently outperform the market.” Perhaps that’s true. If so, then, yes, it may be a wise bet if your investment team has a history of consistently beating the market. The question to ask yourself is if you are willing to bet the house on that decision.
How Well Is Your Business Positioned to Ride The Waves in 2021?
You may have been crushed by waves, or you may feel battered, exhausted after fighting the currents, scratching and pulling yourself forward, only to be forced to relive and repeat the experience time and time again.
As an entrepreneur your daily experience in an attempt to survive the post COVID economy may feel similar to my days of surfing the jersey shores in my teens. You may have been crushed by waves, or you may feel battered, exhausted after fighting the currents, scratching and pulling yourself forward, only to be forced to relive and repeat the experience time and time again.
Conversely, your undertaking may have been like those surfers who danced on the waves and then propelled themselves back out to sea with little effort.
To be certain, the post Covid economic tsunami has afforded incredible rides, but only for those with the capacity to experience them. At the top of the economic pyramid, the big wave hunters are companies like Amazon, Facebook, Netflix and Shopify. They are the veritable Laird Hamilton’s of our time.
While the economy collapsed under our feet, a small handful of companies increased and expanded their market capitalization by over one and a half trillion dollars.
Extraordinarily, the companies that were able to surf the giant waves were predominately not in the health care space. Or serving up alcohol to the hundreds of millions of homebound Americans who sorely needed a drink. Or manufacturing ventilators and syringes.
Who was it that led the market in growth and appreciation?
It doesn’t take an MIT chaired astrophysicist to see that the velocity of change is occurring within the technology sector. In 2020, the economy enveloped entire industries, including travel, entertainment and fossil fuels. Within those market segments lay the fate of tens of millions of Americans, pinned against the sea floor while suffering tremendous hardships.
At the same time, in just a matter of a few months, the largest tech companies in America had increased their value by over a trillion dollars.
Stepping back looking at the big picture it’s easy to see how and where the metamorphosis took place. By December of 2020, the market capitalization of less than a dozen tech companies approximated a quarter of the S&P 500. Nearly 25% of the value of all publicly traded stocks in America was concentrated in fifteen companies.
While this was a tremendous opportunity for savvy stock market investors, we are left with a future for many American businesses that are irrevocably fated to compete against the tech giants (who we call Diamonds – exceeding valuable and difficult to penetrate). They are fueled by hundreds of billions of dollars of fresh capital, ready to be deployed in business warfare against their weaker foes.
The Diamonds were positioned, partly by design and partly through Covid, to be propelled into leadership positions. The Diamonds also have boat-loads of political clout and extraordinary capacity to scale quickly. In short, they will continue to triangulate their competitors, aiming to develop unbridled monopolies.
To be clear, if you are business builder of middle market companies, or an owner of surgical centers, or a professional, your ability to directly compete against the Diamonds is, by and large, extremely limited.
Yet, many thousands of companies and professionals will be pulled to safety and beyond by the currents stemming from the success of the monolith tech companies. Properly positioned, these companies will be able to surf the post Covid economic Tsunami.
The question is whether you’ll be left in a freefall, crushed by the breaking surf, or if you’ll dance on the waves, above the froth, as a ballerina.
In April 2021, I am hosting several private webinars related to the opportunities in this unique time. If you would like to learn more about these webinars and it’s a fit for you, reach out via Private Risk Capital.
We Are Living In A Once-In-A-Lifetime Opportunity Post-COVID
Covid has become The Great Disruptor. In 10 months, it has done more to simultaneously propel businesses to new heights, while virtually extinguishing businesses that only last year appeared impenetrable.
Entrepreneurs and investors are either riding their own epic waves, or experiencing epic wipeouts. In time, there will be no middle ground.
Whether you know it or not, we are living in a once in a lifetime opportunity consisting of a sea change in the way business is concluded, compounded by ultra-low interest rates, deep business discounting and new IRS guidance. These temporary conditions afford business owners and investors with an opportunity to obtain substantial and permanent tax and non-tax benefits that can and will change their lives.
Based on my experience and perspective of the current landscape in 2021, combined with the results I’m already witnessing, there’s a clear way to learn how to turn lemons into lemonade while the opportunity exists.
There will likely never be a swell the size of this one during our lifetimes – you cannot afford to miss your perfect wave.
In my private client webinars, I’ve learned that there are a handful of common assumptions about the current financial landscape that sound logical on the surface. However, acting on those assumptions could significantly limit opportunities a year or two down the road.
In March and April 2021, I am hosting several private webinars related to the opportunities in this unique time. If you would like to learn more about these webinars and it’s a fit for you, reach out via Private Risk Capital.
Planning Using In-Kind Premiums
Private placement variable life insurance can be a useful utility knife for planners.
In 1752 when Benjamin Franklin formed The Philadelphia Contributionship, the organization became the first insurance company in the American Colonies. While much has changed over the past 268 years, the Contributionship still remains in business today, and along with it, the concept of transferring “value” in exchange for goods and services.
Since the beginning of 2000, high-net-worth families have worked with the world’s leading law firms in developing custom-designed variable universal life insurance policies to provide a more complete life insurance solution for their families (a wide array of benefits to their loved ones) and for charities. These policies have been sold via the use of Regulation D “private placement” documents or “PPMs” for securities law purposes. These customized insurance policies are frequently funded with a combination of cash and certain noncash assets, which can include interests in private equity, real property, hedge funds, artwork, aircraft and qualifying majority- owned entities via in-kind contribution.
Overview of In-Kind Premiums
Many tax and life insurance practitioners are unaware that hard-to-value assets, such as interests in private business entities and real estate holding companies (“non-bankable assets”) or “in-kind” premiums are readily accepted by life insurance companies whose primary market focus is with HNW clients seeking customized client-centric life insurance protection plans. For this reason, advisors and their clients miss a variety of the tax-planning solutions that can lead to greater protection and significantly greater tax-advantaged wealth accumulation over the lifetime of the policyholder.
When it comes to the purchase of life insurance, the term “premium” represents the total amount of fiat currency and other consideration (excluding interest on policy loans) that are paid in exchange for the issuance of a life insurance policy and the policy benefits. These in-kind or non-cash premiums become part of the policy’s cash value within the PPVLI policies. These noncash premiums are invested within the policy and receive the same tax treatment as any other types of assets held within any compliant policy, as recently determined under an IRS private letter
ruling non-published and of no precedential value.
From a tax perspective, it is important that the investment policy statement within the policy’s investment fund that governs the investment holdings within the policy be sufficiently broad, and that no prior agreement (expressed or implied) exists between the policyholder and his or her investment advisor regarding the continued holding of the contributed assets within the policy investment/ cash value account basket. The key metric is valuation and maintenance of a diversified portfolio of policy investments within the meaning of Section 817(h) of the Code and the applicable Treasury Regulations.
The National Association of Insurance Commissioners (NAIC) follows this long- standing acceptance of in-kind assets for both casualty and life insurance policies, and goes even further, avoiding any specifically enumerated definition of premium and in-kind premiums within their publications and issuances of regulatory guidance.
Following the death of an insured, it’s common for customized PPLI policies to distribute in-kind holdings from the policy cash value as part of the death benefit’s policy death benefits. Once again, there is no prohibition of in-kind death benefits from a life insurance or annuity policy.
Read the full article by Steven A. Horowitz, Esq., Gerald Nowotny, JD, LLM and Bradley A. Barros here: https://www.wealthmanagement.com/print/120933