Personal financial planning for executives and entrepreneurs : the path to financial peace of mind

Effective financial planning for executives and entrepreneurs is complex, dense, and impossible to reduce to a single, easy-to-understand formula. Designed to emphasize the importance of successful, targeted financial planning, this book begins by telling a story about a fictional, but plausible, power couple and their family who (spoiler alert!) do pretty much everything wrong in securing their financial future. In most cases, they don't do the things needed because they don't know what they are. Using this story as a case study of an executive and an entrepreneur, the book breaks down the case into chapters and offers practical discussions of all the key financial planning components—investment planning, tax planning, estate planning, philanthropic planning, risk management, and equity-based compensation to name a few—with the tools needed to tailor a plan for virtually every circumstance and need. While there is no single plan that works for everybody, this book provides a guide, with technical information alongside general themes, focused on how to build an effective financial plan. In addition to all the benefits of the first edition, this second edition provides significant new content and insights for the entrepreneur who is planning for a future liquidity event such as a sale. It also provides detail on how to manage concentrated ownership positions and on ESG investment strategies, a rapidly growing investment theme. Finally, the second edition includes tax, estate planning, regulatory, and other updates to reflect changes since the first edition was published. Acknowledgments Contents About the Authors List of Figures List of Tables Introduction They Are Leaders Who Set High Goals and Worry About Achieving Them They Are Paid More Than Other Employees They May Be Employed Under a Formal Contract of Employment Their Compensation Is Likely to Be Tied, in Part, to Specific Performance Goals and Standards They Are, or Will Be, Owners of Equity or Equity-Based Rights Their Financial Fortunes Are Correlated to the Company’s Overall Performance They Have Complex, Sometimes Extensive Benefits Packages They May Be Subject to Legal Risks, Obligations, and Liabilities Associated with the Positions They Hold 1: The Story of David and Goliath, and Abby and Samson: A Journey with No Direction 2: The Goals of Executive Financial Planning: Peace of Mind and the Five Pillars 2.1 Maximizing the Rewards of Working as an Executive 2.2 Achieving Financial Independence 2.3 Planning for and Minimizing Taxes 2.4 Planning for Others 2.5 Managing Risk 2.6 The Five Pillars of Peace of Mind 3: Understanding and Negotiating Executive Employment Agreements for Success 3.1 Scope and Nature of the Relationship 3.1.1 Title 3.1.2 Duties and Responsibilities 3.1.3 Reporting Structure 3.1.4 Exclusivity 3.2 Base and Variable Compensation 3.2.1 Base Compensation 3.2.2 Short-Term Incentive Plans 3.2.3 Long-Term Incentive Plans 3.3 Equity Incentives and Participation 3.3.1 Nature of Grants 3.3.2 Amount of Grants 3.3.3 Vesting Schedule 3.3.4 Impact of Death, Disability, Changes of Control, Termination, and Other Events 3.4 Employee Benefits 3.5 Term, Termination, and Severance 3.6 Assignment and Changes of Control 3.7 Restrictive Covenants 3.8 Reimbursement of Expenses 3.9 Restrictions on Liability 3.10 Ownership of Intellectual and Other Property 3.11 Applicable Law and Dispute Resolution 4: The ABCs (and ESPPs, RSUs, SARs, ISOs, and NSOs) of Equity-Based Compensation 4.1 Directly Owned Company Stock 4.1.1 Shares Held in Individual Retirement Accounts 4.1.2 Highly Appreciated Shares in a 401(k) Plan 4.1.3 Shares Held in Taxable Accounts 4.2 Employee Stock Purchase Plans 4.3 Shares in Qualified Plans 4.4 Units in Deferred Compensation Plans 4.5 Restricted Stock 4.6 Restricted Stock Units 4.7 Stock Appreciation Rights 4.8 Incentive Stock Options 4.8.1 Financing Hints 4.9 Non-qualified Stock Options (NSOs) 4.9.1 Early Exercise Versus Delayed Exercise with Immediate Sale 4.9.2 The Turbo Charge 4.9.3 Financing Hints 4.10 Putting It All Together 4.10.1 How Much of My Net Worth Is Directly Tied to the Company Stock Today? 4.10.2 How Secure Is the Company? 4.10.3 Am I in This for the Long Term, or Could There Be a Shorter Window? 4.10.4 Am I Comfortable with the Risks? 4.10.5 What Will I Do About It? 4.11 Special Situations, Hedging, and Rules for Insiders 4.11.1 Techniques for Large Positions of Highly Appreciated Securities 4.11.2 Trading Plans 5: The Story of David and Goliath, And Abby and Samson: The Aftermath 6: Achieving Financial Independence: Goals-Based Planning 6.1 Goals-Based Planning 6.2 Putting It All Together: The Financial Planning Process 6.3 Financial Independence (The Goal of Goals) 6.4 Future Income Sources 6.5 Future Expenses 6.6 Liabilities (Including Home Mortgages) 6.7 Financing a Home 6.8 Opportunities 6.9 Defined Contribution Plans 6.10 Taxable Savings 6.11 An Actionable, Written Financial Plan 7: Investment Planning in Five Steps 7.1 Step 1: Draft an Investment Policy Statement 7.2 Step 2: Assess the Applicable Risk Factors 7.2.1 Investment Risks 7.3 Step 3: Determine the Appropriate Asset Allocation 7.3.1 Diversifying Investments 7.4 Step 4: Select the Right Investment Vehicles 7.4.1 Stocks 7.4.2 How Is a Stock Portfolio Constructed? 7.4.3 Bonds 7.4.4 When Should an Investor Own Fixed-Income Investments? 7.4.5 How Is a Fixed-Income Portfolio Constructed? 7.4.6 What Are Non-traditional Investments, and Are They Appropriate for All Investors? 7.4.7 What Role Can Non-traditional Investments Serve in a Diversified Portfolio? 7.4.8 How Should a Non-traditional Portfolio Be Constructed? 7.5 Step 5: Monitor and Adjust the Portfolio 7.5.1 Rebalancing 7.5.2 How Often Should an Investor Rebalance Their Portfolio, and What Are the Benefits? 7.6 Principles of Investing (and Common Investor Mistakes) 7.6.1 No Plan 7.6.2 Market Timing 7.6.3 Performance Chasing 7.6.4 Speculating vs. Investing 8: Tax Planning and the Ten Commandments 8.1 Optimize the Deferral of Income 8.1.1 IRA Contributions 8.1.2 Roth IRA Contributions 8.1.3 Roth Conversions 8.1.4 Qualified Retirement Plans 8.1.5 Nonqualified Deferred Compensation Plans 8.1.6 SEP-IRAs 8.1.7 SIMPLE IRAs 8.1.8 Traditional Business Planning 8.2 Maximize and Accelerate Deductions and Credits 8.3 Plan for Tax Withholding and Estimated Taxes 8.4 Coordinate Debt and Taxes 8.5 Understand the Difference Between Ordinary Income and Capital Gains 8.6 Maximize the After-Tax Value of Your Home 8.7 Consider Taxes When Making Investment Decisions 8.7.1 Defer and Reduce Taxable Events When Optimal (See the First Commandment) 8.7.2 Look for Opportunities Within Your Portfolio to Realize Losses to Offset Gains 8.7.3 But Remember the 30-Day “Wash Sale” Rule 8.7.4 Also Remember That Special Tax Rules—Some Favorable and Some Unfavorable—Apply to the Sale of Certain Investments 8.7.5 Consider the Taxability of Any Income to Be Produced by the Investments 8.7.6 Use the Right Type of Account to Hold an Investment 8.8 Take Advantage of Tax-Advantaged Ways to Pay for Education 8.9 Beware of All Types of Income Taxes 8.9.1 The Alternative Minimum Tax 8.9.2 Employment Taxes 8.9.3 Net Investment Income Tax 8.9.4 Kiddie Tax 8.9.5 Other Taxes 8.10 Maintain Good Tax Hygiene 8.10.1 Work with a Tax Advisor 8.10.2 Run Tax Projections Over the Course of the Year to Maximize Tax Efficiency, Eliminate Surprises, and Avoid Paying Interest and Penalties 8.10.3 Keep Good Records 9: Estate Planning and Why It’s Really So Important 9.1 Lessons from David and Abby 9.2 The Purposes of Estate Planning 9.2.1 Welfare Planning 9.2.2 Income Continuity 9.2.3 Orderly Distribution of Estate 9.2.4 Tax Mitigation 9.2.5 Asset Protection 9.2.6 Beneficiary Security 9.2.7 Philanthropy 9.3 The Estate Planning Process for David and Abby (Without a Plan) 9.4 The Essentials of Effective Estate Planning 9.4.1 Power of Attorney 9.4.2 Living Will and Healthcare Proxy 9.4.3 HIPAA Authorization 9.4.4 Insurance 9.4.5 Titling of Assets 9.4.6 Beneficiary Designations 9.4.7 Lifetime Gifts 9.4.8 Last Will Simple Will Testamentary Trust Will Pour-Over Will Codicil 9.4.9 Trusts Testamentary Trusts Living Trusts Irrevocable vs. Revocable Trusts Revocable Living Trusts 9.5 The Essentials of Taxes in Relation to Estate Planning 9.5.1 Estate Tax 9.5.2 Gift Tax Using the Gift-Tax Exclusion to Remove Property from the Gross Estate Generation-Skipping-Transfer (“GST”) Tax 9.5.3 The Equation for a Taxable Estate Gross Estate Liabilities Estate Tax Deductions 9.6 Select Estate-Planning Strategies 9.6.1 Portability 9.6.2 Step-Up (or Step-Down) in Basis 9.6.3 Two-Share Trust Arrangement 9.6.4 Marital Trusts 9.6.5 Non-marital Trusts (Bypass Trusts) 9.6.6 Life Insurance and Irrevocable Life Insurance Trusts 9.6.7 Spousal Lifetime Access Trust 9.6.8 Grantor Retained Annuity Trust 9.6.9 Split-Interest Trusts (Charitable Remainder and Charitable Lead Trusts) 9.7 The Estate Process for David and Abby (with a Plan): The Resurrection 9.7.1 Income Continuity 9.7.2 Orderly Distribution of Estate 9.7.3 Tax Reduction 9.7.4 Asset Protection 9.7.5 Philanthropic Planning 10: Planning for Philanthropy and What It Can Do for Everyone 10.1 Elements of a Charitable Gifting Plan 10.2 Establishing a Budget 10.3 Basic Income Tax Rules 10.4 Selecting the Most Tax-Efficient Gift 10.4.1 Appreciated Assets 10.4.2 Other Sources for Charitable Gifts 10.5 How to Make Gifts 10.5.1 Donor-Advised Funds7 10.5.2 Gift Annuities10 10.5.3 Charitable Remainder Trusts11 10.5.4 Charitable Lead Trusts12 10.5.5 Private Foundations13 10.6 Making an Impact 11: Too Much of a Good Thing: Managing Concentrated Holdings 11.1 Strategies to De-Risk a Concentrated Position in Your Portfolio 11.1.1 Hedging the Stock Put Option Call Option Collar Strategy 11.2 Hold, Sell, or Hedge? 11.3 Exchange Funds: Alternative to Hold, Sell or Hedge 11.4 Charitable Remainder Trusts 11.5 Other Ideas 12: Managing Some of Life’s Great Risks Through Insurance 12.1 Health Insurance 12.2 Disability Insurance 12.3 Life Insurance 12.4 Long-Term-Care Insurance 12.5 Property and Casualty Insurance 12.6 Business Interruption Insurance 13: Five-Pillared Planning for Exits and Other Liquidity Events 13.1 Timing: Planning in Advance 13.2 The Deal Team: Assembling a Great Advisory Team 13.3 Maximizing the Rewards: Wealth Building through Liquidity Events 13.4 Achieving Financial Independence 13.5 Planning for and Minimizing Taxes 13.5.1 Making Wise Choices of Entity 13.5.2 Managing Equity Incentives 13.5.3 Accelerating Charitable Contributions and Perpetuating Family Values through Philanthropy 13.5.4 Mitigating State and Local Taxes 13.5.5 Mitigating Estate and Gift Taxes 13.6 Planning for Others 13.7 Managing Risk 13.8 Putting It All Together 14: Finding the Right Advisors 14.1 Getting Started 14.2 What Financial Advisory Services Do You Offer? 14.3 Are You a Fiduciary? 14.4 How Can I Feel Confident That My Assets Are Secure? 14.5 How Do You Get Compensated for the Advice You Recommend? 14.6 What Professional Credentials Do You Hold? 14.7 Who Will I Be Interacting With in Addition to You, and What Are Their Roles? 14.8 What Is Your Investment Philosophy? How Are Investment Decisions Made? 14.9 Describe the Types of Clients You Work With Most Often. Would You Be Able to Provide References? 14.10 How Often Should I Expect to Hear from You Should We Work Together? 14.11 What Is Your Succession Solution Should Something Unforeseen Happen to You? 14.12 What Else Should I Know About What I Might Experience as A Client? 15: The Alternative Story of Delilah, Redemption, and the Promised Land 15.1 The Plan 15.1.1 Maximize the Ability of David and Abby to Earn Income and Benefits from Their Companies 15.1.2 Establish a Plan to Achieve Financial Independence 15.1.3 Minimize the Risks to Which the Couple Was Subject 15.1.4 Optimize Their Current and Future Tax Circumstances 15.1.5 Establish a Plan for the Couple’s Legacy, Including Their Children and Their Favorite Charities 15.2 The Future Index Effective financial planning for executives and entrepreneurs is complex, dense, and impossible to reduce to a single, easy-to-understand formula. Designed to emphasize the importance of effective, targeted financial planning, this book begins by telling a story about a fictional, but plausible, power couple and their family who (spoiler alert!) do pretty much everything wrong in securing their financial future. In most cases, they don't do the things needed because they don't know what they are. Using this story as a case study of executives and entrepreneurs, the book breaks down the case into chapters and offers practical discussions of all the key financial planning pillars--investment planning, tax planning, estate planning, philanthropic planning, risk management, and equity-based compensation to name a few--with the tools needed to tailor a plan for virtually every circumstance and need. While there is no single plan that works for everybody, this book will provide a guide with complicated, technical information alongside specific guidance on how to build an effective financial plan