Jim and Rachel
Jim and Rachel are small business owners who have built a successful manufacturing company from the ground up. They started the business out of their home 15 years ago, and have since expanded into a commercial facility. They recently experienced rapid growth from $4.5M prior year annual revenue to $6M this current year. Their operation is supported by more than 20 employees, three of which are family, as their daughter has begun to work for the business. While all three family members add value, Rachel carries the proprietary skillset that supports the development of the business’s primary offerings. As the key individual in regards to business operations, it’s important to protect the value Rachel brings to the business should something unexpected happen to her.
The family has poured their hard work and passion into their craft, but Jim and Rachel have reached a point of exhaustion and have begun to think about life after the business.The rapid growth has been great, but Jim and Rachel are seeking how to efficiently manage their cash assets while minimizing the tax burden for the company.
Their primary goals are simple:
- Save taxes
- Prepare for retirement
- Ensure business continuity
Here are some of the recommendations that were implemented to support Jim and Rachel’s goals:
Saving Taxes
- We established a Cash Balance Defined Benefit Plan and 401(k) Plan for the company. By establishing these plans, the business would be able to save $221,000 in annual taxes, placing $560,000 per year to fund the Cash Balance Plan. $520,800 of contributions were to the direct benefit of ownership and will eventually be rolled over into an IRA.
Preparing for Retirement
- We established a conservative asset allocation, needing to limit yearly fluctuations to ensure that the annual funding requirements would remain as stable as possible.
- We identified idle assets in cash position during the discovery process after inspecting personal and company financial records.
- In addition to company recommendations, we designed a plan that included Jim and Rachel ‘s individual finances – consolidating an old 401K into a newly established IRA and consolidating various Roth IRAs as well.
- We ran a holistic asset allocation analysis that included both the individual and pooled retirement assets from the Defined Benefit plan. This analysis determined that their level of risk was not age appropriate, so we shifted approximately 20% from equities to fixed income to better mitigate risk as Jim and Rachel were preparing to retire within the next 7-8 years.
- We established a family trust for the business owner, as well as an LLC to house rental properties, thus shielding personal assets from associated liability.
Ensuring Business Continuity
- We helped them to improve employee retention and the company’s ability to attract new talent by providing employee 401(k) plans with profit-sharing contributions, as well as defined benefit contributions for those that qualify.
- We implemented key person insurance (Term Life and Disability), providing $3M in total coverage between Jim and Rachel – allocation was weighted with additional coverage on Rachel. This would support business through projected diminishing returns, as expected with the loss of the key individual.
Drafting a retirement plan for Jim and Rachel while keeping the business in mind has allowed them to route business profits towards their own retirement and a tax strategy resulting in more than $200,000 in savings. Our planning and analysis helped Jim and Rachel know that they were taking steps now to protect both themselves and their business as they transition into the next stage of life over 7-8 years.
If you are a business owner needing to protect your business while planning for your own retirement, we can help you navigate the complex decisions that will ensure the success for both plans.
This is a hypothetical case study provided for informational purposes only and is not intended to be a projection of current of future performance or indication or future results. The information provided is not based on actual current or past clients. All situations are unique, and results will differ depending on individual situation. Past performance is not indicative of future results.
