Is It Time for a Financial Stress Test?
If you’re a successful business owner, it may be high time to conduct a financial stress test on one or more aspects of your business and wealth planning.
I’m regularly involved in overseeing financial stress testing for exceptionally wealthy families with considerable business interests. Often, the outcome of the process is that everything is as good as it can be. However, when problems are found, they tend to be severe and potentially quite damaging.
A few years ago, I was introduced to a billionaire family that was feeling uneasy about some aspects of their wealth planning. The family’s advisors were very creative and, as a result, the family paid very little in taxes on both the business and personal side. They asked me to stress test the financial and related legal strategies that were being used to get them this near-zero-tax result.
I first made sure I understood the wealthy family’s agenda. I arranged for the collection and organization of all the relevant materials. Then, with a carefully selected team of specialists, we dissected the wealth planning being done. And while we determined that nothing illegal was occurring, the wealth planning was very, very aggressive -- with quite a high potential of setting off the claxons at the tax authorities.
Our team was able to provide alternative solutions that were almost as good as mitigating taxes but were all bright-line transactions. Taking this direction eliminated any potential problems posed by tax authorities.
The end result: Just about the same tax outcome with far less risk.
Avoiding a family war.
In another stress testing situation involving an estate plan, a billionaire patriarch (on the advice of counsel) had taken an “even” approach in terms of the inheritances to his four children rather than a “fair” approach. Each child was set to receive an equal share of the estate -- including equal ownership stakes in the 200-plus-year-old family business, even though only one of the four was actively involved in the company (as president by the way). Two of the children were described by the patriarch as “do nothing” and “worthless,” while the fourth was characterized as a wonderful person who had no mind for business.
We discovered that the family dynamics had changed significantly for the worse since the patriarch created and signed that estate plan. Now, the likely outcome after his death would be an all-out legal war among his four children -- a war that would likely be the death knell of the family business.
After deep discussions with the patriarch about exactly what he wanted to achieve, a revised estate plan was designed that included well-structured succession and asset protection plans. Now, the one child involved in the company will get the company. The other children will receive comparable amounts of wealth, but in different forms that they cannot easily decimate.
Stress test equals peace of mind.
These two examples illustrate the value that financial stress testing can bring to wealthy entrepreneurs and others who may be worried or uncertain about how their wealth planning efforts are likely to play out.
The rationale to engage in financial stress testing is twofold:
- To make certain you avoid potentially economically and legal destructive situations
- To ensure you’re benefiting from all possible opportunities
Financial stress testing is very common among the super-rich -- individuals with a net worth of $500 million or more. It’s a powerful way for them to make sure their investments or wealth planning is in alignment with their goals, appropriately state-of-the-art and cost-effective.
The good news: Stress testing is no longer exclusive to the wealthiest among us, notes Peter Sasaki, Managing Member of SDS Family Office. “Because of technology and changes in business models in the financial advisory world, the power of financial stress testing is now available to a much broader range of entrepreneurs who are a lot less wealthy than the Super Rich,” he says.
The upshot: If you are unsure about the likely outcome of your wealth planning or if you want to feel certain that you’re not overlooking significant financial opportunities, consider a stress test.