The days of business ownership being an old boys’ club are long past, as women increasingly form small businesses, open franchises and establish professional practices in law, medicine and accounting. Often, the woman business owner encounters unique issues that a male owner wouldn’t face, including during liquidity events.
And at times liquidity events fall unexpectedly from life’s more somber occurrences, such as the passing of a business owner. The surviving spouse is often a woman who suddenly finds herself confronted with a host of financial planning and tax issues.
An advisor who understands the unique issues women face either as a business owner or a surviving spouse can make a tremendous difference to women encountering liquidity events.
In this month’s Liquidity Events column, we speak with three experts about liquidity events from a woman’s perspective, including related tax issues:
We asked our expert panel the following questions:
What are the top three issues during liquidity events that are typically unique to women, and how should an advisor help female clients manage those issues?
What are the top tax planning issues and potential pitfalls in liquidity events that advisors should help a client manage, and how does an advisor work with tax experts to navigate those issues for clients?
Here is what they shared with us:
Top issues unique to women: Not know what they have, where they have it and what to do next.
For most of my married clients, one spouse usually has the handle on all financial matters – in most cases, the husband. For this reason, if the male spouse passes, many wives are left in a position where they do not know what they have and where they have it.
In this situation, our business management team and I deep dive into the surviving spouse’s financial lives – collecting loan, investment and liquid account information. After this “data collection” process, we run a thorough analysis and make recommendations on what to do next.
Top tax planning issues: Not having a tax and estate plan in place and paying unnecessary taxes as a result.
Having a close relationship with both clients’ accountants and estate planning attorneys is key in managing liquidity events for clients. In some cases, clients have taken the necessary steps to prepare for these situations and we carry out those steps when managing our clients’ liquidity.
However, if we have not had the opportunity to prepare for the liquidity event with the client, we implement the “data collection” and analysis process once again to determine what has or has not been done. This involves detailed conversations with both service providers to fully understand the situation.
Advisors understand the lingo and have experience in these situations so we can quarterback the team to communicate with the client and assist in make recommendations.
Addressing both questions: Quite often, major financial liquidity events can result from a loved one’s passing. Naturally, this is a distressing time for surviving family members to navigate. Here are three important considerations to keep top of mind during this time:
First and foremost, seek out the services of a trusted advisor, ideally a CFP, who supports you in a fiduciary capacity. Many timely and formative decisions must be made after the death of a loved one. Making such complex and critical decisions without professional help can unfortunately result in all sorts of negative tax and estate-planning ramifications. Do not make these decisions alone, and lean into the expertise of a CFP.
Next, work with your advisor to establish a comprehensive financial plan. With death, there is often the loss of additional income from social security or pensions. Surviving spouses will need to reevaluate their income sources and adjust their strategy accordingly. An advisor can help build out modifications to your comprehensive financial plan and provide you with a sense of comfort moving forward.
Lastly, get clear about your own investment goals and objectives. A common mistake with inherited or transferred assets is to keep the portfolio as is. Recognize that your individual goals and objectives may be very different from that of your deceased spouse or loved one. Be open and willing to divest of legacy positions that no longer serve you and seek out an appropriate asset allocation and strategy that helps you achieve your goals today.
Top issues unique to women: Women own one third of the world’s wealth, and closer to 40% in the United States. The rate of wealth accumulation is growing faster for women than it is for men. Financial advisors need to keep this in mind as they approach their clients and prospects. And women-owned businesses are valued higher than their gender counterparts.
When you take all of that into account, women are going to be experiencing many more business-related liquidity events in the future.
Women also tend to deal with large decisions or changes strategically versus going with their gut feelings. Therefore, advisors need to make sure they help women think more holistically. The industry, subconsciously (or maybe consciously) tends to think that the male in the household makes the financial decisions, however this is not the case, so make sure to include the female in the conversation from the start.
Oftentimes liquidity events happen to people who don’t come from wealth so there’s a lot of education that needs to be done to make sure they keep a longer time horizon in mind.
Top tax planning issues: It’s hard to think long-term when a liquidity event happens, however it’s important to think both short- and long-term. I tell clients that every after-tax dollar should have a job description, which helps them think more strategically.
Advisors should not only work with accountants but also estate planning attorneys so they can incorporate all of a client’s potential options. This includes charitable giving vehicles, such as Donor Advised Charitable Funds (DAFs). These strategies can eliminate some of the tax burden, particularly for high-income people.
In addition, sometimes it’s best to spread out the tax impact over time versus dealing with it all at once. By spreading it out, you can decrease the effective rate, which could be more advantageous.
I would also encourage people to prepare for their liquidity events from a tax perspective as soon as they know the event will be occurring versus after the fact. Sometimes people haven’t dedicated enough money to pay for the tax windfall from these events and instead have paid off their mortgage but now need to take out a loan or liquidate investments to pay their taxes.
It’s also important that people thoroughly understand what will be considered ordinary income versus capital gains, which could be subject to additional net income investment tax.
Janeesa Hollingshead, Executive Editor at Wealth Solutions Report, can be reached at email@example.com