How can you prepare for a wealth transfer?

The sale of a family business — or any event that creates an inflow of wealth, often referred to as a liquidity event — can usher in a world of opportunity. At the same time, it adds complexity to your family’s finances and may lead you to reevaluate your goals and plans. And, especially when you’re selling a business, it’s easy to focus so completely on the logistics of the event itself that you can find yourself unprepared for what happens afterward.

“Most people wait until after the deal to plan for what comes next,” says Howard Weiss, Family Office Consultant Bank of America Private Bank. “But if you start thinking about it afterward, it becomes a much more difficult task.”

With any anticipated major infusion of cash — whether it’s from the sale of a business, an inheritance or a sizable compensation package — the issues you may want to discuss with your advisor well in advance include updating your estate plans, anticipating the potential tax consequences, providing for the ongoing administration of your wealth and preparing your family for your new circumstances. Doing so will put you in a better position to decide on your family’s investment strategy and, more specifically, the allocation of your portfolio among asset classes. To help accommodate this more complex set of needs, you may want to consider establishing a family office.

These tips can help as you navigate your upcoming milestone.

Get an early start on preparing

“When you’re preparing to sell a business, there are two tracks to process — planning for the business and the planning on the personal side. And often the personal side gets overlooked,” says Jonathan Hommer, Head of Family Office Planning in the Planning Center of Excellence at Bank of America Private Bank. “But there’s a lot that you can do beforehand,” he adds.

In fact, you may want to start preparing as many as three to five years in advance, when you’re just beginning to consider the possibility of selling. That will give you a range of options to minimize taxes and allow you to have the systems in place to handle your new wealth. A trusted advisor can assist with those tasks — as well as helping you manage your emotions. “It can be an unnerving time,” says Joshua Rief, a Family Office Strategist with Bank of America Private Bank. “A major liquidity event is typically a once-in-a-lifetime experience.” 

Understand your goals for your new wealth

Well in advance of any liquidity event, Rief says, “Ask yourself, ‘What is the purpose of this new wealth?’ Do you want to spend it on yourself, gift it to your family, give it to charity or something else?”

There are also practical questions to consider. Do you want to undertake a fresh entrepreneurial or investment project? What specific causes do you want to support? How do you want your new wealth to be structured and managed? It’s worth spending some time deliberating on these questions and articulating your answers, preferably in writing. You may be surprised at what you come up with. According to Hommer, “After a substantial infusion of cash, a person’s goals can become more real to them — and those goals may change.”

This is a time to involve your entire family, enlisting them in your planning, sharing your values and mission, and setting them up to be good stewards of this new wealth. Here are a couple of questions to ask yourself: Will you expand your philanthropic efforts and make them more of a family affair? Do you envision a role for your children or grandchildren as managers of the family wealth? 

Put thoughtful planning strategies in place

Whatever your specific goals turn out to be, you should next move toward a plan, including a thorough review of your estate. Your advisor, along with other experts, can help you identify the right tax strategies for your wealth transfer goals. These can include assessing what trusts you might need as well as deciding whether to make tax-free gifts to family members and establishing philanthropic vehicles such as donor-advised funds or family foundations.

One strategy you might want to discuss with your advisor and estate professional is what’s referred to as a dynasty trust, so named because it’s designed to continue over generations rather than ending when the grantor passes away as is the case with a family trust. A dynasty trust can help families avoid estate and generation-skipping taxes. (For more on the benefits of incorporating trusts into your estate plans, read “The surprising (and often misunderstood) ways to protect your family today.”) 

Another planning approach involves transferring shares in the business directly to family members. No matter what strategy you employ, you’ll want to discuss options with your advisor long before any sale. “Ideally, your tax planning starts well in advance of a sale,” Hommer says. “You don’t want to be doing it concurrently.”

Bear in mind that the value of a closely held family business can be difficult to determine, and having the business appraised early in the process can help you optimize discounts. Often that presale value is significantly lower than the eventual sales price, Hommer notes, enabling the owner to gift more shares of the business to family members or a trust without reaching the lifetime gift tax exemption.

Consider creating a family office

The sale of a business or any sort of sudden surge of family wealth could leave you with many new and complex responsibilities. If that’s the case, you may want to establish a family office to help manage these new financial needs. A family office can be especially valuable if the sale of your business means losing access to the services employees have been providing for the family, from travel bookings and bill paying to tax preparation and property management (for more on the potential drawbacks of this common arrangement, read “Should your business be managing your personal financial needs?”).

In the wake of a liquidity event, your finances may become even more complex, Weiss notes. “After the sale of a business, families may invest in private equity or put together an elaborate real estate portfolio, and that can be a trigger for needing some type of family office,” he says. Especially when the sale of a family business has an impact on multiple generations, a family office can provide unified oversight of the family’s wealth, financial education for younger generations, legacy planning and the structure to prepare heirs for future stewardship of the family’s wealth. 

The way your family office is organized — and the question of whether you staff a standalone office or outsource all or some of the functions — will depend on its mission, which could encompass investment and real estate management, tax planning and compliance, bookkeeping and financial reporting, philanthropic grantmaking, trust administration, services to family members and more. For more considerations, see “The outsourced family office” below.

Whatever your ultimate decision, this is another issue to consider well before selling the family business. “Historically, most people wait to set up a family office, but what they generally find is that it’s a much more difficult task after the sale,” Weiss says. By establishing a family office structure in advance, he says, ‘You’re better prepared to invest the sale proceeds — and make the most of your windfall.”