The situation

Sandra’s husband teaches engineering at the local university. Two of their children work in her business. One child, Helen, has special needs. Sandra and her husband have three grandchildren.

One of Sandra’s children is married, one is divorced, and Helen is single. Sandra wants to eventually transfer ownership of the business to the two children who work there. At the same time, having seen one child go through a divorce, she wants to make sure that shares in the business will never be transferred to a son-in-law or daughter-in-law.

Sandra and her husband each executed wills a few years ago and currently give $10,000 per year to their church. Now her goals are to:

• Transition ownership of the firm to the children who work there
• Provide opportunities for the children to increase tax-deferred savings
• Ensure that Helen will be physically and financially cared for
• Leave a legacy for their church

Our approach

Taking care of the business.

The first step is to analyze various methods for transferring ownership of the business. Sandra had accumulated substantial savings outside the business, sufficient to provide for her retirement-income needs. One suggestion she can consider is to begin taking advantage of her gift tax exemptions and transfer shares in the business to the children over time.

If the children want to become owners in the firm, Sandra may want to work with her attorney to create a buy-sell agreement. Executing a buy-sell agreement and funding it with life insurance could help keep ownership of the company stock “in the family” if one of the children should die or get divorced.

Some years ago, Sandra’s firm established a profit-sharing plan and regularly contributed generously, putting in 10% of compensation for each employee. However, with the children’s increasing salaries and the family’s desire to help them reduce their current income-tax liabilities, Sandra’s company may want to consider a safe harbor 401(k) as an alternative. This type of retirement plan requires a minimum 3% contribution for each participant annually (which the firm was already making), and it lets the children reduce their taxable income significantly through salary-deferral contributions. And because Sandra is older than 50, she can make catch-up contributions.

Planning for Helen’s welfare.

Sandra and her husband spent time with several specialists to understand some key issues involved in estate planning strategies for a special-needs child. The services of a professional trustee were discussed,* which would let the children concentrate on taking care of Helen without the burden of investment management and trust accounting. These discussions provided a framework Sandra used as she met with family and her attorney.

Finally, Sandra learned more details about charitable giving techniques, such as a charitable remainder trust and charitable lead trust. Sandra and her family can work with their attorney to evaluate how establishing a charitable remainder trust may create the lasting legacy they desire for their church.

The Situation

Today, David is the corporation’s chief financial officer, and he and Barbara are generous financial supporters of their alma mater.

But things are changing—the company was sold to another publicly traded company. When the deal closed, David received approximately $1 million in cash and $19 million in the acquiring company’s stock. He also holds employer-granted stock options. In addition, he agreed to a one-year consulting contract, for which the acquiring company is compensating him.

Our approach

David’s Financial Advisor worked with a team of specialists in our corporate headquarters to help David develop a wealth management strategy. Key parts of the strategy focused on managing his concentrated equity position, exercising the stock options tax-efficiently, and developing an appropriate estate and wealth preservation strategy.

Mitigating a potentially risky situation.

The concentrated equity section of David’s wealth-planning analysis outlined strategies to help him manage the risk of owning a large position in one security. His Financial Advisor presented a variety of strategies to help him:

• Generate cash
• Meet his philanthropic goals
• Reduce potentially adverse income- and estate-tax consequences
• Protect himself and his family against possible price declines in the stock

Getting more from stock options.

In the stock-option section of David’s wealth planning analysis, he was presented with:

• An explanation of the options granted, a vesting schedule and potential tax consequences at the time of exercise
• An exercise strategy based on his financial situation
• A description of Wells Fargo Advisors’ Cashless Stock Option Financing Program that would let him exercise his options without having to come up with a large sum of cash or disturb his existing investment portfolio

His Financial Advisor also talked with him about how exercising these options could affect both his overall asset allocation (investment mix) and concentrated equity strategies.

Because David is continuing to work for the company and has access to nonpublic information, he is considered an insider. This can dramatically affect his ability to trade in company stock. His Financial Advisor invited him to talk with equity compensation specialists about the advantages of creating a 10b5-1 trading plan that may let him sell shares in company stock even though his trading window may be closed.

Planning for estate and wealth preservation issues.

The last major component of his plan was estate planning and wealth preservation strategies, where he learned about such issues as:

• Creating suitable tax-efficient income streams
• Preserving assets through proper beneficiary designations and the use of advanced strategies involving trust services
• Meeting his and Barbara’s charitable giving goals

The situation

Mary Ann is single with no children. She has three siblings, two older and one younger. The siblings are financially stable but, like her, have no experience managing wealth of any kind. She has seven nieces and nephews. She is in good health and wants to maintain an active lifestyle, including European vacations. To do so, she believes she needs approximately $250,000 per year.

Not long after her father’s funeral, a close friend referred Mary Ann to one of our Financial Advisors. She scheduled an appointment to discuss how we would help her manage these assets. In addition to her needs above, Mary Ann wanted to:

• Ensure that her siblings, nieces, and nephews were cared for financially
• Make some gifts to charity
• Reduce potential estate taxes for her beneficiaries

Our approach

“Inheriting” the IRA*.

Her Financial Advisor talked with Mary Ann about the advantages of “inheriting” the IRA from her father. He showed how she could take distributions from the Inherited IRA over the course of 10 years after death. There isn’t a requirement every year for a distribution. However, Mary must empty the Inherited IRA by the end of the 10th year. In addition, he demonstrated how this allows her beneficiaries (her siblings, nieces, and nephews) to inherit the IRA as a successor and utilize the remaining years within the 10 year rule after her death.

Providing the needed income.

Even with her sizable assets, creating an income stream of $250,000 per year tax-efficiently posed a challenge. Wells Fargo Advisors can help develop an asset allocation strategy to help meet that income need and provide Mary Ann with suggestions regarding which accounts to make withdrawals from to achieve that desired income. Because Mary Ann wants to travel extensively, strategies such as managing agent services† and private money management may help reduce her involvement in the day-to-day management of her assets.

Planning for her estate.

Mary Ann will also want to evaluate estate planning and trust strategies to help provide for her siblings, nieces, nephews and favorite charities. These strategies may include charitable remainder and lead trusts, some outright gifting, and providing financial-management education for her nieces and nephews.

* This information is hypothetical and for discussion purposes only. It is not intended to represent any specific return, yield or investment. It is provided for illustrative purposes only and does not constitute a recommendation to invest in any particular fund or strategy and is not a promise of future performance, an estimate of actual returns or of the volatility any client portfolio may experience. Hypothetical results do not represent actual trading and do not reflect the impact of any fees, expenses or taxes applicable to an actual investment. Hypothetical and past performance are no guarantee of future results. Any names used are fictitious.