5 Money Truths for Women

We all know that life is more complicated than it was in our grandparents’ day. That’s true across the spectrum of life’s issues, but it is especially true in the area of money and finances. Today, there are fewer guaranteed options to rely on and vastly more financial decisions to make. Just a couple of generations ago, investment choices were primarily limited to choosing between stocks and bonds. Today, we are presented with mutual funds, ETFs, master limited partnerships, annuities, and variable universal life insurance, just to name a few.

It’s no wonder that so many of us are left feeling overwhelmed. However, just a few basic principles can bring a little clarity to the confusion.

Money Truth #1: Wealth Is Not Bad

What do you think of when you hear the word “wealth”? The popular media today often portrays wealth in a negative light. The wealthy are portrayed as not paying their fair share, as being greedy, or as taking advantage of others. However, this interpretation of wealth is not accurate.

Wealth, as properly understood, is the accumulation of resources beyond your current needs. Whatever your financial goals, you will need to spend less than you make (generate a surplus), save that surplus, and invest it so that it will grow to a level which will fund those goals – retirement, college for the kids, your next house, etc. Simply put, you need to build wealth.

If you have a preconceived notion that building wealth is bad, or if you see it as synonymous with being greedy and selfish, you may subconsciously sabotage your financial future. You won’t make the wise decisions needed to accumulate a surplus and invest it, and you won’t accomplish your financial goals.

Money Truth #2: Marriage is Not a Financial Plan

Regardless of whether you are already married or would like to be married someday, marriage is not a financial plan. All marriages will end (either through death or divorce), so it is important to develop a plan for how your needs are going to be met. Even if you’re married now, and remain so for decades to come, you need to take an active role in developing a financial plan for how both of your needs will be met.

Money Truth #3: Saving a Little is a Really Big Deal

Almost everyone has heard the proverb, “tall oaks from little acorns grow.” Perhaps a better illustration of the power of saving and investing is found in the lesser known saying: “The creation of a thousand forests is in one acorn.”

This is the perfect metaphor because it is a perfect example of how savings create savings. One acorn will give rise to one mighty oak. But to stop there is to miss the magic of the story. The mighty oak will bear additional acorns, which over time, and with the help of the wind, rain, and scurrying animals, will be spread over vast distances. Each additional acorn creates another mighty oak which will create more acorns, and the process grows exponentially.

This is the same sort of magic that occurs with savings and compound interest. You save a little, and over the course of a year, you’ll earn a little interest on that savings. But then in future years you’ll earn interest on the original savings, AND you’ll earn interest on the interest. It compounds! Just as one acorn begets thousands of forests, so too does saving a few dollars beget thousands of dollars for retirement.

Of course, the opposite is also true. We skip the $10 and $50 and $100 contributions to our savings because we don’t see them as the large future amounts they really are. We don’t remember that over 20 years, $10 can become $46; $50 can become $233, and $100 can become $466.

To further illustrate the point, multiply that by twelve months of savings. Saving $50 per month for 20 years can produce a nest-egg of $32,000. Skip just 3 of those contributions each year, and the nest-egg potential is reduced to $24,000. Spending that extra $150 per year (instead of saving it) can cost $8,000. Saving a little is a really big deal.

Money Truth #4: There Is No Such Thing as Risk-Free

Everyone knows that the stock market is “risky.” Stocks go up, and stocks go down. Some stocks can lose all their value, and you can lose your money if you invest the wrong way in the stock market. However, not investing at all carries its own risk – the risk that the value of your money will not keep up with the pace of inflation (the rise in overall prices). The risk of inflation affects every one of us, and it will always be there.

Inflation

The long-term average inflation in this country is 3% per year. That means that something which costs $1.00 today, will cost $1.03 in a year, $1.06 in two years. That doesn’t seem like a big change, but in about 24 years the price of that item will have doubled. If your savings are not earning enough to at least keep up with inflation, you will not be able to pay as many expenses (groceries, gas, clothes, electricity, etc.) in the future as you can today. If you are not earning any interest, your money will be worth half as much in 24 years as it is now.

Risks have to be taken…even doing nothing is a risk. The key is to balance the risks on both ends of the spectrum – doing nothing vs. investing everything in the stock market. The good news is that you don’t have to find that balance on your own. There are plenty of objective financial advisors that can walk you through that decision-making process to find the level of risk that is appropriate for you and your financial goals.

Money Truth #5: You Have To Start Now – Not Sometime Next Month, Year, or “Later.”

We all put off doing what we don’t want to do, what we don’t understand, or what intimidates us. Dealing with money and finances can hit all three of those procrastination triggers.

Understanding the resources you have and the debts that you owe, building a budget, and developing a financial plan are all learned skills. You don’t have to be “good with money” to take control of your financial future. It requires an investment of your time, and will likely require outside advice, but you can be successful – in fact, very successful!

The time to begin developing financial security is today. Whether you start small or start big, the important thing is to start. If you don’t know where to start, call an objective financial planner – not one of the ones who will sell you the latest, greatest annuity, mutual fund or insurance product, but one of the ones who offer advice free from any conflicts of interest. Most of these objective advisors will give you an hour or so, and a few pointers to get started, for free.

Carpe Diem

There you have it: 5 money truths that will help you feel less overwhelmed and intimidated by the financial decisions that all of us face. Though none of these truths are new, they are unknown or ignored by many. Learning to live by them will allow you to positively impact your financial security. Ignoring them can lead to insecurity at the least, and calamity at the extreme. Now is the time to take control and chart your own future. Now is the time to seize the day.

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What is a Family Limited Partnership

A Family Limited Partnership is simply a formal partnership where the partners are family members. Like other partnerships, a Family Limited Partnership (FLP) is a real business selling products, services, or renting property to real customers. The difference here is that family members are involved, and the partnership is structured to provide a number of significant tax and legal benefits for the family. The three most powerful benefits are:

Reduction in estate taxes
Preventing future growth in asset values from being estate taxed
Protection from lawsuits or divorce actions.

If constructed and managed correctly, the Family Limited Partnership can be a powerful tool for high-net-worth families. Interested in learning more? Schedule a meeting with one of our advisors to see if FLPs are right for your situation.

When we say there is a “real” business involved, we don’t mean that you have to start a new business. In fact, most FLPs are created to take ownership of an existing business or investment real estate. Whether you already own a manufacturing, distribution, or services company or own several real estate investments, you can transfer ownership into the FLP to take advantage of its key benefits.

Understanding the Family Limited Partnership

Here’s how it typically works. On day one, you have an attorney create a Family Limited Partnership agreement. There needs to be at least one general partner and one limited partner, but typically, there are several limited partners. To activate the partnership, you would transfer your ownership of your business or investment real estate into the partnership in exchange for all the general and limited partnership shares. On day two, you would own 100% of the partnership, which now owns 100% of your business or investment real estate.

Here’s where the fun begins. To take advantage of the key benefits we’ve mentioned, you need to gift some or all of the limited partnership shares to other family members. This isn’t just a series of random gifts; you’re gifting shares to each family member whom you eventually want to own your assets after you’ve passed away.

You’re fast-tracking your estate plan. Instead of waiting until you’ve passed away when your heirs would receive your assets, you’re giving them away now in a manner that reduces gift and estate taxes while providing some creditor protection. To understand why you need to understand more about the difference between general and limited partners.

General vs. Limited Partnership Interests

General Partners

General partners in a Family Limited Partnership are responsible for the management of the partnerships and its assets. They control management of the partnership very similarly to how a business owner controls his or her company. The general partners have unlimited liability for debts incurred by the partnership agreement, but there are ways for general partners to protect themselves against liability. The general partners can be paid a salary just as a business owner is paid a salary.

Limited Partners

Limited partners in a Family Limited Partnership are only responsible for management duties that the general manager assigns them. They also can be paid a salary. The limited partner is not responsible for the partnership’s liabilities, and the limited partners do not have any control over the partnership. All that control stays with the general partners. These limited partners are generally the youngest family members – typically children or grandchildren.

Percentage Ownership

The responsibility and control described above is NOT affected by the percentage each partner owns. In other words, if the general partner(s) own 2% of the partnership, they still control 100% of the partnership and, therefore, 100% of the business or investment real estate in the partnership.

The limited partners could own 98% of the partnership, but they still would NOT control the partnership, nor any of the business or investment real estate in the partnership.

The profits of the Family Limited Partnership (after salaries and other expenses) must be shared with all the partners in the same percentage as their ownership. In our example above, the general partner(s) would control 100% but would own 2% and therefore only be entitled to 2% of the profits; the limited partners would not control anything but would own 98% and therefore be entitled to 98% of the profits.

Remember, the general partner controls who fills different management roles and which family member is paid a salary. The general partner can take a substantial salary in keeping with his/her management role.

Cashflow distributions are discretionary. The general manager determines whether a distribution will be made. This is important – and goes to the heart of the benefits we mentioned – because the limited partners are entitled to a share of profits (and have to pay income taxes on them), but the limited partners are not entitled to cash if the general partner decides he or she isn’t going to make a distribution that year.

The partnership agreement allows the general partner to keep management control over the business or real estate and to keep control over cash flow.

Advantages of Family Limited Partnership

The unique ownership structure of Family Limited Partnerships is what allows this estate planning tool to provide such powerful benefits.

In this video, Greg Welborn gives a review of some of the complexities and benefits to Family Limited Partnerships.

Tax Reduction

The FLP reduces estate and gift taxes because partnership shares are not worth the same amount. In a general corporation, one share of stock has the same fair market value as another share of stock. In a Family Limited Partnership, the general partner shares are uniquely different than the limited partner shares. The general partner shares (even just 2% ownership) are more valuable than the limited partner shares.

Think about this logically. If I told you I own a company worth $1,000,000 and want to sell 98% of it to you, you’d be willing to pay me $980,000 (98% of one million dollars). But if I told you that those 98% shares do NOT let you vote for the board of directors, do not let you fire/hire the managers of the company, and do not entitle you to any dividends or distributions, you would not pay me $980,000. You might still want to own part of this company, but you’d pay me a lot less for those shares.

A good general rule of thumb is that you’d pay roughly 60%. In other words, there would be a 40% discount in value for those shares which do not give you any control. That discount can vary, but it is a good rule of thumb.

The IRS acknowledges this economic fact. That means if you gift your kids/grandkids 98% of the Family Limited Partnership in limited partner shares, the IRS will acknowledge that you’ve made a monetary gift of roughly $588,000 (a 40% discount on $980K).

Tax laws only allow you to give away a certain amount of your net worth before estate taxes are due. If you use a FLP, you can give away almost all of a $1 million business or investment property but only use up a small amount of your lifetime estate tax exemption.

This is known as valuation discounting, and it is very powerful. If used on larger businesses or real estate, the tax savings are huge.

Preventing Future Growth From Being Taxed

This is a pretty simple concept. Once you’ve gifted the limited partner shares, they are out of your estate. No matter how large the underlying business or real estate grows, it won’t be subject to estate tax or gift tax as long as it stays within the Family Limited Partnership. This benefit can be continued for future generations if the limited partner shares are gifted to trusts for your kids instead of to the kids directly, but that’s a topic for a different article.

To understand the power of this technique, let’s assume the business or real estate grows by 6% per year. In 24 years, the $1 million value will have grown to $4 million, but there will not be any estate or gift tax on that $3 million in growth.

Creditor and Divorce Protection

The sad reality is that many civil lawsuits and divorces are not settled on their merits but instead are settled on whose lawyer is the best poker player. It’s mostly a negotiating game. If your kids are seen as “deep-pockets” with lots of cash flow coming their way, the attorney suing them is going to go for the jugular and not be motivated to settle.

On the other hand, if your child’s attorney points out that a substantial portion of your child’s net worth is limited partnership shares offering no control, no rights to liquidate, no cashflow, but potentially a substantial tax liability, well, that other attorney is more motivated to settle quickly and for less money. In fact, if structured properly, FLP shares couldn’t even be included in your child’s or grandchild’s divorce case; they would be off-limits.

The Right Structure and Right Asset Are Critical

Family Limited Partnerships are powerful tools for high-net-worth families, but not all FLPs are created equal. The key is choosing the right asset or investment real estate to be owned by the partnership. You need to balance cash flow, earnings, future growth, potential future asset sales, and a number of other factors before deciding which assets to place into a FLP. You need to carefully consider what restrictions you want to place on the limited partners to maximize the tax and creditor protections.

It all starts with a well-crafted and personally tailored wealth and estate plan. Understanding where you are now, what you want retirement to look like, and how best to achieve that are all precursors to establishing a Family Limited Partnership. We highly recommend you engage the services of a 100% objective wealth advisor – someone who qualifies as a fiduciary and is legally bound to act in your best interests – to design your family’s plan and help you implement it.