Case Studies

Case Studies

Case Study 1: Tony and Jennifer Armstrong: Empty Nesters. What Next?

  • Tony and Jennifer’s Story

In their late 50s, Tony and Jennifer are new empty nesters. They finally have the house to themselves, and are now able to focus on their own financial matters. The Armstrong’s have set their sights for “financial independence” by age 62. Like many pre-retirees today, the word “retirement” doesn’t fit their definition of how they expect to live the remainder of their lives. They perceive retirement as an act of sitting on the couch, remote in hand, watching The People’s Court.

For many of today’s pre-retirees, the term “financial independence” suits them better. It signifies a shift from having to work to make ends meet, to having enough money to fund a lifestyle of choice, even if it means working by choice rather than obligation. 

Winding down a life of work and understanding how it all works can be overwhelming. Schools and employers don’t teach financial independence. For Tony and Jennifer, their questions should include:

  • Will we run out of money? If so, how can we make it work?
  • Which accounts do we take money from first?
  • When should we claim Social Security benefits?
  • What should we do about life insurance?
  • What are we missing?

These questions commonly do come up when talking to clients similar to Jennifer and Tony. Using our Cornerstone 360 approach we are able to work through a process guided by these questions and many more that may arise during the conversation.

The Approach

The Cornerstone 360 process considers a client’s total financial condition. This approach involves a cross disciplinary look at household cash flow, investments, real estate, insurances, taxes, and estate planning, among other areas of finance. The experience is like having all of a client’s advisors around a table at the same time, working together to coordinate the most appropriate ideas. This process helps Cornerstone identify coordination gaps and areas for potential improvement in a client’s current plan.

Specific to Tony and Jennifer, their questions centered on their goal to maintain their current standard of living. To help illustrate their current position and options, Cornerstone 360 collects data, information, and documents to create their Base Case. A Base Case answers the question, “If Tony and Jennifer continued with their current plan and did nothing different, what is their potential outcome in meeting their goals?” From a Base Case, Cornerstone is able to help measure the impact of recommendations made to seek improvement to their plan, or modify down the road as needed.

Observations 

During the Cornerstone 360 Clarity phase, a theme continued to emerge. Although Tony and Jennifer spoke of financial independence, Tony was never comfortable with the idea that he could potentially step away from full time work. It became clear he felt that he would always have to work because he could not imagine how their household would be able to function without earned income to support it. He was discounting the impact and use of the family retirement and savings accounts simply because he did not understand how this would all work. Other observations included:

  • Although they seek to maintain their current standard of living, Tony and Jennifer have a goal to move to a less expensive community in a neighboring state. If they chose any of the locations they talked about, they could replace their current home and mortgage with a new home, debt free. In addition, state taxes are much lower, as is the cost of living. This was important because it redefined what was needed to “maintain their standard of living.”
  • Tony and Jennifer also wanted to travel more during their time of financial independence. That was addressed by assuming travel expenses for a period of time to their Base Case.
  • Both Tony and Jennifer are gainfully employed, and have contributed to Social Security. As a result, they have different benefit options to consider. This is different than their original plan to claim Social Security benefits as early as possible. 
  • There are several reasons for owning life insurance in retirement, including survivorship benefits and potentially funding tax-free retirement income. For Tony and Jennifer, assuming no extraordinary circumstances, Cornerstone 360 reported zero life insurance need for either spouse. The “liquidity” that Jennifer would like to have if Tony were to die prematurely could come from a few different accounts, allowing the family to save money on an otherwise costly life insurance policy.
  • Not on their radar is the risk of requiring extended care beyond what medical insurance covers. The risk of long-term care could by itself negate all the good work done in creating Tony and Jennifer’s plan, and could push the healthier spouse into financial hardship. The question with long term care is not how much insurance is needed, but rather, what is the plan to provide and fund this care?

Tony and Jennifer have worked hard for many years to get to this point. They deserve a plan that aims to help them thrive in the many years that remain in their lives. Cornerstone 360 is designed with the goal to help gain financial confidence in a family’s life. To learn more about what might be the best approach for you, we invite you to visit. Cornerstone Wealth Management: Planning to be Our Clients’ Most Valued Asset™.

Disclosures

This case study is a hypothetical illustration based on years of experience with various clients. Since no two client circumstances are alike, the information provided is not meant to be a recommendation for others.

No strategy assures success or protects against loss. This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. Tax and legal services are not offered by Cornerstone 360, Cornerstone Wealth Management, LPL Financial or affiliated advisors. We suggest that you discuss your specific situation with a qualified tax or legal advisor. These are hypothetical situations. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing. Tracking#1-05112527

Case Study 2: Betty Cousins, Pre-Retiree, Recent Widow

Betty’s Story

Five years ago at age 56, Betty was enjoying a career as a Marriage and Family Therapist (MFT). She was working 30 hours per week, leaving enough time to enjoy research, reading and gardening. When her husband Bill passed away while still in his prime, this life change had a profound impact on Betty in many ways, including her view of her finances. Although she and Bill raised two children who are self-supported, and were fortunate to have a small community of close friends, she had little confidence in financial matters. That had always been her husband’s thing.

Before Bill’s passing, their plan had been to declare financial independence at her age of 64 and move closer to children and grandchildren. When Bill passed, Betty felt there was no way she would be able to accomplish this goal. 

ï  .The Approach

Cornerstone 360 is designed to be flexible to help clients going through life changes. When this type of transition occurs (We all will experience a few in our lifetimes), Cornerstone will prioritize by focusing on the goal of stabilizing a client’s short term needs. While our approach to life changes can be “lighter” in the beginning than our regular approach, it allows in the time permitted by clients a focus on what matters most: How does income happen when time is taken off work? What immediate recurring and non-recurring expenses need to be covered, and where does this money come from? How will my medical insurance change? What does Betty need to know about collecting Bill’s life insurance?

While the start of a major life change is usually not the best time to go deep and broad in planning, it is important to visualize and plan for the next six to 12 months. The process of grieving, rebuilding community, and then finding a new “self” can take years.

A year following Bill’s passing, although Betty’s own journey to finding her new self was far from complete, she was interested in getting a better understanding about her financial condition. She still felt that her original goals to retire and move closer to family was doomed, and wanted to get a better idea of her current condition. During this process, questions, thoughts, concerns, and goals included:

  • Betty abandoned the idea of retirement, and assumed she would work the remainder of her life. During the initial conversation Cornerstone reframes this approach: “If you could retire, when would that be? Where would you go? What would need to happen for you to feel your financial independence was a success? What would you like to learn about how this all works?”
  • Betty was concerned about how long-term care would work. They purchased policies years ago, but she was unsure about how it would work without Bill.
  • Betty did not know what to do about Bill’s life insurance proceeds. The total death benefit from employer group and personal coverage was $750,000 and remained in a checking account until she could make time to address this.
  • She knew that she was planned out for a 12-month period, but was not sure how it would all work after that.
  • Betty thought that she needed life insurance on her own life to pay off the mortgage when she died, and was concerned about the cost.

Observations 

In reviewing the details of her current assets and household spending, keeping planning assumptions prudent, using the Cornerstone process we can help identify potential planning opportunities.

  • It turns out that, even without the benefit of Bill’s income until retirement, financial independence was possible … assuming a few important adjustments to her planning. Life insurance covered nearly all of what Bill would have earned during the balance of the years he would have otherwise worked.
  • A combination of death benefits proceeds being invested, earned income until age 64, money saved in retirement accounts by both Bill and Betty, and Bill’s survivor Social Security benefits, will likely fund Betty’s financial independence.
  • Cornerstone 360 can analyze social security and Medicare to discuss distribution strategies.
  • A risk to this plan is the loss of income due to becoming sick or injured. In reviewing this possibility, financial independence was less certain. Betty, made aware of this risk, cost, and options, decided to own this risk into retirement. 
  • Another risk was her long-term care policy. She and Bill had LTC insurance. And it included a rider that terminated premium payments at the death of a spouse as long as the policy was in force for 10+ years, which was the case. On the other hand, the daily benefit for all areas of care was low. It was a policy that was sold on “low cost” rather than potential “need.” Her options at that point included buying additional coverage, buying a hybrid (dual use) insurance policy that included LTC benefits, and renting instead of owning a home. Not on the table for Betty were other options; asking friends and family for assistance, spending down assets to qualify for Medicaid (Medical).
  • Betty did not need life insurance to pay off her debt. She was holding on to a belief that debt should not be passed along to kids. In her case, her other assets would settle the debt. In addition, debt is not passed along to children unless they are a party to the debt.
  • A few changes can be considered: Change/update in registering her assets, and updating her estate planning.
  • Cornerstone 360 includes an online tool to help track in one place assets, liabilities, spending, and her overall plan. These accounts and the plan are updated daily, and can trigger notifications upon requested.
  • We spent time with Betty on personal finance education. These conversations aimed to help Betty become more confident about her financial life.

Cornerstone 360 is designed to help clients like Betty work toward retiring and move closer to children and grandchildren. To learn more about what might be the best approach for you, we invite you to visit. Cornerstone Wealth Management: Planning to be Our Clients’ Most Valued Asset™.

Resources

Modern Widows Club
Open to Hope
The Liz Logelin Foundation
GriedNet.org
Sisters on the Fly
Social Security Administration

Disclosures

This case study is a hypothetical illustration based on years of experience with various clients. Since no two client circumstances are alike, the information provided is not meant to be a recommendation for others.

No strategy assures success or protects against loss. This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company. Tax and legal services are not offered by Cornerstone 360, Cornerstone Wealth Management, LPL Financial or affiliated advisors. We suggest that you discuss your specific situation with a qualified tax or legal advisor. These are hypothetical situations. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.

Putting Your Family First

We are committed to providing a highly personalized experience that seeks to help you make good financial decisions. Clients who work best with Cornerstone 360:

  • Seek specific answers to specific questions
  • Seek customized financial strategies
  • Expect to review options before making decisions
  • Understand that wealth management is more than just investments and insurance
  • Value their personal time
  • Value the impact of professional advice

Exploring “what if…” scenarios is part of Cornerstone 360, and  helping with questions like “what is the impact of …

  • Saving more, spending less before retirement … or saving less, spending more?”
  • Downsizing an existing, or buying a second, home?”
  • Helping fund college for a child, grandchild, niece or nephew?”
  • Moving out of the area, renting a current residence?”
  • Making a big financial change at or near retirement?”
  • Working longer, shorter, part-time, or stopping work entirely?”
  • Market timing?”
  • A persistent down market in retirement?”
  • Gifting to family? Funding a charity?”
  • Funding a special needs strategy in the family?”
  • Cancelling or adding a life insurance policy, or what to do with an existing cash value policy?”
  • The risk of extended care at home or a care facility”
  • Taking Social Security benefits early, or the merits of taking it later?”
  • Buying rental property for cash flow in retirement?”
  • Paying off debt a little more each month, by retirement, or carrying debt into retirement?”
  • Distributing our estate to children from our first marriages?”
  • What we have saved:… ‘will I run out of money and be homeless?’” Yes, even with well-to-do families, we hear that concern during their first visit.

Each client situation is different. Savings and spending is different. Attitudes toward needs and wants vary. Financial behavior plays a role. Cornerstone 360 is designed to help each client prepare for a financial future of her and his choice.

In 2008, WORTH Magazine named Cornerstone one of the Top 250 Wealth Advisors in the Nation. Cornerstone earned this distinction by being nominated by readers and industry peers, and then being selected by Worth editors based on attributes including credentials, approaches to customer service, portfolio management and risk, as well as insights into the current investment environment.

This work and commitment to accomplishment continues today. Cornerstone Wealth Management: Planning to be Our Clients’ Most Valued Asset™.

Tracking#1-05112527

Case Study 3: Kelly Fielder, Rental Property Owner

Kelly’s Story

Age 57, Kelly is single, loves the outdoors, and is a successful corporate attorney. She recently parted ways with her long time financial advisor because the advisor did not agree with her purchase of a single-family rental property. Now, Kelly had to find a new advisor … one who understood how to integrate rental property as part of her overall plan

In addition to searching for a new advisor to assist on other financial matters, Kelly was looking for help understanding “what next” with her new rental property. She seeks to retire in about five years, and wants to understand how this will all work. In discussing her long-term goals, Kelly visualized the best-case scenario as “being able to walk the beach without clothes, never having to worry about money for the rest of my life.” Although that may not be exactly what happens (she might have to worry about the Baywatch police!), this simple statement characterize the financial independence Kelly sought.

The Approach

The Cornerstone 360 process considers a client’s total financial condition. This approach involves a cross disciplinary look at household cash flow, investments, insurances, taxes, estate planning, among other areas of finance. The experience is like having all of a client’s advisors around a table at the same time, working together to coordinate the most appropriate ideas. This process helps Cornerstone identify coordination gaps and areas for potential improvement in a client’s current plan.

Specific to owners of real estate investments, the analysis included a performance review. Each investment property is unique, and generates its own income and expenses cash flow model. When this cash flow is measured against equity, considering leverage and the benefit of potential tax deductions, a calculation of possible performance and return rates is what we term a Performance Footprint. But, getting to a Performance Footprint is not where Cornerstone 360 ends.

Because the investment property is only part of Kelly’s assets, her rental’s Performance Footprint is factored into her total current condition. This becomes her Base Case. A Base Case answers the question, if Kelly continues with her current plan, what is her potential outcome for meeting her goals? From a Base Case, Cornerstone is able to help measure the impact of recommendations made toward improving her plan.

Observations 

Performance Footprint of this investment property: While the property felt to Kelly like it was breaking even, it was actually producing an annualized (-15.0%) loss against equity for the next year and foreseeable future. It wasn’t until the debt is paid off in 28.5 years that the property would likely produce positive cash flow. What about growth of rent over time? This is offset by the growth of expenses. What about factoring in appreciation? To realize the benefits of appreciation, the property would have to be sold. The goal for Kelly was income. Appreciation can have a positive impact over time, but only when the property is sold and the cash flow stops. What about holding this property for 10 years and then selling, realizing the benefits of appreciation? Because of the negative cash flows and transaction costs, assuming a range of potential appreciation rates, the property still underperforms compared to holding cash. What cannot be calculated in this Performance Footprint is the risk of being a landlord, holding a significant amount of equity in one investment, and unexpected costs.

Throughout the process, the beach and financial independence was calling. Will the investment property help? It turns out, even with the tenant “paying down the loan” over time, and factoring in the merits of leverage (debt), the rental’s 28.5-year negative Performance Footprint was too long a period of time from which to recover. And even when the debt is paid off over time, the cash flow rate without debt was still just under 2%.

With Kelly’s Base Case understood, it was not too late to make a more suitable financial decision. 

All properties are different. All clients have different circumstances. Cornerstone 360 is designed to help you work toward getting to whatever beach you want, when you want, in whatever stage of clothing you choose. To learn more about what might be the most appropriate approach for you, we invite you to visit. We will be the ones wearing clothes. Cornerstone Wealth Management: Planning to be Our Clients’ Most Valued Asset™.

Disclosures

This case study is a hypothetical illustration based on years of experience with various clients. Since no two client circumstances are alike, the information provided is not meant to be a recommendation for others.

No strategy assures success or protects against loss. Investing in real estate involves special risks such as potential illiquidity and may not be suitable for all investors. Tax and legal services are not offered by Cornerstone 360 Wealth Management, LPL Financial or affiliated advisors. We suggest that you discuss your specific situation with a qualified tax or legal advisor. These are hypothetical situations. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.

Real Estate Investors. You have a home at Cornerstone.

The financial services industry tends to shy away from deep thinking and advice on a family’s directly-held real estate investments. Offering this type of help is difficult, and requires a level of experience, training, and insight that is not part of the licensing and credential process of many of today’s advisors. Cornerstone is different. This gap in providing advice on real estate is the reason Cornerstone advisors became financial planners.

The Cornerstone 360 process provides strategies and options that honor our client’s interest in this asset class, and that seek to help them make better financial decisions. Cornerstone has the experience to assist real estate investors with questions like:

  • “We need more income for retirement. Are there changes we should consider?”
  •  “Can you take a look at our real estate and everything else to help us understand how this can all work together?”
  •  “How is our real estate performing?”
  • “What should we do with [a specific building] when we retire?”
  • “What is the best way to transfer our real estate to our kids?” Or more likely, “One of our children might be interested in taking over. The others are not as interested. What suggestions do you have to make this fair to all of our children?”
  • “We inherited these properties. What should we know?”
  • “How can we pass along our real estate portfolio to our family and avoid selling properties to pay estate taxes?”
  • “Being a landlord has become harder over the years. What are our options at this point?”
  • “Is there a way to reduce or eliminate taxes if we sell a highly appreciated property?”
  • “Should we be thinking about our real estate differently?”
  • “Is there anything you see that we are missing?”

Imagine for a moment walking into a traditional financial advisor’s office and having a deep conversation about these or similar matters. This is the needle in the haystack … the prized resource … that Cornerstone can offer families who currently own, or wish to own, small rentals, apartment complexes, retail shopping, warehouses, office buildings, or land.

Cornerstone real estate and planning strategies have been featured in many financial and business magazines, including Newsweek, The Wall Street Journal, Chicago Tribune, California Real Estate Journal, Investor’s Business Daily, Time Inc., Kiplinger, REALTOR® Magazine, Real Estate Business, California Real Estate, Christian Science Monitor, Journal of Financial Planning, Journal of Accountancy, and more.

In 2008, WORTH Magazine named Cornerstone one of the Top 250 Wealth Advisors in the Nation. Cornerstone earned this distinction by being nominated by readers and industry peers, and then being selected by Worth editors based on attributes including credentials, approaches to customer service, portfolio management and risk, as well as insights into the current investment environment.

This work and commitment to accomplishment continues today. Cornerstone Wealth Management: Planning to be Our Clients’ Most Valued Asset™.

Case Study 4: Greg and Gloria Ketchum, Wealthy Real Estate Family

Greg and Gloria’s Story

In their mid-80s, they’ve worked hard and taken risks to build a real estate portfolio/business conservatively valued at $80,000,000. Because the properties have not been valued in a considerable length of time, this estimate given by the Ketchums is the first step in determining the impact of estate (death) taxes. Greg and Gloria have three children in their 50s who contribute to varying degrees to this family business. Responsibilities range from active management of tenants and leases to bookkeeping and collecting rents. Because the business is time-consuming, the parents have done virtually no planning. This is common for real estate clients focused on what they know best. As Greg and Gloria grew older, parents and children were becoming more concerned about how this would all work out over time. They were at a crossroads, had some idea of the consequences of waiting any longer, and needed help.

Various concerns were shared by Greg and Gloria, and areas for potential improvement uncovered by Cornerstone 360. Some of these concerns included:

Reducing/minimizing estate taxes

  • Distribution to children; and as important, equalization of distribution
  • Taxes on current income: The properties have been held so long, tax shelter is minimal
  • Property Registration: Different ownership types, many outdated, many not creditor protected
  • Aging: the feeling of not being able to keep up their current pace much longer, and the longer-term risk of needing extended care and who would provide it
  • Preserving the real estate business for their children. This is different than estate taxes and distribution. This is preventing the forced sale of property to pay taxes
  • Liquidity: Cash reserves and other liquid assets are low
  • Second-to-die life insurance policy performance: It was purchased at a different time in interest rate history, and will likely lapse before the  death of the second parent

It is common for substantial real estate families to carry these risks for a long time, then to address them as they think about their exit. For the purpose of this brief, we will focus on Estate Taxes, and to some extent, how we can coordinate this with other planning areas.

The Approach

The Cornerstone 360 Wealth Management Process considers a client’s total financial condition. This approach involves a cross-disciplinary look at household cash flow, investments, real estate, insurances, taxes, estate planning, among other areas of finance. The experience is like having all of a client’s advisors around a table at the same time, working together to coordinate the most appropriate ideas. This process helps Cornerstone identify coordination gaps and areas for potential improvement in a client’s current plan.

Some of the strategies to unlock Greg and Gloria’s specific complex real estate situation. Some of the strategies may involve gifting or discounting, and the calculation of cost basis, cost recovery, and cash flows will be required and simple estate tax rule-of-thumb calculations may not satisfy this. 

Observations 

The estate was estimated at $95,000,000, not the $80,000,000 previously assumed. The Ketchums thought that if they reported a lower amount, it would reduce taxes. The reality is that at the time of death, an appraisal is done on the estate. Assuming the current income from each investment property and regional capitalization rate averages, $95,000,000 was a much closer estimate.

  • Registration on some properties will cause much of the estate to be subject to public probate, which is significantly more expensive and less private than having the properties properly registered and titled.
  • Assuming that the second death of Greg and Gloria happens the current planning year, estate taxes and settlement costs are estimated at $42,000,000. Assuming the life insurance policy was structured correctly, the estate would need to sell a number of properties to pay an estimated $30,000,000 in additional settlement costs, due from nine months from death. Note: There are a few post-mortem strategies for real estate families similar to the Ketchums, but they are designed to defer taxes over a period of time rather than reduce or eliminate taxes. In addition, the requirements to satisfy these strategies are strict.
  • Due to the way the insurance policy is structured, the significant life insurance policy will likely lapse, costing the family another $12,000,000 settlement costs, and requiring that another property be sold.
  • Finally, there is no clear path to equalization of distribution of the Ketchum estate.

Based on their current plan, none of the goals stated by the Ketchums would be achieved. While this was a surprise to this family (like other wealthy families, they imagined a family trust created in the 1990s would cover estate taxes), it is not too late to make progress toward reaching these goals. Additionally, the family members are generally cooperative with each other, and have shared aspirations for the family business.

Because the family is in alignment, the parents are thinking clearly about family and business, and there was reason to believe that between mom and dad one will likely live for the next five to seven years, we were able to explore a number of options. The ideas ranged from simple to complex. The simple ideas included updating the trust, creating some entities, correcting registration and titling, and updating assets owned by the trust. 

The second-to-die life insurance was another matter. If it survives the second death of Greg and Gloria, it will offset $12,000,000 in settlement costs. But it is more likely to lapse, due to unforeseen changes in the interest rate environment. Still, there are various options that discount the value of the original policy, including reducing death benefit, slightly increasing premium contributions, and life settlement. All viable options. Titling of the policy was not designed correctly, but could be corrected with nominal effort.

In instances with aging parents who have spent their lives working the family business, letting go of control is never an easy decision. But, if given the choice between potentially achieving their goals through these strategies and compromising some control, or having full control of business but losing assets due to taxes, distributing less to beneficiaries, it’s possible for a compromise.

Our work with a scenario like the Ketchums started with helping them express, shape, and prioritize their goals. We call this Clarity. This process may include collaboration with the client’s tax professionals and attorney, generating ideas, and narrowing down options. We call this Decision. The spark plug to a successful plan is taking Action on these Decisions. This process seeks to lead to greater Confidence in this family’s financial life. Cornerstone Wealth Management: Planning to be Our Clients’ Most Valued Asset™.

Disclosures

This case study is a hypothetical illustration based on years of experience with various clients. Since no two client circumstances are alike, the information provided is not meant to be a recommendation for others.

No strategy assures success or protects against loss. Investing in real estate involves special risks such as potential illiquidity and may not be suitable for all investors. This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. Tax and legal services are not offered by Cornerstone 360 Wealth Management, LPL Financial or affiliated advisors. We suggest that you discuss your specific situation with a qualified tax or legal advisor. These are hypothetical situations. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.

Real Estate Investors. You have a home at Cornerstone.

The financial services industry tends to shy away from deep thinking and advice on a family’s directly-held real estate investments. Offering this type of help is difficult, and requires a level of experience, training, and insight that is not part of the licensing and credential process of many of today’s advisors. Cornerstone is different. This gap in providing advice on real estate is the reason Cornerstone advisors became financial planners.

The Cornerstone 360 process provides strategies and options that honor our client’s interest in this asset class, and that seek to help them make better financial decisions. Cornerstone has the experience to assist real estate investors with questions like:

  • “We need more income for retirement. Are there changes we should consider?”
  •  “Can you take a look at our real estate and everything else to help us understand how this can all work together?”
  •  “How is our real estate performing?”
  • “What should we do with [a specific building] when we retire?”
  • “What is the best way to transfer our real estate to our kids?” Or more likely, “One of our children might be interested in taking over. The others are not as interested. What suggestions do you have to make this fair to all of our children?”
  • “We inherited these properties. What should we know?”
  • “How can we pass along our real estate portfolio to our family and avoid selling properties to pay estate taxes?”
  • “Being a landlord has become harder over the years. What are our options at this point?”
  • “Is there a way to reduce or eliminate taxes if we sell a highly appreciated property?”
  • “Should we be thinking about our real estate differently?”
  • “Is there anything you see that we are missing?”

Imagine for a moment walking into a traditional financial advisor’s office and having a deep conversation about these or similar matters. This is the needle in the haystack … the prized resource … that Cornerstone can offer families who currently own, or wish to own, small rentals, apartment complexes, retail shopping, warehouses, office buildings, or land.

Cornerstone real estate and planning strategies have been featured in many financial and business magazines, including Newsweek, The Wall Street Journal, Chicago Tribune, California Real Estate Journal, Investor’s Business Daily, Time Inc., Kiplinger, REALTOR® Magazine, Real Estate Business, California Real Estate, Christian Science Monitor, Journal of Financial Planning, Journal of Accountancy, and more.

In 2008, WORTH Magazine named Cornerstone one of the Top 250 Wealth Advisors in the Nation. Cornerstone earned this distinction by being nominated by readers and industry peers, and then being selected by Worth editors based on attributes including credentials, approaches to customer service, portfolio management and risk, as well as insights into the current investment environment.

This work and commitment to accomplishment continues today. Cornerstone Wealth Management: Planning to be Our Clients’ Most Valued Asset™.

Case Study 5: Marie Haas, Business Exit Planning

Marie’s Story

It seemed that from age 10 when she led her Girl Scout Troop in cookie sales for several consecutive years, Marie was marked for success… and hard work. Now age 60, she is the owner of a technology service company that is worth an estimated $12,000,000. While she is married, and raised three children during this time, this case study will focus solely on Marie and her desire to exit her business sometime soon and pursue what could be a second career.

The triggering event is the realization that after so many years focused on operating a business through all types of market cycles, it was time to pull back and enjoy other activities. Marie had a growing interest in local charities, especially animal shelters.

The ideal Cornerstone client is a business owner. Cornerstone advisors have been through many start-ups and related enterprises in their previous careers, and connect easily with the business owner’s journey. 

Coming into this advisory relationship, Marie had been exposed to a few different business exit concepts. They seemed to represent bits and pieces of some good ideas, but in total it was not clear which was a better idea, or what the process would be. At the start of our work together, Marie’s biggest goal was to get the highest value possible for her business without too much risk in the transfer. She also knew she had to pay taxes on this transaction, and felt that there was nothing she could do to mitigate that result.

The Approach

Cornerstone 360 Business Exit Planning considers the following to be an important sequence to help an owner exit his/her business:

  • Establish business owner’s exit goals and requirements
  • Determine owner’s financial and emotional preparedness
  • Identify suitable options (there are eight ways to exit a business)
  • Measure potential outcomes for each option
  • Implement the chosen option
  • Monitor results, help preserve income and wealth

The business exit planning experience is different than personal financial planning: It integrates the many important aspects of a personal plan, like maintaining a standard of living and managing risks along the way, and estate planning. Added is heightened collaboration with other key tax and legal advisors, a review of current retirement plans, tax returns, balance sheets, a reconciliation of personal/business expenses, and measuring the impact of taxation on each of the potential exit strategies.

Observations 

  • Marie had done an excellent job preparing for this planning moment. Financially, assuming all range of outcomes on the sale of her business, she appeared to have enough resources to maintain her standard of living. Emotionally, she is near ready. Based on her feedback, it appeared that a gradual ramp down of responsibilities would work best. The sticking point with most business exits is, what will the owner do after the business is sold? Getting to an answer can be paralyzing, and may require deeper coaching. Marie has already taken steps into her “encore” career, and is looking forward to spending even more time adding value to the animal shelters’ experience.
  • Due to her level of financial and emotional preparedness potential ways for her to exit the business included Gifting and Charity, Employee Stock Ownership Plan (ESOP), and straight Sale of her Business. Considering the impact of taxes and calculating proceeds net of taxes were calculated, it may turn out that option that would potentially generate the highest gross sales value may actually result in the lowest net proceeds. 
  • Taxes were the biggest challenge for Marie. While it would “be nice” to sell for the highest price possible, taxes and terms on each option showed that an option with a lower sales prices might actually result in a higher proceeds after taxes. After reviewing each of these illustrations and factors that caused the results, Marie made a shift in her priorities and placed a higher premium on net proceeds after taxes than highest sales price.
  • Of particular interest was the option for Gifting and Charity, where Marie could potentially bring together the efficient exit of her business with her charitable interests. Not only did this illustrate to be more tax efficient than an outright sale at the highest price possible, but also it resonated as a better total outcome for Marie.

Disclosures

This case study is a hypothetical illustration based on years of experience with various clients. Since no two client circumstances are alike, the information provided is not meant to be a recommendation for others.

No strategy assures success or protects against loss. Tax and legal services are not offered by Cornerstone 360 Business Exit Planning, Cornerstone Wealth Management, LPL Financial or affiliated advisors. We suggest that you discuss your specific situation with a qualified tax or legal advisor. These are hypothetical situations. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.

Your Business is Our Business

If you own and operate a business, you’ve spent untold hours and boundless amounts of energy making it work. You have also owned the responsibility of making payroll, managing employees, delighting clients, covering medical and workman’s compensation, and for the privilege of doing all this, paying taxes. In this regard, your business is the same as our business. And our businesses are similar to businesses of other clients we help.

Our advisors at Cornerstone are career entrepreneurs. With decades of combined experience, our titles included Director, VP, SVP, EVP, CEO, CFO, President, Board Director, and Founder. In exchange for the risks and low points, we have exercised stock options, taken companies public, navigated mergers and acquisitions, “exited” these businesses, and have started all over again. At a minimum, we have the experience to empathize with, and work toward adding value to, optimizing and protecting the wealth earned from your business.

Cornerstone can work with you to design strategies that help pursue your goals in a variety of areas:

  • Business exit planning
  • Maximize retirement contributions. Explore opportunities to defer amounts beyond commonly published 401k and 403b limits
  • Advanced tax planning strategies
  • Optimizing business cash reserves
  • Senior management compensation and benefits
  • Key employee retention strategies – “Golden Handcuffs”
  • Business succession and continuity
  • Advanced insurance strategies
  • Insurance policy reviews
  • Financial independence/retirement gap analysis
  • Charitable giving

In 2008, WORTH Magazine named Cornerstone one of the Top 250 Wealth Advisors in the Nation. Cornerstone earned this distinction by being nominated by readers and industry peers, and then being selected by Worth editors based on attributes including credentials, approaches to customer service, portfolio management and risk, as well as insights into the current investment environment.

This work and commitment to accomplishment continues today. Cornerstone Wealth Management: Planning to be Our Clients’ Most Valued Asset™.

Case Study 6: Dave Peters, Business Owner Tax Burden

Dave’s Story

When the topic of retirement contributions comes up, Dave cannot help but express frustration and disappointment. He owns a S-Corporation business that employ 12 full-time and six part-time workers (including his wife Julie). What Dave cannot understand is, why is it that his employees could contribute up to $18,500 each year to the Employee 401k plan while he is generally limited to $12,000. Dave’s tax preparer understood the limits of the current, but did not have any ideas that could help. Dave felt stuck.

His frustration grows when he considers that as business owner, he takes on significant risks: Market risk, employment risk, legislative risk, competition, the list goes on. And while he is willing to assume these risks, and the regular challenges dealing with employee and customer, he is forced to limit his own contributions to about $12,000.

What exacerbates Dave’s frustration is, while his S Corporation has done well and generates a considerable amount of free cash flow each year; these earnings are subject to taxation at the highest bracket. That means, for every dollar Dave generates in income that is not eligible for 401k contribution, he is paying more than 50% in combined federal and state income tax on that dollar. He will never see this money again, except perhaps in the form of government services, like if he were to be audited by the IRS. He would be essentially paying for his own tax audit!

How can a honest, hard-working, risk-taking business owner get a break?

The ideal Cornerstone client is a business owner. Cornerstone advisors have been through many start-ups and related enterprises in their previous careers, and connect easily with the business owner journey. We, too, are subject to the invisible hand of the IRS getting into our pocketbook. 

The Approach

The Cornerstone 360 Wealth Management Process considers a business owner’s total financial condition, including taxation.

Specific to Dave:  his need centered on reducing income taxes. The frustration with his 401k contribution limits was that the low level did not help much. If this could be “fixed” somehow, then contributing more to retirement would be a way to save more in taxes.

To identify potential strategies, Cornerstone 360 collected data, information, and documents relating to business cash flows, balance sheet, and 401k plan documents listed below:

  • Current employee census
  • Retirement Plan and Trust Document
  • Summary Plan Description
  • Investment Options
  • Current Form 5500

Note: These documents should be reviewed on a regular basis by a qualified financial advisor, Cornerstone, and or a qualified Third Party Administrator (TPA).

Observations 

  • Dave’s current 401k provider is a well-known payroll provider who offered 401k services as a satellite service to its core payroll and accounting business. As a result, Dave’s 401k plan documents and provisions were generic, not customized to optimize the plan for Dave and his business.
  • Retirement plan employee education had not taken place in two years, putting the business owner at considerable risk of not fulfilling requirements to provide annual education. Failing to satisfy ERISA requirements can be a costly mistake for business owners.
  • Plan Documents and references in the annual filings were not consistent. Documents needed to be adjusted, refreshed.
  • Investment options offered in the plan should be reviewed. In particular, cost and performance of the existing investment options did not appear to be competitive with the open market.

The items listed above represent small tweaks to Dave’s existing plan. Executed well, it could result in allowing Dave to increase his contributions. More importantly, these adjustments can help Dave’s business (and Dave as a Trustee) keep in compliance with ERISA and the DoL, mitigating the risk both face from unnecessary liability.

Now, the good stuff! Further Observations included:

  • Financial documents confirmed that Dave’s business was generating considerable free cash flow, which triggered a sizable amount of taxes due each year.
  • The employee census highlighted the difference in age and income between Dave and his wife, Julie, and the rest of his employees. Because most of the employees were much younger, and Dave and Julie in their late 50s, earned a much higher wage, there was opportunity to establish other strategies that could help both of them contribute more aggressively into a retirement plan.
  • Among strategies to consider regarding increasing retirement  contributions: 
    • Profit Sharing. This is a flexible addition available to a 401k plan because an employer may choose whether or not to make a contribution each year. There are also several types of allocation formulas available, many of which benefit owners and/or key employees at a higher rate than the other employees.
    • Cash Balance Plan. This is a type of defined benefit plan that has the characteristics of a Defined Contribution Plan. In 2021, contribution limits are $290,000. A cash balance plan offers more portability than traditional pension plans since business owners can take the vested account as a lump sum when ownership terminates. As it related to Dave’s circumstances, this plan could allow him to defer over $200,000 into this plan.

The person who penned “money can’t buy happiness…” might be wrong in the case of how Dave may feel about his retirement plan options. As part of Cornerstone 360, we learned about Dave’s business and personal financial goals, his tax challenges, and what might work best for his circumstances. Working under the guidelines established by the IRS, given his current and foreseeable cash flow and employee census, It may be possible for Dave to increase his annual contributions from about $12,000 to over $220,000. Assuming a 50% combined marginal tax rate, he could save more than $100,000 in income taxes each year. Equally important, these funds have the potential to grow tax-deferred. According to Cornerstone 360, assuming current income tax law at retirement, his then current combined marginal tax rate could be half of his current tax rate, saving him more taxes over time.

We’d like to hear more about your business, and your goals to improve your current retirement planning. Cornerstone Wealth Management: Planning to be Our Clients’ Most Valued Asset™.

There are many derivatives of the term “money can’t buy happiness…” Some of the more interesting include:

  • “Whoever said money can’t buy happiness simply didn’t know where to go shopping.” Bo Derek
  • “Friends and good manners will carry you where money won’t go.” Margaret Walker
  • “Money can’t buy happiness, but it will certainly get you a better class of memories.” Ronald Reagan
  • “While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx
  • “Money can’t buy happiness, but it can make you awfully comfortable while you’re being miserable.” Clare Boothe Luce
  • “If money can’t buy happiness, then I guess I’ll have to rent it.” Al Yankovic
  • “Money doesn’t make you happy. I now have $50 million but I was just as happy when I had $48 million.” Arnold Schwarzenegger
  • And finally, “Money can’t buy happiness.” Howard Hughes

Disclosures

This case study is a hypothetical illustration based on years of experience with various clients. Since no two client circumstances are alike, the information provided is not meant to be a recommendation for others.

Tax and legal services are not offered by Cornerstone 360 Business Exit Planning, Cornerstone Wealth Management, LPL Financial or affiliated advisors. We suggest that you discuss your specific situation with a qualified tax or legal advisor. These are hypothetical situations. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.

A Cash Balance plan is an employer-funded defined benefit plan that specifies both the contribution to be credited to each participant and the investment earnings to be credited based on those contributions. Each participant has an account that resembles those in a 401(k) or profit sharing plan. A Cash Balance plan may be appropriate for businesses with consistent revenues for long-term funding where owners are older and earn more than the average employee. These types of plans have additional costs and generally involve engagement of an actuarial firm for plan administration. Traditional 401(k) plans are employee-funded and allow for optional employer contribution; employees can defer up to $18,500/yr. (additional catch-up contributions of $6,000 if age 50 or older), with total combined contributions not to exceed $55,000/yr. Profit Sharing Plans are employer-funded and allow contributions to vary from year-to-year depending on profitability. Cash Balance Plans must be amended in order to change contribution levels. Traditional 401(k) and Profit Sharing Plan distributions taken prior to age 59 (age 55 if separated from service), may be subject to 10% penalty tax, in addition to ordinary income tax, and minimum distributions may be required at 70 . Cash balance plan participants are eligible to receive the vested portion of their account balances when they terminate employment.

Your Business is Our Business

If you own and operate a business, you’ve spent untold hours and boundless amounts of energy making it work. You have also owned the responsibility of making payroll, managing employees, delighting clients, covering medical and workman’s compensation, and for the privilege of doing all this, paying taxes. In this regard, your business is the same as our business. And our businesses are similar to businesses of other clients we help.

Our advisors at Cornerstone are career entrepreneurs. With decades of combined experience, our titles included Director, VP, SVP, EVP, CEO, CFO, President, Board Director, and Founder. In exchange for the risks and low points, we have exercised stock options, taken companies public, navigated mergers and acquisitions, “exited” these businesses, and have started all over again. At a minimum, we have the experience to empathize with, and work toward adding the goal of, optimizing and protecting the wealth earned from your business.

Cornerstone can work with you to design strategies that help pursue your goals in a variety of areas:

  • Business exit planning
  • Maximize retirement contributions. Explore opportunities to defer amounts beyond commonly published 401k and 403b limits
  • Advanced tax planning strategies
  • Optimizing business cash reserves
  • Senior management compensation and benefits
  • Key employee retention strategies – “Golden Handcuffs”
  • Business succession and continuity
  • Advanced insurance strategies
  • Insurance policy reviews
  • Financial independence/retirement gap analysis
  • Charitable giving

In 2008, WORTH Magazine named Cornerstone one of the Top 250 Wealth Advisors in the Nation. Cornerstone earned this distinction by being nominated by readers and industry peers, and then being selected by Worth editors based on attributes including credentials, approaches to customer service, portfolio management and risk, as well as insights into the current investment environment.

This work and commitment to accomplishment continues today. Cornerstone Wealth Management: Planning to be Our Clients’ Most Valued Asset™.

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