Our niche is working with the decision maker of an organization to do the following -
Strategic Planning -
All executives know that strategy is important. But almost all also find it scary, because it forces them to confront a future they can only guess at. Worse, actually choosing a strategy entails making decisions that explicitly cut off possibilities and options. An executive may well fear that getting those decisions wrong will wreck his or her career.
The natural reaction is to make the challenge less daunting by turning it into a problem that can be solved with tried and tested tools. That nearly always means spending weeks or even months preparing a comprehensive plan for how the company will invest in existing and new assets and capabilities in order to achieve a target—an increased share of the market, say, or a share in some new one. The plan is typically supported with detailed spreadsheets that project costs and revenue quite far into the future. By the end of the process, everyone feels a lot less scared.
This is a truly terrible way to make strategy. It may be an excellent way to cope with fear of the unknown, but fear and discomfort are an essential part of strategy making. In fact, if you are entirely comfortable with your strategy, there’s a strong chance it isn’t very good. You’re probably stuck in one or more of the traps I’ll discuss in this article. You need to be uncomfortable and apprehensive: True strategy is about placing bets and making hard choices. The objective is not to eliminate risk but to increase the odds of success.
In this worldview, managers accept that good strategy is not the product of hours of careful research and modeling that lead to an inevitable and almost perfect conclusion. Instead, it’s the result of a simple and quite rough-and-ready process of thinking through what it would take to achieve what you want and then assessing whether it’s realistic to try. If executives adopt this definition, then maybe, just maybe, they can keep strategy where it should be: outside the comfort zone.
Comfort Trap 1: Strategic PlanningVirtually every time the word “strategy” is used, it is paired with some form of the word “plan,” as in the process of “strategic planning” or the resulting “strategic plan.” The subtle slide from strategy to planning occurs because planning is a thoroughly doable and comfortable exercise.
Strategic plans all tend to look pretty much the same. They usually have three major parts. The first is a vision or mission statement that sets out a relatively lofty and aspirational goal. The second is a list of initiatives—such as product launches, geographic expansions, and construction projects—that the organization will carry out in pursuit of the goal. This part of the strategic plan tends to be very organized but also very long. The length of the list is generally constrained only by affordability.
The third element is the conversion of the initiatives into financials. In this way, the plan dovetails nicely with the annual budget. Strategic plans become the budget’s descriptive front end, often projecting five years of financials in order to appear “strategic.” But management typically commits only to year one; in the context of years two through five, “strategic” actually means “impressionistic.”
This exercise arguably makes for more thoughtful and thorough budgets. However, it must not be confused with strategy. Planning typically isn’t explicit about what the organization chooses not to do and why. It does not question assumptions. And its dominant logic is affordability; the plan consists of whichever initiatives fit the company’s resources.
Perhaps one of the worst effects of high estate taxes is the way tax planning diverts attention from other important estate planning issues. For many years, I have stressed that estate planning is about much more than taxes, but most people believe estate planning and estate tax planning were the same thing. Though wrong, it was understandable when the lifetime estate tax exemption was $600,000. Many "modest millionaires" who considered themselves middle class would be hit by high estate and gift taxes without planning.
Unfortunately, the idea that estate planning is all about tax reduction still is widely held. With the estate tax exemption at $5.2 million and likely to stay there or higher, many people simply are neglecting estate planning. Since estate taxes are not going to be a problem for them, they see no reason to put together a plan.
One way to avoid falling into this trap is to think about legacy planning instead of estate planning. Everyone needs a legacy plan, even those with less than $1 million in assets
. With a new estate tax law likely to come down the pike this year and stabilize the tax picture, 2009 is a good time to put together your legacy plan.
Legacy planning has four key goals. Consider these goals and how to accomplish them. Working with an estate planner will be easier and faster when you understand legacy planning this way, and it will make meeting these goals easier and more likely.
Financial security for you and the objects of your affection is a priority of legacy planning.
Though few people realize it, putting yourself first should come be the priority of legacy planning. Establishing a legacy involves giving to or providing things (not necessarily money) for others. Yet, you are best able to give to others when your own standard of living is secure. You won’t be able to give to or provide for others when your own situation is precarious. As the plan is developed, keep returning to the question of whether a strategy would put your standard of living at risk under some circumstances. The sharp decline in asset prices in 2008 brought that home to many people.
Once comfortable with your financial security, establish goals for the ultimate disposition of your wealth. Often, the spouse is the first beneficiary of the wealth. After that, children, grandchildren, and charities are the usual recipients of the wealth. You need to decide who will benefit from your estate, the order in which they will benefit, and the amount or percentage of your wealth they should receive.
After determining who should benefit from the wealth, the next issue is how they will benefit. That issue often is determined by the other goals of legacy planning.
Continuing the management and caretaking of the estate is the next goal. If you are like most people, you have been calling the shots if not doing all the management. Too many estates, regardless of their size, dwindle rapidly after the first owners pass them on. Often the successors did not understand how the assets were to be managed or did not share the values and outlook of the founder.
This issue is particularly important with small businesses . The founding owner must decide who will own the business, who will benefit from its income, and who will manage the business. Those are three separate categories and do not have to consist of the same person or people. A key to successful legacy planning for a business, however, is to have a succession plan in place and to follow it. Succession planning is critical
Even estates without businesses need to address the issue of the stewardship transition. It could be that the people you want to benefit from the wealth are not likely to manage it well over the long term. In that case, you want to consider trusts and other arrangements that separate management and ownership. It is important to recognize that those who benefit from the assets do not have to be the managers.
Protecting the estate is another key element of the plan. This goal is particularly important to small business owners and professionals. They feel a greater need to protect assets from potential creditors and lawsuits. But others might need asset protection from those sources as well as disgruntled family members, irresponsible family members, and ex-family members in divorces.
There are simple, low-cost vehicles that will protect assets, including different ways to hold title to assets, IRAs, annuities, and umbrella liability insurance. These work for estates of any size. For larger estates, there are vehicles that can be used to protect assets, including trusts and limited partnerships. Your fears, needs, and the various methods can be discussed with your estate planner. The key is to identify the assets you want protected and the potential harms from which you want protection. Surprisingly, the size of the estate often is not a factor. Many estate planners report that the worst fights are over the smaller estates.
The legacy plan must address the potential tax burden. Once you have established who should benefit from the wealth, you want to transfer the wealth to them in the ways with the lowest possible tax bill that meet your other goals. For many estates, that has become easier each year for about a decade, but easier tax reduction is always at the whim of congress.
One reason many people do not develop estate plans is they do not realize how valuable the estate is and the potential tax burden. There often are "hidden assets" that are included in the taxable estate such as annuities, life insurance, IRAs, and some trusts. Other people "forget" about some of their assets or do not know their true value.
Even when federal estate taxes are not a problem, state inheritance or estate taxes could be. A number of states have these taxes, and some impose taxes on estates or assets with values as low as $250,000.
Income taxes on beneficiaries also need to be considered in the plan. For example, the beneficiaries of IRAs face an income tax burden many people overlook. That burden is one reason it might benefit you or your heirs to empty an IRA early (better convert it to a ROTH), pay the taxes, and put the IRA assets in a taxable account to compound over the years. If you do not consider income taxes, your beneficiaries could benefit from far less of your wealth than you expected.
Planning a legacy involves far more than reducing estate taxes. It is time to start determining your goals and putting your plan together. Once the new estate tax law is final, push forward with the final details and implementation.
Family Planning -
No matter what the current economic situation is like, adhering to a few sound and well-practiced strategies will help you to prepare for the future; while your individual situation will always have its unique qualities, the following suggestions may prove useful as you review your family’s long-term plans.
Whenever possible, you should try to preserve the assets and resources you’ve set aside for retirement; although you’re allowed to make withdrawals from these funds whenever you need to, early (i.e. before age 59½ for IRAs and similar plans) and frequent withdrawals will often bring costly taxes and penalties.
Since you can’t recoup the time you’ve invested , you’ll need to ensure that you can quickly replenish the lost funds; otherwise you may find yourself with fewer available assets when the market rebounds.
Maintain a diversified portfolioThe various types of financial products and asset classes — life insurance, savings accounts, CDs, annuities, bonds and stocks — serve different objectives and perform differently in different economic climates, so it’s essential to maintain a broad selection of these assets in your portfolio. By combining insurance protection, asset allocation and investment management you can help reduce the impact of market fluctuations on your savings. Of course, diversification alone does not assure a profit or protect against market loss.
Don’t chase the latest financial or investment fadsAlthough it’s often tempting to invest in the newest or fastest growing assets, it’s important to take the time to regularly review your strategies with your financial professional to help ensure that your needs and objectives canbe met by these products. Naturally, if your current assets are secure and healthy, then it’s best to let them be; remember, what’s novel today may not always be what you need in ten, twenty, or even forty years from now.
Manage your risk carefullyTaking on too much risk when the markets are soaring (and everything looks safe) can often leave your exposed and vulnerable to a resulting decline. To protect your portfolio and ensure that your long-term investment goals are being met, you should balance the risks inherent in investment products with other financial assets that offer guaranteed income upon retirement (such as fixed annuities). No matter where you invest, though, you should always check the financial strength rating of the company you are buying from (any guarantees issued by an insurance company are based on their ability to pay claims effectively). Keep in mind that investment products have no guarantees, as they’re subject to market fluctuation.
Keep a long-term perspective on your financial futureGenerally speaking, markets are cyclical: so rather than react to each swing of the market, it’s usually more effective to build a portfolio with an emphasis on long-term strategy is usually appropriate to stick with a carefully considered long-term strategy, particularly when it comes to your retirement and other long-range needs.
