Sterling Advisor Solutions

The sale of a business is often the largest single financial transaction in the business owner’s life. While the actual sale itself is usually adequately handled by the investment bankers and lawyers, too often the owner’s big-picture concerns get subordinated to the drive to “get the deal done.” Those big picture concerns may include everything from the owner’s spouse’s feelings, to good income tax planning, from the consideration of long term counterparty risk, to good planning for the owner’s retirement assets, and from the time shape of the purchase price, to good estate planning. These big picture concerns may fall through the cracks, unless there is someone driving the process and taking the big picture view. Sterling is uniquely qualified and capable of making sure your goals are achieved during the sale of your business.

From the point of view of need, an investor who does not expect to need the assets in his retirement account has, by definition, a large retirement account. In absolute terms, a large retirement account is often defined as an account of at least $1 million. This guide focuses on accounts that are large by both definitions. Large retirement accounts are different from other accounts in at least three ways. First, the proper time horizon for these accounts should be much, much longer than the investor’s life expectancy. Second, large retirement accounts are subject to devastating taxation at the death of the investor, and thus require special planning. Third, large retirement accounts are often associated with large required minimum distributions, and these distributions often create large, unwanted tax bills. The combination of required minimum distributions, and eventual investor death leads to large taxes, and a corresponding reduction in the funds available for the investor’s family, and also to a reduction in advisor assets under management. Good planning can in most situations solve most or all of these problems.

Holding a concentrated position in a publicly traded stock requires the holder to bear excess risk. Excess risk is risk for which the holder cannot expect to be compensated. We examine a number of reasons people continue to hold concentrated positions despite the excess risk. Perhaps the most frequent and compelling reason is the desire to avoid, or at least postpone, tax. We examine nine commonly discussed solutions, and find that one of two solutions – outright sales and stock diversification trusts – are the most appropriate solution in most cases. We also explain the often confused concepts of hedging and diversification.