4 Opportunities for Founders to Align Business and Personal Planning

This article was originally featured in Triangle Business Journal.

Entrepreneurs who are scaling a business through an exit often find that the same ingenuity that brought them initial success isn’t sufficient to grow the business, or to position it attractively for acquisition.

Founders sometimes wear blinders that keep their eye on the prize, but that might also cause them to make mistakes that throttle their potential. When business owners have tunnel vision, they can miss opportunities to integrate their business and personal family planning in ways that are advantageous to both.

After several decades in the financial industry, I’ve seen firsthand the unique challenges entrepreneurs face, as their business decisions are tightly integrated with their personal financial success. I’ve come to appreciate that there are four key opportunities that can align your new or growing venture with your personal planning.

1. Upgrade your advisory team.

I get it: Your college roommate joined a big bank after graduation and has climbed the ranks selling investment and insurance products to the masses. Your aunt has done your family’s taxes since before you were born, though winces when you bring in a stack of K1s at the start of tax season.

Just as early employees at a start-up aren’t always best suited to scale the business through an exit, your advisory team should grow to include those who specialize in working with others facing similar issues. Many smart business owners seek out referrals from peers and investors, or take advantage of community organizations such as North Carolina’s Council for Entrepreneurial Development (CED) for introductions to build their advisory team as they grow.

Once this team is in place, it’s important to ensure collaboration occurs so that decisions are not made in isolation. My most conscientious clients organize meetings with their team — trust and estate attorney, business attorney, CPA and wealth manager — annually to collectively identify ways they can better accomplish their goals.

2. Create a plan in the event of death or disability.

Running a startup is hard, with limited time to focus on dinner, much less personal planning. But that’s no excuse not to get the basics in place. Full disclosure, I’m head of financial planning at a $7 billion RIA, so if anyone should be buttoned up, it’s me. Yet, it took until my wife and I were pregnant with our second child that we finally executed our estate plan and obtained the needed term life insurance. I don’t let my clients make that mistake.

In addition to standard planning documents like a Last Will and Testament, Financial and Health Care Powers of Attorney, Health Care Directives and Guardianship Plans, founders need to ensure they have a Buy-Sell Agreement in place that identifies what happens to your ownership at death or disability, and who will be in control. Failing to do so doesn’t just impact your family, but also your employees, investors and suppliers.

3. Consider legacy planning when your company moves into a high growth phase.

As your ownership stake goes from $10 million to $100 million, you pass a critical milestone that relates to how much your estate pays in taxes to the federal government.

As of January 1, 2024, each taxpayer has a federal lifetime gift and estate tax exemption of $13.61 million. When combined with a spouse, a founder can give away $27.22 million free of any estate tax. However, under current tax law, this exemption drops to approximately $7 million for individuals and $14 million for couples on January 1, 2026. Failing to take advantage of the remaining two-year window could cost you over $5 million in estate taxes! And if you wait until an IPO to gift shares to a trust, you could miss out on significant appreciation already free of estate tax.

Much like trying to score a last-minute Mother’s Day Brunch reservation, scheduling time with an estate planning attorney may be difficult as we get closer to 2026, so getting a meeting on the books in 2024 could be beneficial.

4. Maximize tax advantages of Qualified Small Business Stock (QSBS).

Founders, early employees and investors frequently benefit from Section 1202 (qualified small business) stock exclusion, a U.S. tax benefit that applies to eligible shareholders of C corporations that meet specific requirements. Namely, they are able to exclude from capital gains the greater of $10 million or 10 times their basis in the stock if certain requirements are met. Note that the exclusion applies per taxpayer, which includes individuals, trusts and partnerships.

Many founders holding QSBS enjoy the initial benefits by excluding a portion of the gain of their stock, yet fail to maximize the tax savings by not planning ahead. A strategy referred to as “stacking” involves increasing the shareholders of Section 1202 stock, which can include transferring stock to additional individuals (spouses, children and other family members), trusts and other entities. I find this is most commonly done to accommodate broader estate and legacy planning goals, but it is also effective with non-grantor trusts.

“Packing” is a different strategy, in which a taxpayer “packs” as much cost basis as possible into the annual exclusion calculation in order to increase the QSBS limitation beyond $10 million to take advantage of the “10 times” basis. This could include selling QSBS with imbedded gains during the same tax year as you sell other high-basis (low-gain) QSBS in order to increase the total cost basis sold.

As referenced above, be sure to have your advisory team in sync when exploring QSBS strategies.

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