Christopher S. Holton
May 31, 2016
The realization of a liquidity event, whether it be through an inheritance or sale of a company, tends to accelerate the achievement of individual or family goals. One goal may be to retire early. Another may be to purchase a second home. Still others could be to finally buy a boat or take that “bucket list” trip. While attaining these goals may provide fulfillment or joy in life, there is a risk of jeopardizing longer term goals without proper risk management planning.
In today’s digital age, it is not hard to find information on individuals through Facebook, Instagram, Twitter, or Google. In the wrong hands, information touting success can be used to cause harm. Consider an example: a high-ranking executive at a public company has recently completed a highly publicized merger or acquisition. The executive has a teenage child who is involved in a minor accident with a minor injury to another person. With minimal effort the injured party could find enough information to consider a much more aggressive lawsuit than originally intended. While this may sound extreme, the facts could be varied to create any situation in which a liability lawsuit perhaps would not have otherwise occurred but for the very public nature of an event. What to do? Conduct a comprehensive review of property and casualty insurance coverage, including liability coverage, prior to a liquidity event or secondary material purchase.
A liquidity event may also provide families with flexibility and opportunity to reconsider the planning they have done previously. Perhaps the whole life insurance policy that was purchased 20 years ago is no longer necessary for one client. At the same time another may want to purchase more permanent life insurance in order to provide a predictable legacy to his or her heirs. What to do? Conduct a comprehensive review of your life insurance portfolio. This should include an understanding of the goals for which the insurance was originally purchased and how those goals may have changed due to the liquidity event.
Protecting newly acquired assets is extremely important while a person is alive. It is equally, if not more important to make sure those assets are protected when that person passes away. What to do? Review estate planning documents immediately following a life-changing liquidity event. The structure of a will may need to be altered in order to properly secure the family’s new wealth. These changes may include various strategies, including drafting of trusts to minimize estate taxes, which may have not been a concern prior to the event. Another strategy could be to pass on a newly purchased vacation home to heirs in a gift or estate tax efficient manner while providing funds for operating costs.
At an exciting moment in a career and life journey, it is tempting to focus on all the special life moments that will be enjoyed upon a liquidity event. In such moments, it is important to take time to have a financial counseling team support you, so unforeseen circumstances do not get in the way of enjoying what is to come.