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OVERVIEW & GOALS

Entrepreneur mother and daughter
Susan is a 54-year old owner of a marketing agency that employees 15 individuals. She started the business 25 years ago and hopes to transition her business to her daughter, who is currently working at the firm. She hopes to retire within 5-10 years. She would like to determine when she can retire, how to transition her business to her daughter, whether or not to downsize her home, and how to reduce her debt as much as possible before retirement.

 

RESOURCES & FACTS

Her primary residence is worth $2.3MM with a $1.1M mortgage. She has an investment property that is currently generating $1,300 per month. She has a 401(k) account with a balance of $970K and various brokerage accounts worth $1.2MM. Her social security benefit at full retirement age is estimated to be $2700 per month. She does not have a life insurance policy, she has an estate plan that was created last year, and she files her taxes through an enrolled agent.

OUR RECOMMENDATION

After creating multiple scenarios and having several conversations with Susan and her daughter, we recommended that she slowly transact her business to her daughter over a period of 15 years. During this timeframe, Susan will be given a salary that will slowly decline as she hands over more responsibilities to her daughter. Susan’s daughter will acquire equity from her mother via the firms’ free-cash-flow during this 15-year period. This way, neither Susan or her daughter will have to use debt to facilitate this transaction. Furthermore, this 15-year period will also provide Susan with an income source during her retirement. We introduced Susan to a well-qualified CPA to begin tax planning and a well-qualified estate attorney to begin organizing her estate. We also discussed the buy-sell plan with her corporate attorney to begin facilitating a more formal agreement with her daughter.
We recommended that Susan downsize her primary home using the homes’ equity to fund the purchase of a new home. By doing so, she will enter retirement debt-free with a lower budget expense need. Due to the passive income stream via the transaction of her business, she will not need to file for social security until the age of 70. In all scenarios we created, the ones where Susan files as late as possible are those that provided a higher probability of success. Of course, financial plans are living documents and we will update the plan and its recommendations as Susan approaches retirement.

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