You are the Chief Financial Officer (CFO) of your own finances. As such, your ongoing job is to make sure your personal “corporation” succeeds financially. That means you’ll look to increase revenue, reduce unnecessary overhead, use debt strategically, and decrease your federal and state taxes.
Just as a CFO reviews finances any time his or her company experiences a major event, you, too, should closely review your balance sheet of assets and liabilities. And the 2018 fiscal year definitely counts as a major-event year for most high-net-worth individuals and families, says Jeanne Krigbaum, Senior Wealth Planner for Wells Fargo Private Bank, for two primary reasons: increasing stock market volatility and the impact of tax reform.
“Impending tax changes mean that many families are likely to pay less in taxes. Individuals who own businesses stand to pay less in corporate taxes, too,” Krigbaum says. “On top of that, the federal estate tax exemption doubled to a very generous $11.18 million for individuals, or $22.36 million for couples starting in 2018.” (The exemption increased to $11.4 million for individuals in 2019).
These new variables make it a good year for family CFOs to embark on full financial reviews. The following are some considerations to keep in mind. As you do, it is important to consult with your entire team of wealth, tax, and legal professionals to determine the right path for you — just as any CFO would.
Look for efficiencies in your assets
“Companies regularly review what assets they own, how they own them, and whether there might be more tax-efficient ways to own them,” notes Krigbaum.
Consider your personal real estate. The IRS has lowered the maximum amount of property taxes you can itemize on your federal tax return. That means you might not get much of a tax break for owning that lakeside vacation home.
Example: If you have been using the property infrequently, you could consider turning it into a rental. The tax advantages might be better if that lake home is a business asset instead of a personal one, suggests Krigbaum.
It is important to consult with your entire team of wealth, tax, and legal professionals to determine the right path for you — just as any CFO would.
Find opportunities to diversify
Corporations understand the value of selling more than just one product or service: less risk. If one product or service isn’t profitable one year, the company can turn to other products or services for revenue.
Example: In your financial life, there are many ways to create income from multiple sources. For example, your investment portfolio should include a diversified mix of stocks, bonds, and cash or cash alternatives. If you were heavily invested in equities before this year, it could be time to consult with your financial advisor about your current investment portfolio, notes Krigbaum.
Example: If you already depend on your employer for your salary, you might not want to also be heavily invested in your employer’s stock – it puts too many financial eggs in one basket. Consider talking to your financial advisor about diversification strategies such as setting up a Rule 10b5-1 plan to help you systematically sell your company stock and stock options.
Review opportunity costs and wise uses for credit
Like successful multimillion dollar business owners, you should consistently check that your financial assets are working as hard for you as they can.
Example: You’re considering paying cash up front for your next home. There are certainly advantages (primarily risk avoidance) to that strategy. However, would it make more sense to take advantage of cheap credit (low fixed mortgage rates) and instead put your cash to work in a higher-earning investment? It’s a point to consider.
Have a plan for wisely deploying profits during “up” years
Corporations often hand out bonuses during high-profit years. However, most companies don’t use all of their profits on these kinds of splurges. They also look for ways to invest profits back into their business.
“You can use the same approach for your own finances,” says Krigbaum. In years when you come into a significant inheritance or earn a generous work bonus, spend 10 to 20 percent of the bounty on something fun. However, invest the rest of the windfall back into the corporation of “you.”
Example: Consider alternatives for additional sources of income, such as bulking up other investment accounts and buying income-producing real estate. “Do what you can to create future income for yourself,” Krigbaum suggests.
The bottom line: When you view your personal finances this way — as a business that plans to operate successfully for many years to come — consulting with your wealth, tax, and legal advisors may help you discover creative financial options that you wouldn’t have otherwise.