Only 30% of families maintain wealth through the third generation. You’ve spent a lifetime sacrificing in building wealth, and as you and your adult children grow older, you’ve begun to wonder, will I be part of the 70% who fail or among those who make it? You fulfill a variety of roles as a business owner, but with all the time you’ve dedicated to building your business, have you considered the future of your personal wealth? Have you utilized all resources to ensure that your wealth is preserved in taxes, assets, and heirs?
Wealth Advisors, Bill Hrapmann and Chad Hrapmann, share the information you need to protect your business, your wealth, and your legacy. By providing some of the same insights they share with their clients, they help you save income taxes, navigate estate taxes, prepare family heirs, and facilitate open communication between all the professionals in your life. You’ve spent a lifetime creating this wealth. Now learn how to keep it. This is your ultimate resource for minimizing risk, preserving long-term value and ensuring that future generations reap the benefits of your hard work. This is the Author Hour podcast. I’m your host Frank Garza. Today I’m joined by Bill Hrapmann and Chad Hrapmann, Authors of a brand new book, Taxes, Assets, and Heirs: Personal Wealth Management for Business Owners.
Bill and Chad, welcome to the show.
Chad Hrapmann: Hey, Frank. Nice to have us.
Bill Hrapmann: Hey, Frank. Great to be here.
Frank Garza: To start, I just love to hear a little bit about each of your background and how that led to you writing this book. Bill, do you want to start?
Bill Hrapmann: Sure. I started in the financial industry 40 years ago. Over time, we’ve had a lot of experience in working with different types of clients. Then when Chad joined our firm, it really made us focus on who do we have the biggest impact on. It came across that business owners were the people that our processes had the biggest impact on.
Frank Garza: Great. Chad?
Chad Hrapmann: Yes. My background is in engineering, that’s where it went from education in college. I made the jump to the financial side. It’s been a little over three years now. It sounds like a crazy jump, but it’s actually more common than what it seems, and the thought process are pretty similar, so it’s been great so far working with my dad and bringing my outside thoughts into this world.
Frank Garza: Can you all talk about this book that you wrote, Taxes, Assets & Heirs? Who is the audience you had in mind as you were writing the book? Who’s your target audience?
Bill Hrapmann: Well, we often work with business owners who had a lot of success financially. Now they’re very concerned about, they’re paying too much in taxes. They want to be sure their assets are working in their favorite to accomplish with it with light. They want to be sure their heirs are prepared, they’re afraid the heirs are going to blow the money. When we were writing this book, researching this book, we found out that 70% of the wealth does not make it past the third generation. We’re trying to get our clients to be the 30% that do have a good plan and the wealth continues as a family lives.
About Taxes, Assets & Heirs
Frank Garza: The first chapter is called Wealth Management for Business Owners. One of the things you talk about is the importance of conducting a wealth management review to make sure your finances are healthy enough to implement some of the strategies you’re going to be going over in the book. What might a wealth management review look like?
Bill Hrapmann: Well, it’s getting with the clients and find out what’s really important to them and their families. It’s really totally about them. Just listen, what do they want to accomplish? What’s the important things that are game breaker for them? From there, we review where they stand already. Then, of course, meet and talk to their trusted advisors, their CPA, their tax attorney. We put together a map of where they are and where they want to go and see if that can be improved upon.
Chad Hrapmann: Yeah. It seems like when you get the overall picture together, there’s a lot of things that can come up that either the client thinks they already have covered, or that they want to do with their wealth, but that’s not what is actually getting done as far as their whole wealth picture. We try and see the gaps and also see what’s important to you. Is it wealth enhancement or to try and get the wealth to your heirs? And those sorts of things.
Frank Garza: Talk to me about these clients that come to you. Do you find a lot of people get started on their journey to wealth management early? Or do you get a lot of people coming to you that are getting close to retirement, and they’re worried about whether they’ve done enough?
Bill Hrapmann: We have both. I think in today’s world with access to so much information, a new business owner starts relatively early. The generation of the baby boomers, it wasn’t so much because number one, either the information wasn’t available or the planning strategies were not available. Business owners are very busy. They’re very achievement-oriented. They’re focusing on their business just blown in going. Then eventually, they get to the point something jumps out, “Oh, my goodness, I’m going to have to pay all these taxes.” Or, “I’m paying way too much income taxes now, what can I do?” There’s an enlightening moment that they start to plan for the future with more advanced strategies.
Then one more income tax strategy that is probably not utilized enough is called the Captive Insurance Company and especially coming off of COVID these past few years, many businesses were shut down for various reasons, restaurants, health clubs, etc. none of their insurance possibly didn’t cover this loss of revenue. When a business owner adopts a Captive Insurance Company, they’re able to pay premiums, deductibles premiums themselves to this insurance company that they would own. They would have control over investing those assets. The important thing here is a lot of people say, “Well, I’m just going self-insured.”
Self-insure means they’re just saving the money, and then when an event happens, they pay for it, but there is no tax deduction. With a Captive Insurance Company, you’re going to make premium payments that are deductible. Then if in the future, you have any claims, you could have some tax-advantaged distributions from the insurance company. If you never use the money, that’s an asset under today’s tax law, that you could cash in as long-term capital gains. You get an ordinary income tax deduction and a potential capital gain tax rate to withdraw the money in the future.
Frank Garza: Okay. In the next chapter, you talk about Income Tax Strategies for Business Owners. What are some of the, I guess, common missed opportunities you see people make in tax savings or some of the missed opportunities you see the most?
Bill Hrapmann: Retirement planning strategies alone it fits the business owner and typically they have less than 20 employees and the business owner is over 50, 55 years old. There’s cash balanced type plans that the business owner can double, triple, or quadruple the amount of money that they put in for themselves without necessarily increasing the amount of contribution they have to do for the employees. We all get lulled to sleep that, oh, I have a retirement plan and that’s all I can do, versus let’s look at upgrading it. As you get closer to selling the business or moving to the next stage of life, maybe you can double or quadruple your tax savings.
That’s one example.
Frank, another ideal of approach is when business owners have children who already have earned income, and it could be teenagers. They have some earned income from summer jobs. A huge opportunity, although it’s small dollars, it’s only $6,000 a year, is to start your children with a Roth IRA. That money is not tax deductible, but the children are typically in a lower tax bracket. The money grows with no taxes, and then qualified withdrawals are tax free. So for young person started these 15 to 20 years old and take that out for the years. It’s a huge income tax savings.
Chad Hrapmann: Yeah. Also, Frank, with the income tax savings, everyone knows about the 401K plan and things of that nature, but a lot of people think that’s the only plan you can go with. Really, when you start getting into it, in trying to optimize what is your business, what does that income, how many employees. There are other options out there that can help optimize the income tax savings.
Frank Garza: Okay, next thing you talk about in the book is the Estate Tax Strategies. This one really caught my eye, because it’s something I don’t know a lot about to be honest with you. I found it really helpful when you just explained the two different categories of estates, probate and non-probate, and what each of those are and what the difference is. Could you just give us a general overview of that? Because I think that could help some people out there, as well.
Bill Hrapmann: Yeah. So Estate Taxes, as business owners build their business up, they typically have assets outside of the business, which may be liquid assets, meaning you can get a hold of the cash, or the business may be worth millions of dollars, which is liquid. Regarding your question about probate and non-probate, a probate asset would be something that does not have a beneficiary attach, for instance, the ownership of the business. That has to go through probate, which probate is simply a changing of the ownership, once the original owner has died.
A non-probate asset will be something like your retirement account in which you name a beneficiary doesn’t have to go through probate. The beneficiary already named who the next owner is. When we’re doing his estate review, we look at probate and non-probate assets, but both categories are included for estate taxes. As an example, if someone owns a life insurance policy on themselves, that’s payable to their spouse or their children, that’s a non-probate asset because the life insurance has a beneficiary. The death benefit is included in the estate of the deceased.
Once a couple accumulates enough assets that they’re financially independent, they typically no longer need life insurance for dependent care. That’s a pretty common strategy that a person will have this life insurance, but it’s taxable. So you turn around and do a strategy of gifting that policy to an irrevocable life insurance trust and your children would be the beneficiary. Then after so many years of the trust owning the policy, that insurance policy is out of your estate, with estates taxes at 40% above the exemption equivalents, someone has a $4 million policy, and they transfer it over just right off the bat after a three year wait, that’s $1.6 million of estate tax savings.
Frank Garza: That’s a lot.
Bill Hrapmann: A lot of people are just not aware of that and they shouldn’t be. I mean, people are running their business. I mean, I’m sure you know many people who have businesses, you could ask them any question, they know that top to bottom. Most business owners, they don’t know everything about every level of their business, but when it comes to these intricate financial strategies, you really need to have a team of experts. You need to have your CPA, you need to have your tax attorney, you need a corporate attorney, you need your wealth advisor to work together as a cohesive team.
Chad Hrapmann: Yes. There’s other strategies that we use with that estate tax strategy. When someone gets that amount of wealth and they want to start to pass it on to their children, who would either be in the business, which would be, you need to start to send them shares certain ways that can help save on the value of the shares or if you were into trying to give your money to charities and things like that, where there’s certain trusts you can use to makes it more efficient to gift and those sorts of things.
The other thing that is very common that we’ve seen that has not is something that’s commonly overlooked is getting your will done and actually updating it. With clients we go through pretty good conversation to see what they actually want and help speak with their attorneys to get that word drafted the correct way, because that’s something that people don’t even think about that it can cause a lot of either drama or headache in your family, or it can just have things happen that you didn’t want to happen.
Bill Hrapmann: That’s a good point, Chad. Frank, what many people are not aware of there’s an exemption equivalent that we all have. Exemption equivalent means the equivalent dollar amount of assets that you can pass on to your heirs, as they’re tax free. Well, that number hasn’t been increasing. When I started the business, it was $250,000 a purse. Then Reagan came along, and he increased it to $600,000. Bush, increased it some and kept on going. Then Trump got it increased to 12. It’s about $12 million a person right now. A married couple could have $24 million, and with a properly drafted will pass on $24 million to their heirs and not pay any estate tax.
However, number one, the will have to be properly drafted, both of them. Number two, this $12 million per person has a sunset provision that in 2026 it goes back down to $6 million per person. This is 2022, so we’re adamant reviewing with people, what are we going to do for taxes and planning if in 2026, this exemption equipment reverts back from $12 million dollars back to $6 million. If you think about that $6 million again, that’s 40%. That’s another $2.4 million of estate tax per person.
Educating Your Heirs
Frank Garza: Speaking of your heirs. You have a whole chapter in the book dedicated to educating your heirs. You start the chapter by suggesting that people sit down with their family and tell the origin story of their business or wealth. Why do you think that is so important?
Bill Hrapmann: It’s so important, because along the way, somebody’s sacrifice, somebody’s put in a lot of sweat, equity, it could have been an immigrant like my grandfather came in from Germany. The story is so important, it adds more value to the family legacy, and adds more value to the financial assets. We’ve experienced it when there’s a story behind the money, it’s no longer $1, or it’s no longer a million dollars. It’s generations of sweat and sacrifice of working on Saturdays or Sundays. Business owners put in a lot of effort. They’re responsible for a lot of employees. I think in today’s environment, it’s just not known. So by having the story of where the money came from, you just increase the probability that you will have a family legacy, and it won’t just be spent as if somebody won the lottery.
Frank Garza: Okay, you also mentioned earlier that you need to put together an optimal financial team to help you along the way. As you’re thinking about who should be on your team, who are some people, I know it’s going to be different, maybe for everybody, but who are some people you should consider having on your team?
Bill Hrapmann: Well, that’s very important. You start off, of course, with your CPA, and your tax attorney, and your corporate attorney, your property casualty agent, your wealth advisor, and we come together and do this whole interview process and do a stress test. You may come to a point where you need specialists. For instance, if we feel like this particular business owner would benefit drastically by a different type of retirement plan, we would bring in a retirement plan expert. In today’s world, they have these intention tax credits from the COVID years, we bring in a tax credit expert. There may be some experts that we bring in periodically, for instance, a business evaluation expert. If you’re really truly doing estate planning, what is the value of your business? The IRS has certain guidelines there, and we bring in a valuation specialist to give us a valuation of the business.
Chad Hrapmann: Yes. So in general, most business owners will likely have accountants and CPAs and tax attorneys, but when we all meet together, you start to unfold, hey, well, you need some other expert out there, and if they don’t have one, we obviously have certain people that we’ve done the work with that we can recommend or if they want to find their own, great. It’s more of making sure you talk, and you exploit those areas where hey, you need someone who is in the field of that estate tax part to make sure everything’s getting done correctly.
Frank Garza: Well, writing a book is such a feat. Congratulations on putting this out into the world. Before we wrap up, is there anything else about you or the book that you want to make sure our listeners know?
Bill Hrapmann: Well, I like people to realize that this book is not just an answer all. It’s not something that you just read and put away it away. The book should start a conversation. Start a conversation with your trusted advisors. Really dig into, is your current plan in the line with what you would like to pursue or achieve with your finances. One of our biggest enemies as a person, a business owner works their life and then dies, and you look back and say, “Wow, their situation could have been improved, either a little bit, or drastically.” That’s the point of the book is really to get people to start thinking and planning so that their effort over the years is not wasted.
Chad Hrapmann: The other point in the whole scheme of it is to show the business owners and other potential wealthy families that, hey, it’s a very complicated and intense thing to peddle your wealth and your finances, and you don’t have to do it your own. A lot of people will speak with their CPA and get the answer from them and speak their wealth adviser and be the middleman. Nowadays with the technology. You don’t need to be the middleman and not know what you’re asking, because your accountant told you to ask your advisor this question, well, instead we think just let us speak to each other. It clears things up, very, very well.
Frank Garza: Thank you, Bill and Chad. This has been such a pleasure. The book is called Taxes, Assets, & Heirs: Personal Wealth Management for Business Owners. Besides checking out the book, where can people find you?
Bill Hrapmann: Well, of course, we have a website, billhrapmannwealthadvisor.com. You can simply email us at [email protected]. Our phone number is 985-674-4400. We’re located in South Louisiana, but we have clients from throughout the Southeast and throughout the nation.
Frank Garza: Thank you, Bill and Chad.