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Editor’s note: This is the first article of a six-part series about financial planning related to employee stock ownership plans (ESOPs), with a focus on getting the right financial advice for you, strategies for diversifying and preparing for retirement.
He had $14 million when he retired. A successful employee stock ownership plan (ESOP) exit, real estate investments and decades of disciplined saving built wealth that should have lasted generations.
Then a lawsuit wiped out $3.2 million because his umbrella policy maxed out at $2 million.
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His estate attorney had recommended proper asset protection trusts years earlier, but his financial adviser never followed up.
Nobody was coordinating. Nobody was quarterbacking the team.
When his daughter inherited what remained at age 45, she was going through a nasty divorce. Because the trust was drafted but never fully implemented, half of her inheritance went to her ex-husband in the settlement.
The math is brutal: $14 million reduced to roughly $5 million through a series of entirely preventable wealth destroyers. Not market crashes or bad investments. Just a lack of coordination between the professionals who were supposed to be protecting his family’s future.
You need more than good professionals. You need someone coordinating them. And that quarterback should be your financial adviser.
Three preventable wealth destroyers
When you’ve built significant wealth, three threats loom larger than market volatility:
Each one can devastate a family’s financial legacy. All three are largely preventable with proper coordination.
Lawsuits can strip away millions if you’re underinsured or haven’t structured your assets properly. I’ve seen a client with $8 million net worth lose nearly everything after a tenant sued over a rental property accident. His $1 million umbrella policy seemed generous until the jury awarded $4.3 million. The difference came straight out of his retirement accounts and investment portfolio.
Adequate liability insurance can help protect against catastrophic claims. But your financial adviser needs to be asking:
- Have you reviewed your coverage lately?
- Does it match your net worth?
- Is your insurance agent aware of your ESOP diversification?
Divorce destroys wealth for the next generation when inheritances aren’t properly protected. Your daughter inherits $2 million in the middle of a contentious divorce. Without trusts designed to keep inherited assets separate from marital property, that inheritance becomes part of the divorce settlement.
Your estate attorney knows how to draft these protective trusts. But does your financial adviser know the trust has been created? Are your retirement accounts titled correctly? Is anyone ensuring your five-year-old estate plan matches your current beneficiary designations?
Taxes can cost your family hundreds of thousands, or even millions, if professionals aren’t coordinating strategy.
Your strategic quarterback
A knowledgeable financial adviser does more than pick investments. They coordinate your entire wealth protection team to help ensure everyone’s working from the same playbook.
Converting $500,000 from a traditional IRA to a Roth IRA over five years instead of all at once might save you $80,000 in taxes by staying below the 35% bracket threshold. But this only works if your adviser coordinates with your CPA and your estate attorney on overall plan impact.
Putting the right investments in Roth accounts can potentially save heirs millions. Growth stocks and real estate typically belong in Roth accounts where tax-free growth compounds for decades. Bonds and dividend-paying stocks might make more sense in traditional accounts.
When it comes to leaving accounts properly structured for the next generation, your adviser needs to work with your estate attorney. Are your beneficiary designations aligned with trust documents? Have you considered qualified charitable distributions? Does your estate plan account for the SECURE Act changes?
These aren’t questions any single professional can answer in isolation. They require coordination.
We recommend an annual coordination meeting, bringing together your financial adviser, CPA and estate attorney to review your complete financial picture.
This makes sure:
- Insurance recommendations still make sense
- The estate plan reflects how your assets are titled today
- Your CPA’s tax strategy aligns with your adviser’s investment approach and your attorney’s estate planning recommendations
For ESOP participants, this coordination becomes even more critical. Your CPA needs to understand your diversification timeline to plan for the tax impact. Your estate attorney needs to know how ESOP proceeds will be distributed to structure trusts appropriately. Your insurance agent needs to account for the concentration risk while you’re still holding significant company stock.
Without someone quarterbacking, critical planning opportunities get missed. Deadlines pass. Strategies that could’ve saved hundreds of thousands in taxes never get implemented. Asset protection structures sit half-finished while lawsuits and divorces threaten the wealth you’ve spent a lifetime building.
What proper coordination looks like
Effective coordination means your financial adviser proactively identifies issues and brings the right professionals into the conversation at the right time.
When you’re approaching a major ESOP diversification election, your adviser should be coordinating with your CPA months in advance to model the tax impact and explore strategies such as Roth conversions or charitable giving to offset the tax hit.
When life changes happen, your adviser should be convening the team to reassess whether your liability coverage, estate plan and tax strategy still make sense.
This kind of proactive coordination can help:
- Identify gaps in liability coverage
- Structure inheritances to help protect them from beneficiaries’ creditors and divorcing spouses
- Implement multi-year tax strategies that potentially save hundreds of thousands in taxes
- Ensure your estate plan works the way you think it does
- Keep your entire professional team working toward the same goals
The alternative is what happened to the client I mentioned at the start of this article.
Your wealth deserves a coordinated strategy
Building wealth is hard. Protecting it requires a team approach.
Because at the end of the day, it’s not just about having the right professionals on your team. It’s about making sure they’re actually working together before the lawsuit hits, before the divorce happens and before the tax bill comes due.
For readers looking to better understand how these strategies apply to their own situation, Peter Newman created My ESOP Planner — a resource focused on helping employee-owners plan for diversification, retirement income and legacy decisions. Learn more at www.myesopplanner.com.
