For many business owners, building wealth is closely tied to the success of the company. But as revenue grows and priorities shift, it can be difficult to know how much cash to keep available, how much to reinvest and when to begin planning for longer-term goals. By the same token, generational wealth can lead to a maze of tax laws. Here’s how to keep your wealth strategy up to par.
Panelists: Christopher Degenhardt, AVP of Commercial Banking, Service Credit Union
Brent Kiley, Private Wealth Advisor, Chief Executive Officer, Rise Private Wealth Management
Christopher Degenhardt, AVP of Commercial Banking, Service Credit Union
What is the first step in building a stronger financial strategy for a business?
Start by understanding your cash flow.
Business owners should have a clear picture of what is coming in, what is going out and when major expenses are likely to occur. That includes payroll, taxes, insurance, equipment, inventory and seasonal changes in revenue.
Once you understand those patterns, you can begin separating the cash needed for day-to-day operations from funds that may be available for emergencies, future investments or longer-term growth.
How much cash should a business keep readily available?
There is no single answer, because every business is different. A seasonal company may need a larger reserve than a business with predictable monthly revenue. The right amount also depends on fixed expenses, access to credit and the owner’s comfort level.
The goal is to maintain enough liquidity to handle an unexpected expense or a temporary slowdown without disrupting operations. A dedicated business savings or money market account can help keep those reserves separate while still making the funds accessible.
What should owners consider when the business has excess cash?
Excess cash should have a purpose.
Some of it may be appropriate for near-term priorities, such as hiring, technology, renovations or equipment. Funds that will not be needed immediately may have an opportunity to earn more in a certificate or another dividend-earning account.
The key is matching the account or product to the timeline. Money needed soon should remain accessible. Funds set aside for a later goal may be able to earn more if the business can commit to leaving them untouched for a set period.
Where does borrowing fit into a wealth strategy?
Using credit does not necessarily mean a business is struggling. In many cases, borrowing can help preserve cash reserves and allow the business to pursue an opportunity without draining its operating accounts.
A business line of credit can provide flexibility for short-term needs, while a term loan may be a better fit for a significant purchase with a longer useful life.
The important thing is to understand the cost of borrowing and make sure the repayment structure aligns with projected cash flow.
How should business owners connect their company finances with their personal goals?
Business and personal finances should be kept separate, but they should not be planned in isolation. The value of the business, the owner’s income, retirement goals, insurance needs and succession plans are often closely connected.
As the business grows, owners should regularly meet with their financial, tax and legal professionals to review the full picture. A coordinated plan can help the business remain financially strong while supporting the owner’s long-term goals.
What is the biggest mistake owners make?
Waiting too long to plan. Wealth management is not only for businesses that have already reached a certain size. The earlier an owner establishes good cash management habits, builds reserves and defines long-term goals, the more options they are likely to have as the business grows.
Brent Kiley, Private Wealth Advisor, Chief Executive Officer, Rise Private Wealth Management
With so much attention on the markets, what do you see as the biggest long-term threat to wealth?
In a world where investors are constantly fed information through a 24-hour news cycle, it is easy to focus on what is most visible. Market volatility often drives short-term, emotionally driven decisions, but some of the most meaningful impacts on wealth happen more quietly.
While market movements will always demand attention, taxes often represent a greater long-term threat to wealth, as compounding inefficiencies gradually erode strong outcomes and damage generational wealth.
Consider a family with a $10 million portfolio generating a 1% annual tax drag due to inefficient asset location, unnecessary turnover and poor distribution planning. While 1% may seem insignificant in any given year, over 25 years it can reduce accumulated assets by more than $3 million compared to a more tax-efficient approach. The loss occurs gradually and often goes unnoticed, yet its impact can rival or exceed the effect of a market downturn.
Why is tax planning so important for high-net-worth individuals and families?
Tax laws are inherently complex, and multiple layers of taxation can reduce net results when the full picture is not considered. For high-net-worth individuals, tax planning cannot be done in a vacuum.
Income taxes, capital gains taxes, estate taxes, gifting strategies and philanthropic goals should be evaluated together. The type of income generated also matters. Ordinary income, capital gains and deferred retirement assets are each taxed differently, and those distinctions can have a meaningful impact on long-term outcomes.
Another important consideration is tax location. Where assets are held can significantly affect after-tax results, particularly when viewed through the lens of long-term preservation and transfer. It is often the lack of coordination across these elements, rather than any single issue, that leads to the gradual erosion of wealth.
Research suggests that tax-aware asset allocation and asset location strategies can improve after-tax returns by approximately 0.35% to 0.45% annually. While that may seem modest, over multiple decades those incremental gains can translate into more than a 10% increase in accumulated wealth.
What can families proactively do to preserve wealth across generations?
Trust and estate structures can play an important role in protecting assets, reducing estate tax exposure and creating a framework for responsible stewardship. Strategic gifting is another valuable planning tool.
Under current law, individuals can transfer up to $19,000 per recipient annually, or $38,000 for married couples, without triggering gift tax reporting requirements. For families with significant assets, lifetime gifting can allow for a gradual and tax-efficient transfer of wealth. It also creates opportunities to instill financial responsibility and family values during the transfer process rather than waiting until wealth passes through an inheritance.
Why do so many families struggle to maintain wealth beyond the first generation?
Studies show that 70% of wealthy families lose their assets by the second generation and 90% by the third. This is rarely the result of a single failure. More often, it stems from insufficient long-term planning, a lack of coordination among advisors and inadequate preparation of the next generation. Education is critical to establishing a clear understanding of the responsibilities that come with significant wealth.
Wealth managers, CPAs and estate attorneys often operate in silos, which can result in missed opportunities for tax-efficient planning and long-term protection. Working with a practice that takes a more integrated approach allows individuals and families the opportunity to align investment strategy, tax planning and estate design through the financial planning process.
While market uncertainty will always come and go, preserving generational wealth requires a long-term strategy focused on the risks that matter most. By integrating wealth management, tax planning and legacy planning, families can position themselves to protect what they have built, manage the unexpected and transfer assets more intentionally.
If you’d like to explore how a coordinated approach could support your family’s goals, schedule a complimentary consultation to start the conversation.
For many business owners, building wealth is closely tied to the success of the company. But as revenue grows and priorities shift, it can be difficult to know how much cash to keep available, how much to reinvest and when to begin planning for longer-term goals.
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