Ep #154 - When Your Wealth Doesn't Give You a Paycheck

[00:00:00] Ben Haas: Hi everyone, and welcome to AB Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple certified financial planners on how we think and feel about everyday financial planning questions, and what should really matter most to you. A healthier financial life starts now. 

[00:00:27] Ben Haas: So today let's talk about wealthy people that may not have wealth in the way that people traditionally hire us to manage. Right? And we're gonna speak to those that don't have portfolios that send them a paycheck. Right? Wealth is created in many different ways. We'll talk about businesses, real estate, land, you know, maybe even art. 

The key here is to maybe articulate those planning challenges, right? It's not building wealth. They've done that or collected that over time in a different way. Mm-hmm. Let's talk about turning that illiquid value into something that's gonna feel usable. Of course we're often tired. We're hired around retirement. 

Say that five times fast. Yes. You know, how do we turn these things, Adam, into something we can live off of? 

[00:01:11] Adam Werner: Yeah. Yeah. Especially when it comes to, you know, the, I'll say the traditional retirement planning space that we live in. It's okay, I get to retirement, but now my normal paycheck has stopped. 

How do I recreate that? And this is a completely different realm, right? When there are illiquid assets, right? Yeah. Illiquid investments over time. You said it right? It's, people have different pieces of real estate, rental properties, apartment buildings. You may we have plenty of clients that run a business. 

[00:01:41] Ben Haas: Family farms. 

[00:01:42] Adam Werner: Yeah. Yeah. Farms are a big one in this area, or you mentioned earlier just collectibles, right? We've heard it from art to classic cars, you know, you name it, the family heirlooms that have some value. But it's you can't go out and pay a bill or, you know, take income from a piece of art, for example, right there. 

There's just different planning strategies that go into these more illiquid type of investments. 

[00:02:08] Ben Haas: Right? They're not. They're not poor by the sense of net worth. Right? I think traditional planning, like you said, I need to have investments to go hire a financial advisor, right? We live in that planning space. 

But it's to be clear, these are people that don't have a net worth problem. They're just not liquid, right? So oftentimes then they're gonna come to us at some point and go, I'm ready to retire, right? I'm ready to sell my business. I'm ready to liquidate this. I just don't know what comes next, right? 

Because now if that's liquidated, what do I do? And sometimes it's even before that happens, it's, well, I know there's gonna be a process to this. I know there may be dominoes. Let's talk about some of these things today. Mm-hmm. Mm-hmm. But it, let's be clear, these people have a net worth that they probably could live a comfortable retirement of, it's just not as simple as giving the boss your final day because you've got this 401k that now is going to turn into a paycheck. 

There are many other planning challenges. I'll throw it to you. Let's maybe just go through what those challenges are and how we might be able to help. 

[00:03:08] Adam Werner: Yeah, so you said it right, and I'll just double down on it. This type of planning is very different than, yeah, you have a 401k or we have a, just a non-retirement investment account and I need $10,000 to support my, you know, whatever I'm gonna do in retirement. 

I'm gonna take a trip this year. I call up my advisor, I say, Hey, send me $10,000. We click some buttons. It's in their account within a matter of days. Takes a little bit more planning. 

[00:03:33] Ben Haas: You make it sound really easy, Adam. 

[00:03:36] Adam Werner: I'm distilling it down to its simplest port, but yes, thank you. But now you think about that for, okay, I have this rental property, or I have this business, or I have this collectible. 

It's not that simple, right? You can't just click a button within a matter of days and now all of a sudden I have money and I can go do with it, would I please? I think there's a lot, there's a lot more that goes into it. And the part of that is just the lead time, right? The planning that goes into it. 

There's more moving pieces on the front end. And one of those is just what is this thing valued at? How do I even come up with a value for a collectible that may not have a very liquid market where you can get comparable, you know, sales prices. Your business needs its own evaluation, just all of these things. 

It's just knowing what it's worth is a huge part of that equation. But ultimately what it's worth is what someone will eventually pay for it. Which there's, we've often seen kind of that disconnect too with some retiring business owners that say, well, here's what I think it's worth. But then when they actually go through the process of trying to sell the business, it can be a much different outcome. 

[00:04:39] Ben Haas: Yeah, so that valuation, the timing of that's like step number one, especially for business owners, landowners, building owners, whatever. Whatever it is. Yeah. There's often though, I think in our experience, sometimes a mismatch between what it's worth and what it could pay you, or what it is paying you. You think of land that farmers own, that's worth a lot of money and maybe it's worth a lot of money because of what somebody else would do with that land, but then you look at what their paychecks are while they're farming that land and it doesn't seem like that's a fit for that. You could go to the other side, right? 

We had a business owner that sold the business. It was like a cash cow. Like the thing was literally an ATM machine for this guy. But then when it was time to go sell it. Well, gee, the income he was used to living off of from the business was not something that he could continue living off of based on the sale price. 

Yeah. So there is a planning challenge there of kind of figuring out as well, what is this worth? If it's liquid, what is that income going to be able to produce for me? 

[00:05:38] Adam Werner: Yeah. And the other part of that and thinking about, I was gonna say, just thinking about the business aspect here, but we've seen it recently with some of the collectible side of things too. 

It's that forward thinking on the tax impacts. Because we've often seen it with business owners when they sell the business, it's now this huge hit when it comes to taxes, right? Yeah. I'm gonna have capital gain on whatever the sale price is. There's a lot of moving pieces just to calculate that tax impact. 

But in our experience, typically over many years of somebody owning a business, right, their basis ends up very low. They sell it for a larger amount, and now all of my income. May be at a much higher tax rate in that given year. So when it comes to those, I'll call them windfalls, even though right, we're most, most of this has been kind of created or collected over time, but it is still just that, like that one time impact of a much higher, you know, income year can have domino effects on some of your other income from a tax standpoint. But just from a planning perspective too, there may be some other proactive strategies to try to minimize the tax bite, which we know, you know, when you're trying to react from a planning perspective to try to, especially when it comes to taxes, it can be difficult and your options may be much more limited when you're trying to react, rather than try to be proactive with planning. 

[00:06:59] Ben Haas: Especially if in this, in these examples, we are talking to somebody who's, whose net worth all of that wealth that we're talking about that's not liquid is really concentrated into one thing. Whether that's one asset, I've got this building, but it's one tenant. There's only one buyer out there, my artist from one artist who, whatever's, if you're really concentrated in that, then the planning flexibility of being able to you know, do something different or do sales in, in stages or in portions. You may just not have those options depending on how concentrated you are. Right? Yeah. I can't, I'm selling my business now. Maybe we can talk about installment sales, but we just maybe don't have that flexibility. That's a challenge. 

[00:07:40] Adam Werner: Yeah. Yeah. And I guess another challenge is too, just the emotional attachment. 

[00:07:46] Ben Haas: Oh, sure. 

[00:07:46] Adam Werner: To what, whatever the thing is. Right? It's my business. Rental properties. These have been in passed down from parents and I wanna keep them in the family. It's, the actual property, right? 

The collectibles, that is a thing. We've certainly seen that, but it's just different through the lens of, I don't know anybody who's attached to their parents old Vanguard account when they inherit it. Yeah. There might different, there might be an investment in there that is, you know, they bought this, it has sentimental value. 

I don't wanna get rid of this particular investment. But yeah, I think just the way that people approach and think about their investments or their assets is very different when it's has some tangible qualities or I've built this thing versus I have this investment account over here and it's just numbers on a piece of paper. 

[00:08:30] Ben Haas: We joke about that, especially during down markets. How people might react differently if they were carrying around their liquid net worth in a suitcase of like a hundred dollars bills, right? If it, when it's on a statement, maybe it doesn't feel as tangible, but as you're talking about the emotional side. 

I think there's also, especially if you have that concentration, this is my business, like this is what I built. It's the fear of just doing something wrong or not going about it the right way. What if I sell it and the value goes up? What if we sell the business and now it's like, that's who I am. 

What if I just lose my identity? There's, I think, an emotional hurdle that most people that we deal with in this space have a very hard and for right reasons. They have a very hard time getting over that emotional hurdle before they even click a button or sign a piece of paper or take an agreement to a lawyer or anything like that. 

[00:09:21] Adam Werner: And even just in the realm of, I'll keep throwing out these same examples, right? It's, I own the business, I have rental properties, or I'm a collector, like I know these worlds, right? If I haven't also been an investor aside from this specific world that I'm living in and breathing on a day-to-day basis. 

It's very easy to say, this is what I know and this is what I'm comfortable with, so I don't wanna deviate. That thought of now turning this into something liquid into an area and invest it in an area that I just am not familiar with. It worries me. Right? You read the headline news, it's very easy to just say, I, you know, I don't have this other experience and I just wanna avoid that. 

So we've certainly seen that over time too. This is just a, it can open up a whole new gateway to ways to manage and invest money that just haven't been in their wheelhouse. And that also comes a, along with a whole heck of a lot of baggage potentially as well. 

[00:10:19] Ben Haas: And we saw it just brief example, sometimes that comes into the timing of things too. 

You know, gentlemen, if you, sold a business at the very end of 2021, early 2022. Now you have this liquidation event. Now we build this plan that goes, all right, here's how we have to separate all these buckets of money to be able to serve you over time. But that's the year the market's down 20% and bonds are down 10%. 

Now, somebody's first experience and something that you said very well is not something they've gone through before, right? Because very common business owner doesn't diversify their wealth. It's all built in the business. That first experience now shaped this guy's thoughts on what things are gonna look like moving forward. 

Yeah. And not trusting the market and needing to rely on some lower interest bearing things that may not help him keep up over time with inflation and the things that we would worry about in planning. So there is a lot of fear and like you said, a lack of experience in the way that we would now have to direct them to recreating paychecks that becomes its own hurdle, own challenge. 

[00:11:24] Adam Werner: It's just I think that just falls into just that general fear of the unknown, right? I don't know exactly how that world works, so I immediately start to fill it with how everything can kind of go wrong, right? My negative, my, my intrusive negative thoughts take over in that space. So then let's switch gears a little bit to, okay, but then how do we actually help people navigate this to some degree? 

You mentioned it earlier, right? That idea of if I'm going to sell a thing, whether it's the business or a property or you know, collectible art, whatever. It doesn't have to be an all or nothing proposition. Right? You don't have to completely sell. Yeah. Yeah. Right. I guess there's always some circumstances where that may be required, but yeah, I think there's ways to go about it to start to dip your toe into it, start to get the experience for how does this process actually work, have some liquidity, have some experience? 

Diversifying out of whatever it is that you've been kind of concentrated in. Right? And just start to get a feel for it as a way to transition into the process more than just, let's just rip the bandaid and you know, start down this new path, you know, blindly. 

[00:12:31] Ben Haas: Or sometimes I'm thinking of another recent example. 

Somebody that, again, has built a lot of net worth, but it is in real estate and kind of acknowledging that, okay, at some point I'm going to need to sell something that doesn't need to be today. But a lot of the planning exercise was trying to identify when is that and does that timeline kind of match where I think I may be in life and what may be important to me now. 

Or at that time, right? Because we do know that people go through different stages of retirement. You know that honeymoon phase, right? As you get into it may look very different, right? Those go-go years may look very different than the slow go years or the no-go years. So just identifying okay, at what point in my future plan am I gonna have to make a different decision? 

What's gonna be the pivoting point? 

[00:13:14] Adam Werner: Yeah. And sometimes it's something just as, I don't wanna say as simple as, but it can be as basic as coming up, I need this money for this purpose before you sell. Right? Whatever the thing is, right? Because then I think that just that helps. We are big proponents of mental accounting, the mental bucketing kind of thing. 

I think that makes it much easier to connect the dots between I'm selling this thing that I'm emotionally attached to, but there's a purpose. I'm doing it to fulfill whatever this other thing is that I say I either want or need to do. I think that just, that makes it an easier proposition to kind of stomach and just deal with, rather than the other side, which is, well, I need to get out of this business, or, I don't wanna own this property anymore, so I'm just gonna sell it, and then I'll worry about what's to do with the cash afterwards. 

That's usually that black hole of, but I, but then, I don't know. Yeah I'm just kind of dangling in the wind. 

[00:14:08] Ben Haas: I mean, we've seen that in different examples recently. Again, if there are multiple pieces of art, you sell one piece of art that solves this problem for now. Mm-hmm. Until we have the next problem, or I've got both of these properties, I want to keep this one here because it's closer to my grandkids, but, they're not gonna be little for the rest of their lives. They're gonna move on with their life and who knows where they're gonna be. So as long as I have the knowledge that I can, or maybe should be selling that sometime within the next 10, 15 years, now I'm like you said, mentally accounted for this, serving this purpose over this period of time, and then I may be able to do something different. 

[00:14:44] Adam Werner: Yeah, the other aspect I know we, I already touched upon this a little bit, I think you did too, just how to deal with the taxes in advance. Right? Just being proactive with that side of things. Yeah. Just something as simple as, if we know we're gonna have a bigger tax bill, what levers can we pull? 

Or does it make sense to pull, to try to offset some of that? Right? Charitable giving is one of those levers that we often see with clients, which again it's hard to do that proactively. And the calendar can sometimes play a role in any of these decisions. Right? So the more lead time somebody would have, right, 'cause we've seen this recently. We've had either a business sold, or a collectible sold, you name it like third quarter of the year. Yeah, getting close to year end. And now the clock is ticking because anything that happened from a tax standpoint usually needs to happen by year end. And that can really compress the decision-making timeline, which can make it difficult to take advantage of some potential strategies within a timeline time with that. 

[00:15:44] Ben Haas: Also, depending on the structure of the business and how big it is, or who's gonna be coming in and buying it, whether it's something internal or external, you know, we've seen installment sales really work for that reason. You know, I own a hundred percent of the business, but I'm only gonna sell 20% of it this year, then 20% the next year, or I'm making up numbers now, but kind of phase your way out not only for business succession planning, but also because that is often way better from a tax perspective. 

[00:16:11] Adam Werner: Yeah. Yeah. 

[00:16:14] Ben Haas: All right. 

[00:16:14] Adam Werner: What else? 

[00:16:15] Ben Haas: I would also say now I'm kind of stuck on those business owners, you know, there, there is to a certain extent, like wanting to be sale ready. And again, it depends on who you're selling it to, but you know, oftentimes the institutional knowledge on how you do things doesn't help you, if that's not able to be replicated by the next person. 

So whether it's the books and the way you keep them, you know, the titles of things, the proper appraisals documentation on, you know, a client base whatever's going to help that next party or that next person, you know, execute on the job the way that you did. 

You need to start doing that ahead of time, and that's something that we would wanna help somebody with. 

[00:16:56] Adam Werner: Yeah. And even just thinking from a value standpoint, in valuing a business like that or whatever it may be. Yeah. . The more work you can do to make that transition as seamless as possible, in theory, should help the valuation or if there's some sort of income agreement on top of an original sale. Right. Which, you know, that could be another way to kind of go about it. You mentioned the installment sales, but we've certainly, in our industry, certainly those earnouts, over a period of time it's gonna look like an income stream. 

[00:17:24] Ben Haas: Nobody's buying our desks. 

They're wanting to have a continued relationship with the client base. Right? Right. The plumber's tools are, that's great, but anybody can go get the tools. What do they want? It's access to that goodwill that has been created over time with whatever that business's clients are. 

[00:17:40] Adam Werner: Yeah. 

[00:17:41] Ben Haas: Certainly. All of that pre-planning work and then what needs to happen to get things liquid, of course, is something that we can play a role in. Mm-hmm. What really then needs to happen is making sure that we turn that sale into the paycheck, right? 

Bring things full cycle to how we talked about this. Yeah. I think where we would want to help people is make sure they understand, okay, once that thing is sold, what is it doing for me? How am I going about structuring that? What are the types of investments that are gonna serve different purposes, right? 

This is not just gonna be one big pile of cash that's gonna sit in somebody's safe right there. There needs to be a structured income plan, and of course, that's the more traditional planning that we do. 

[00:18:22] Adam Werner: Yeah. Yeah. I'm picturing, you know, the Scrooge McDuck. Yeah. With the gigantic pool filled with gold coins. 

That's, yeah, that's, I, at least as far as I've seen. 

[00:18:30] Ben Haas: That's be one way to do it. I guess. 

[00:18:31] Adam Werner: That hasn't been, that hasn't been a reality. 

[00:18:34] Ben Haas: Somebody maybe somewhere. All right. As always, appreciate you, appreciate your insight. This is not that uncommon, right? People build wealth in different ways. If you have wealth in that space, you need to turn it into a paycheck. 

Talk to a planner, right? There are a lot of great investment advisors out there. I get it. There's a lot of planning that needs to happen on the front end, all the way down to just emotionally being able to hold a hand through the process and help get to the root of what's really gonna serve you moving forward. 

[00:19:02] Adam Werner: Yeah. Well said. It can be a much more complicated and complex planning approach to this, these types of assets, whatever you wanna call them, it's just, it requires a little bit more care. 

[00:19:15] Ben Haas: So let's talk. 

[00:19:17] Adam Werner: All right. 

[00:19:17] Ben Haas: All right. Till next time. 

[00:19:19] Adam Werner: Bye. 

[00:19:20] Ben Haas: Bye. 

[00:19:26] Ben Haas: Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant, and financial advisor, or tax advisor prior to making any decisions or investing. Thanks for listening. 

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