Business Innovators Radio - Interview with James Lavorgna, Founder of Spencer Advisory Services Discussing Succession & Legacy Planning

Episode Date: January 29, 2024

Mr. Lavorgna started in the insurance business in 1976 and has been in the financial services industry for 45 years. He earned his Certified Financial Planning designation in 1984. He also has earned a Bachelor of Science in Finance, Juris Doctor (Litigation), Master of Laws in International Tax and Offshore Planning, and Master of Laws in Wealth Management and Private Banking. He has been in and associated with the investment industry since 1979. And is currently an Investment Advisor Representative of Forsyth Wealth Management, Inc. fee-only Registered Investment Advisor and licensed insurance agent.He is also the Managing Member of Spencer Advisory Services, LLC, and a Certified Team Based Model Consultant.He has spent his career consulting with successful business owners and high-net-worth families.Learn More: https://spencervfo.com/Spencer Advisory Services, LLC and Forsyth Wealth Management, Inc. does not offer tax, legal advice or investment advice directly. We strongly encourage you to seek advice from your own qualified tax and/or legal experts regarding the best options for your particular circumstances. Investment advisory services are offered through FWM www.forsythwms.com. Life, long-term disability, long-term care, or other non-variable insurance products are offered individually through licensed insurance producers. All non-investment advice is offered through Spencer Advisory Services, LLC. In compliance with Circular 230, any U.S. tax advice contained in the body of this email, including attachments, was not intended or written, to be used and cannot be used, by the recipient for the purposes of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax laws.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-james-lavorgna-founder-of-spencer-advisory-services-discussing-succession-legacy-planning

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of Influential Entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us, James LaVordia, who's the founder of Spencer Advisory Services and will be talking about succession and legacy planning. James, welcome back to the program. Thanks, Mike. I'm glad to be back again. Yeah, you know, I'm familiar basically with these terms, so I'm happy that you're going to be talking about both of them and how they compare and what's different because I know that succession and legacy and estate planning all kind of tie together, but we want them to be clarified.

So get us started with, first of all, let's define what is succession planning and what is legacy planning. Then we'll talk about some of the differences. I'll give you a couple of examples. Like success in planning is like a business owner or who's going to succeed in my me in my business. Who's going to take over the reins after I exit the business either by transferring to a family member or selling to a stranger, all right? So that involves quite a bit of planning.

And if you want to maximize the efficiency of growth of the transfer, you really have to work hard at it. So on the other hand, legacy planning has to do what you're going to be leaving behind after you're gone, right? So I would basically say that, you know, most business owners are probably familiar with certain things that they have to do in their business that if they want to sell. it, you know, or if they want to transfer it to a family member. You'd be surprised how many family members do not want to be involved in the family business. I can testify to that myself with my own family. And sometimes it's because they don't want to do it, sometimes because it's a unique type of situation where you need a specific type of education, which they don't want to get.

And there's statistics out there that basically say that most family businesses last about 25 to 30 years before they go kapit. And it usually begins and ends with the founder. Wow. That's curious. And so typically if you have a sustainable business, and I don't remember exactly what I quoted in my book, but the research I did shows that the average length of a business could be three generations or about 100 years. Wow. And without good governance, that's about how long it's going to happen. Because the same ideals, right, that are instilled in the founder of the company, basically

each generation that changes until you heard the adage shirt sleeves, the shirt sleeves in three generations. So, you know, the first generation is bounds the business. The second generation starts selling, you know, or spending the money from the business, and the third generation goes out of business. Oh, well. Yeah, you know, so that's more or less what succession planning is involved in, is to setting up the governance and ideals for the people who are going to inherit it,

whether they're family members, right? Or not, yeah. With culture, right, the culture of the business, okay, and also selling to a stranger or to a group. Does that group or a stranger have the same ideas, do they fit with the culture of the people, right? You know from the newspapers a lot of times when one company takes over another, they say, well, we're keeping everybody. And six months later, three quarters of the workforce is replaced. Why?

Because the cultures didn't fit. So in a nutshell, that's basically what succession planning is, getting the right people involved, training them, and making a smooth transition. to the new owners, all while increasing the probability of the business so that when you go to exit and sell it, you can sell it at a premium. Yeah. Do you ever find in your work with business owners and they put that plan into action and then they move on and maybe it's sold or whatnot that the owner kind of six months later goes,

you know what, I've had my big long vacation and now I'm bored and I sure wish I hadn't done that or I wish I'd kept my foot in, you know, so I know that there's a lot of, um, varieties of types of, of way that you can move out of the business. Like, maybe he's, the owner's going to retain a certain small percentage ownership and come in and work one day a month just to kind of feel like they're participating. But is that something that you've seen in the past as well that you. Yeah, that's what we call a liquidity event. And basically, um, it happens to a lot of, it happens to a lot of owners, um, you know, six, months after, like you said, six months afterwards, it sets in like, oh, what do I have to do here

now? And, you know, if you're sitting there with a big pile of money, you know, a lot of these business owners were very meticulous. They're in their business and they have what they call analysis paralysis, right? They got this pile of money to do with it and they're scared to do anything, make the wrong moves. So it sits in cash making very little money. And until they go to figure out what, you know, what they're going to do with it, that's given rise to family offices for the longest time, I guess, since back in the John D. Rockefeller era on exactly that thing. You know, what are we going to do with, what are we going to do with this money?

And that brings up another area is legacy planning, right? not only what am I going to do with the money now, okay, what am I going to do with the money, you know, when I die? I mean, I don't want my kids inheriting $50 million and, you know, here's cash, let's go. You know, it's very hard for individuals who sell their business to handle the money, never mind people inheriting the business. Yeah, that never kind of paid their dues and earned it. it and felt the satisfaction because when you inherit a big chunk of money, all of a sudden, maybe you're not using it wisely.

So those decisions go into that legacy planning. And boy, I would think that that almost gets really fun to be talking with the client to go, okay, now here's some ideas on charitable or giving, you know, the money to family and passing it on that way. Well, yeah, I mean, that has to be, that has a lot to do with the values. the values of the owner and the family, and then the governance that they put in place or don't put in place.

You know, to answer your question, it was sort of a question before that you were, I was thinking that you were asking. You know, a lot of these business owners have this planned, okay? And you said, well, they put it in place and then retire, but a lot of them have these plans and they don't put it in place. Oh, wow. Or it's on paper, okay, and they never put it in place.

That's what we try to help them do. You know, we bring them along. And our engagements, you know, are not a one-and-done type of deal. We have a long-term client engagement with the clients. Many of these clients become our friends. And, you know, we know the families. we help them with doing what they're going to, you know, what they want to do and accomplish the tasks and goals that will help them finish that to get to that liquidity event, you know.

So two separate, two separate areas, the succession planning part of it while they're in business and then the liquidity event after they actually sell the business, you know, exiting the business, okay we find that there's two areas that most business people that are in business have they either want to grow their business or they want to exit the business and strangely enough like I said before when they exit the business what we want to do is we want to make sure that we increase the cash flow okay and make it more efficient and reduce the expenses so that it looks very attractive to the people who are buying it, right? Assuming it's not a family member, right?

So, you know, that's a lot of what we do as far as the business succession planning. Now, legacy planning, on the other hand, okay, is not quite as, is not quite the same as necessarily just the state planning, okay, because there's a lot of, or state tax planning, I should say. When you say legacy planning, a lot of people think, you know, estate taxes. Do I have enough assets for, you know, to worry about estate taxes? Well, right now, unless you and your spouse are topping 25 million of assets after expenses, okay, right now you might not have an estate tax problem. all right. However, with the new legislation, I mean, they've been they've been chomping on the bit to bring that $25 million down the $3.5 million each, which would be about $7 million. And that would put a whole load, boatload of people in that situation where they have to worry about estate tax planning, right? But legacy planning minus the estate tax planning would be making sure that your errors, maybe your kids, the minor kids, don't,

become spend trips and that they basically utilize the money in the way that they're inheriting in the way that aligns with the values of the business owner. But a lot of it has to do with the efficient transfer of taxes, okay, but these are not necessarily income taxes. These are transfer taxes that we're talking about for the estate. going from one generation to another, estates happened to shrink quite a bit. And I don't know if you've been following along over the years, but just within the last three years, okay, there were people in Congress that were trying to have trusts, okay, at the end of every 20-year period, mark to market, which means if you have all these capital gains that are, built up in the trust, you don't have to pay taxes on them, okay, until you sell them. Well, they want to deem sale every 20 years. So if that passes, there's going to be a lot of people

with income tax problems as well as estate tax problems, and it would devastate transfers in the legacy planning as we know it now. But right now, what we try to do is we try to minimize, the taxes and the drag on the estate from probate and anything else that gets in a way through different techniques that we use. And so, you know, some of these techniques that we use, succession planning will require certain risks to be covered and minimized, okay? there's a lot of risk mitigation, for example, using, say, a business owner use captive insurance and private insurance

to minimize health insurance risk or premiums and warranty risks and any other risk that might not be able to be covered by insurance. So a lot of times we'll use, like I said, captive insurance or private reinsurance companies, okay? private reinsurance companies, basically when we set those up, they have the ability to turn ordinary income into long-term capital gains

coming back to the business owner. That's something that a lot of people know about. So in addition to that, maybe the efficient use of life insurance could be utilized to cover key management, fund by sell agreements, and provide private insurance plans. we have a technique that we use called premium finance life insurance which you can buy vast amounts of life insurance with fractions of dollars that it would normally cost and it's ways we find money for the business owner to fund these different things you know through our planning same thing with the legacy.

planning, okay? Sometimes the tools overlap. In legacy planning, we use tools like trusts, charitable instruments, and insurance to reduce the shrinkage, right? So, you know, we're doing a lot of risk management in both sides as far as the succession planning and the legacy planning. However, in legacy planning, we use a lot of gifting as well and discounting of assets, maybe the one's lifetime. So we might set up a structure so that the assets that are put that are put in that structure because of the lack of liquidity, be one reason maybe we'll give a 10, 20, 30, 40% discount on the fair market value. That in itself reduces taxes down in the future. Yeah, so another thing is life insurance, all right, to cover estate taxes or basically to benefit the errors.

Problem with life insurance, even though it's tax-free under Section 101A of the code, the income tax part of it is tax-free, but the estate tax part of it is not. it adds to the estate. So if you have a $10 million or $20 million life insurance policy, okay, and you die without preparing it for your estate, then basically you just added $10 or $20 million to your estate to whatever it is, and the government's in for at least half. Okay, so. Wow.

You know, can we- That's a lesson you don't want to learn when it's after it's too late, huh? Well, that's why we do proactive planning. Yeah. You have to, you have to, but like, you know, if you plan, you can't plan for this, okay, and it works out really well. In the instance that we do, we set up what we call an irrevocable life insurance trust or an islet, okay? So unlike a living trust, a revocable living trust, the is a separate entity, okay? It's not revocable after you set it up, okay?

And it's separate from the client. It's got its own identity, its own tax ID number. And the way this works is that the trust purchased life insurance policy on the life of the spouse, I'm sorry, the life of the client. And sometimes, what I was thinking ahead of here, sometimes we'll do a second-to-die policy with a spouse, right? And so it won't pay off when the first spouse dies because you have a second-to-die-die-law. like an unlimited marital deduction or that you don't have to pay anything on the first death. But when the second person dies, the estate taxes are due, that's when a life insurance pays up. All right.

But since it's purchased in an irrevocable life insurance trust, it's totally out of the client's estate. So it doesn't add to the estate like I explained in the last example. Okay. And so throughout the life of the policy, the grantor or the client, okay, or husband and wife, grantors, they gift, okay, premiums to the islet, right? And basically it stays in there and the policy grows just like a regular policy would anywhere else. Okay. And that pays off income tax free and estate tax free because it's out of the estate, right? At the time of the first death or second death, depending on a type of policy that's in there.

And that's determined by whatever the client's circumstances are. So, you know, it's a problem to some people if they, you know, they basically say, well, you know, well, there's plenty of money. We'll let the, well, let the people who inherit it were. Yeah, the airs sorted out. Yeah. You know, that's okay when it's $100,000, you know, and there's no estate taxes.

But, you know, when it's $25 or $50 million that you're leaving, you know, you just got the government in perhaps if you happen to live in a state with inheritance taxes, then you got that, you know. So there's, and then there's probate. So you got a lot of shrinkage. Just a couple things you got to, you know, a lot of pitfalls that you got to watch out for. You know, I tell you, James, with succession and legacy and estate and planning and being proactive, all of these things coming together, there's just no easy, fast Google search that educates people. You know, I think that's what people want is give me the quick answer.

Well, there is none. yeah well that's what that's what people i i i freeze when people say well what do you do for a living yeah right right well here's my website um you know the problem is you've got a lot of um you've got a lot of moving parts here and it's a lot of professionals that need to be involved and the problem with that even if they're the best professionals is the coordination Right. And that's why we approach things the way we do through a team-based approach in a virtual family office where we have everybody in-house. We've got the legal people that handle the legal part. The life insurance people handle life insurance part. The CPAs that handle the accounting. We work with clients, CPAs or tax professionals. And so everybody's on one team. And nothing gets lost in the shuffle.

And I mentioned this a number of times on other podcasts that basically one of the reasons I went to law school and got a couple of law degrees was because in my earlier days when I was trying to do estate planning when the minimum exemption was $675,000, if you can believe that. you know we were waiting for a couple clients trust and wills to be done and it took the attorney so long because the lack of communication that the client died too that happened to be twice so coordination is the most important thing in any of these things because you know you don't want it to die in the mind literally yeah literally yeah wow well and like you said it's one thing if it's only a small amount, but when you start adding zeros and zeros and that silent partner called Uncle Sam that you really don't want to be sharing the funds with gets now huge amounts of money. It's so powerful to look ahead and do the planning, whether it's succession for the business, legacy,

estate planning, and plan for all of these things. So I think this is just such a huge need for your clients. And I think that people probably listening are going, hey, what Where can I learn more and what can you do for me? Give me that, you know, kind of like an overview. So what is the best way that someone can reach out and connect with you? Well, they can go to my website. It's Spencer V-F-O as virtual family office.com. So that's S-P-E-N-C-E-R-V as in VictorF-O.com.

And we have plenty of videos. and workshops there that they can get for free. Just take a look on our page. You can see our process, et cetera. And I didn't want to minimize the point before that if you don't have an estate tax problem, this is an important. Yeah, it is important to make sure, you know, to plan for incapacity and while you're alive, etc.

Somebody to handle your affairs, that's very important. It's just that the more you go forward and the more successful you are, the more important it is for the planning. So, like we said, go to spencervO.com. Take a look at what we have available there. And if you're interested, just drop us a note. Contact us. Well, James, thanks again once again for coming.

and on, it's been very enlightening talking with today. Okay. Thanks, Mike. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes, visit www. www.influentialentrepreneursradio.com.