Opes Wealth Trust met with Brian, a 41 year old self-employed IT Consultant earning €140,000 per annum. Brian is married to Emma and they have two children aged 7 and 4. They have a mortgage-free home. They have no Will in place. Opes Wealth Trust began the ‘Financial Solutions Service’ by firstly carrying out a detailed fact-finding exercise with Brian and Emma, followed by a comprehensive financial planning exercise.
We have detailed below some of the specific findings.
- We have helped Brian and Emma identify their financial objectives and the level of lifestyle income they desire at their desired target date (when Brian is aged 60).
- We outlined the capital fund required to meet this target.
- We assessed their progress against this target based on both their current asset base and the existing regular level of pension funding and savings/investing.
- We outlined the additional regular funding that would be required to reach their financial target.
- We outlined tax-efficient planning tools and how such structures can greatly enhance real returns.
- We provided a detailed analysis of their investments and detailed the annual investment returns that would need to be achieved to reach their financial goals. We also provided an analysis of their stated tolerance to investment risk versus where their current assets actually are at present relative to this. We outlined the relevance of this to them, and the relationship between investment risk and reward.
Choosing the Right Business Structure
- We outlined the drawbacks to operating as a sole trader and provided a comprehensive outline of the benefits (of which there are many as outlined in more detail below) to Brian of incorporating his business and operating as a company going forward.
- Once we had quantified their monthly lifestyle income, which was €3,500 net per month, we showed Brian the advantages of the corporate structure in reducing his effective tax rate.
- A comprehensive analysis of their protection requirements was undertaken.
- Brian is the primary income earner, and particularly with two young children, it is essential that his income is protected in the event of illness, disability or death. We put the appropriate level of protection in place for the appropriate term at the most competitive cost.
- As Brian and Emma have no Will in place, we highlighted the serious implications that this can have on their estate and their children’s welfare in the event of their untimely death.
- We held a number of meetings with them discussing the sensitive issue of their final wishes and who they would like to perform certain roles e.g. the Executor, Trustee and Guardian.
- We worked with Brian and Emma in devising a financial model that provided the Guardian to the children with access to funds on a regular basis and on a specific needs basis.
Personal Tax Planning
We provided Brian with a detailed breakdown of the level of tax he is currently paying and how we can reduce this significantly through tax planning and restructuring.
As a result of the Opes Wealth Trust planning exercise, Brian and Emma now have a very focused and tax-efficient financial plan in place that is appropriate to their specific circumstances. We have helped Brian establish a new company from which he now provides his services. This new corporate structure will enable Brian to accumulate wealth much more efficiently going forward. They also have the peace of mind that comes with knowing that, in the unfortunate event of something happening either of them, they have a tax-efficient and up-to-date estate plan that deals with how their children are looked after and ensures that their final wishes for their estate are adhered to.
Benefits to operating in a company structure:
- Limited Liability – this provides a safeguard for individuals against their personal assets.
- Tax Efficiency – a company can be a very tax efficient structure, both for transacting business and also through creating wealth in a personal capacity for the directors and employees through retirement planning. One of the major benefits of incorporation is access to the lower tax rates that apply to a company’s profits, as well as it being more economical to build up working capital in a company rather than as a sole trader.
- Corporate Identity – a company is a separate entity with its own sense of image, stability, sophistication and credibility.
- Raising Equity/Capital – a company provides individuals with the ability to raise equity by selling its own shares to potential investors. This is on top of traditional sources of finance such as loans which require interest to be paid.
- Continuous Life – a company can survive its founders. It also provides some additional comfort in the area of permanence of the business activity.
- Flexibility – a company’s shares can be transferred, pledged, sold, given away, used as security, or given as bonuses.
- Alignment of key individuals with success of the business – a company can align key individuals to the longer term success of the business. Increasing salaries or paying bonuses can provide incentives for short term performance, whereas stock options align the individual in the longer term.
- Cash Extraction – the process of incorporation itself, for an existing business, can be used as a tool to allow the sole trader to extract capital value from the business in a tax-efficient manner as a part of the transfer of the business to the new company.
- Succession Planning – generally speaking, a company will be a more attractive business prospect to either a potential purchaser in the future or to transferring ownership of the business to the children. Not only will the stamp duty cost be reduced with the company structure but the business owner may also be in a position to extract profits in a tax-efficient manner before the disposal, thus reducing the overall tax cost to both the seller and the purchaser.