For clients with large, contingent or back-loaded compensation, death can create a financial problem for their family and heirs. Deferred compensation, equity awards, earn-outs, partnership interests and other forms of income may be treated differently when a client dies, potentially leaving a family with a significant and unexpected cash-flow gap.
To learn how advisors can determine which income survives and how to replace what does not, we spoke with Bryan Molinar, Partner and Wealth Advisor at Atlas Legacy Advisors; Roshan Weeramantry, Founding Partner of Hyphen Wealth Management; and Matthew Smart, Chief Investment Officer at WWM Investments.
We asked each of them what they would say if a client asked, “If I died tomorrow, would my biggest paycheck still show up?” And how would the advisor know?
Their responses follow.
Bryan Molinar, Partner And Wealth Advisor, Atlas Legacy Advisors
If a client asks, “If I died tomorrow, would my biggest paycheck still show up?” what I hear is, “Will my family be okay if something happens to me?”
To answer that, we have to understand the full picture. What income survives and what disappears? What assets and liabilities remain? How is the estate plan structured? Are beneficiary and survivorship elections current? Is there enough liquidity, and does the family know who to call?
For clients with contingent compensation, we dig into the employment contracts, compensation agreements, guarantees and business agreements to see what actually survives death. Then we quantify the gap and build a roadmap through estate planning, liquidity and, where appropriate, insurance.
But this is not just about helping a family get by. We need to understand the lifestyle, opportunities and impact the client wants preserved.
Planning for what can go wrong comes before planning for what can go right. Protection planning is the foundation supporting everything else.
Roshan Weeramantry, Founding Partner, Hyphen Wealth Management
During my career I’ve found that clients rarely read the fine print of their compensation packages. The excitement of the new job opportunity often overshadows the ability to truly consider what happens if things don’t work out.
Our job is to manage risk in all aspects of our clients’ lives. When a client is dealing with an earn-out, deferred compensation or partnership buy-sell agreement, we audit the governing documents with our client’s legal and tax teams. Once we understand the details, we model a financial plan that simulates premature death. If we find a void, and a contract can’t be changed, then we identify low-cost solutions to replace lost revenue for the family.
It’s not unusual to have a client think they made a mistake with an employment contract, but working through the audit and financial modeling process leaves clients feeling confident knowing their loved ones are protected.
Matthew Smart, Chief Investment Officer, WWM Investments
The answer is: We don’t assume the paycheck survives. We prove it.
For clients with complex compensation, we map where their income actually comes from and what happens to each piece at death. Salary may stop immediately, while deferred compensation, equity awards, partnership interests, earn-outs or trailing commissions can all have very different rules. We review the underlying agreements to determine what the family actually receives, when they receive it and what disappears.
Then we build around the gap. That may include life insurance, funded buy-sell agreements, beneficiary and trust planning, and a portfolio and liquidity strategy designed to replace lost cash flow without forcing the family to sell assets at the wrong time.
The goal isn’t simply to leave behind a large death benefit. It’s to leave behind a paycheck. We coordinate the pieces to create a reliable stream of income that can continue long after the paycheck stops.
Jeff Berman, Contributing Editor and Reporter at Wealth Solutions Report, can be reached at jeff.berman@wealthsolutionsreport.com.
