Reference no: EM133086125

Paul and Sara, are spending a well-deserved long weekend at their recently purchased home on Bald Head Island which is located about 2 ½ hours south of Edenton. They bought the house for $1.2 million and they have an interest only mortgage with an every five year interest adjustment time period when the mortgage interest rate will adjust to current market interest rates. After twenty years they will need to either pay off the mortgage or refinance. The current interest rate is 2.75%. It is a lazy Sunday afternoon and they are sitting on the screened in porch with a large pitcher of sweet tea reviewing the blur of the past fifteen years and considering an unexpected offer to sell their seafood processing business. Ten years ago Paul took a significant business gamble; even though the business growth had been modest, he tripled the size of his sales force to cover New England, the Mid-Atlantic coastal states, and Florida. He also expanded the plant processing capacity by fifty percent. He felt the high quality of his product would find a market niche and orders would increase dramatically. He turned out to be correct.

He hit the market just right and during the next five years revenues increased 400%. The plant was generating profits in the low seven figures but instead of taking the money out of the business, he and Sara decided to continue their modest lifestyle and reinvested the profits back into the business. In addition to selling fresh seafood, they now are freezing seafood and shipping the product to customers located east of the Mississippi River and from the Gulf of Mexico to Canada. For the past three years the business has generated net income in the range of $5-7 million. Paul's old employer recently contacted him through an investment banker to determine if he had any interest in selling his business. They have offered him $15 million to purchase the business. The business is incorporated and Paul and Sara are the only shareholders. Paul thinks the business is worth more but he now realizes that he and Sara need to pause and spend some time thinking about the rest of their lives.

As the pitcher of sweet tea empties, they realize how little time they have spent thinking about the future and they also realize that they have a lot of work ahead of them whether they choose to sell the business or not. Paul has spent all of his time and energy over the past ten years on his business and has achieved significant success but he now recognizes that he and Sara have no personal financial plan. Their last will was written over twenty years ago. Paul has never contacted a financial advisor to suggest an investment strategy for his retirement; he has no 401(k) or IRA. He has no personal investment account. His business is his wealth which he realizes offers no diversification. On the other hand, Sara still has an IRA rollover from her first employer right out of college (forty years ago) where she worked for about twelve years. These funds have been sitting in two Vanguard Mutual Funds; the first is an index fund similar to the S&P 500 and the second fund is a bond fund containing investment grade corporate bonds. Sara has paid little attention to these accounts but they have done quite well for her.

During the past ten years they have earned a combined 10% average annual return which gives her a current balance of $972,650 in her Vanguard account. She also started contributing to her current employer 401(k) which offers a 5% maximum employer match. She started to contribute at the 5% level five years ago to get the maximum match and she selected a 2020 target date fund to invest in because she didn't know what else to select and this investment option seemed easy to understand. Her current balance is $48,900. Both Sara and Paul still vividly remember their near bankruptcy experience shortly after the processing plant opened and was severely damaged by the hurricane so they currently have $750,000 primarily invested in local bank CDs (Sara's bank). They estimate that these CDs have an average return of .75%. Their joint checking account has a balance of $95,000. Other than the mortgage on the recently purchased house on Bald Head Island, they have no other personal debt and the business has paid off the North Carolina Economic Development loan. For the past two years, they have taken pay from the business in the amount of $500,000 but they could easily take out two or three times that much given the financial success experienced during the past five years.

Paul has a company paid Cadillac Escalade (value $95,000) and Sara drives a BMW 535i (value $65,000). The annual expenses for their house in Edenton are about $15,000 and it has a current value of $185,000. The annual expenses for their house on Bald Head Island are $17,500 not including the mortgage payment and its current value is $1.2 million. Their son-in-law the accountant has been telling them that they will have a tax planning mess if they don't soon start working with a tax advisor to develop a tax plan which includes estate tax planning.

They don't understand estate planning, estate taxes (will their estate have to pay estate taxes?), or how money gets distributed to heirs from the estate. Should they include grandchildren as heirs? Sara's bank administers trusts; should they consider establishing a trust? What is the benefit of a trust? How do trusts work? Paul has been very involved in coastal conservation organizations and Sara has been involved with the local hospital and historical society; should they consider charitable contributions; if so, how does that work within an estate? Should any gifts be made before death? They have business advisors but they now realize that they need personal financial advisors. Their net worth is significant and they have a responsibility to care for it just as they have professionally managed the business that created their net worth. Sara has a discussion with her regional vice president about her and Paul's situation and he suggests that they contact you because you have a lot of experience working with high net worth individuals/families. You have had multiple telephone calls with them and you have gathered significant information about their current financial situation. You and your staff have analyzed all of the issues. They are coming to your offices in Raleigh tomorrow; what action will you recommend that they take?