Financial Planning

Leaving a Legacy: Tax and Estate Planning

There’s an assumption among the general public that, upon attaining a certain level of wealth (don’t ask me for numbers, because no one seems to know), they and their progeny are what is popularly referred to as “set for life.” 

Hogwash. If anything, wealthy people are more susceptible to losing substantial portions of their assets specifically because of their wealth. 

As one accumulates assets over time, the titling (ownership) of those assets is like an insect in amber—locked in, based on the letter of the law. This fact makes comprehensive tax and estate planning by qualified professionals essential for protecting one’s wealth, and for ensuring their ability to leave behind an estate, a legacy for future generations. 

Many married couples have joint accounts with rights of survivorship, set up with capital well below the federal estate tax exemption limit (known as the unified credit). Over time, however, that capital can appreciate sufficiently to exceed the limit. It’s an easy-to-overlook detail, a problem waiting to happen—especially for those trying to self-manage their tax and estate planning. 

In my book, You’re Retired. Now What? I share the story of a man who named his second wife as beneficiary on his IRA, after she promised to name his children (from his his first marriage) as her beneficiaries—the recipients of the remaining funds—upon her demise. But his children would learn the hard way that blood is thicker than water. 

After their dad passed, their stepmom changed the beneficiaries to her relatives, on what was now, by law, her IRA. The people whose futures the man had worked all his life to help secure received none of their father’s IRA funds. Oops.

I’ve seen enough in my 30-plus years in this industry to help clients avoid situations like these. Sadly, they happen all the time, and they don’t have to. In this case, a trust would have been my recommendation, and I’d have referred this man to an estate planning attorney to assure it was set up properly. 

Might it have caused friction between the couple? Indeed it may have. But if he’d explored setting up a trust and the stepmom protested, the man would have learned something important about her “investment” in the relationship. Painful as that might have been for a month or two, it may well have preserved the wealth he’d worked for, and assured that his kids received it.

Because I am no expert on tax or estate planning, I make referrals to specialists in those disciplines all the time, professionals with whom I have worked for years. When their work is done, I have them copy it to me, so both my practice and my client know exactly who owns what, and who we work for: the client himself.

The Emotional Pitfalls When Handling Money | Debra Brede

The Emotional Pitfalls When Handling Money

If you believe the discount brokerage houses—the E*Trades, allys, and Schwabs of the world—self-directed investing is the way to go. Save on fees! Invest for yourself! Blah, blah, blah. (And don’t even get me started on Jim Cramer.) Far be it from me to suggest that anyone not play with their money—provided they can afford to lose it. Few can, but many take the risk nonetheless. And lose.

Back in 1987, the late Martin Zweig appeared on the PBS show Wall $treet Week and told host Louis Rukeyser, “I haven’t been looking for a bear market per se… I’ve been really, in my own mind, looking for a crash, but I didn’t want to talk about it publicly because it’s like shouting ‘fire’ in a crowded theater.” The following Monday, the market took what remains its largest single-day percentage nosedive of all time: over 22 percent. All because some talking head scared the heck out of people. What was an individual investor, watching TV on a Friday night, after the markets had closed, supposed to do with Zweig’s warning? There was nothing they could do, and here’s what happened: Stocks began to sell off on Sunday night, as markets reopened in Asia, then in Europe. Come Monday on Wall Street, the Dow fell at the open, and continued its plunge throughout the day, with trading volume at unprecedented levels.

Armed only with the old Wall Street adage, “buy low, sell high,” what chance does a self-directed investor have? Even those who hold firm to that advice risk a crash every bit as devastating as that which befell thousands in October 1987. The reason? Trying to time transactions, which that old adage leads countless individuals to attempt. But think about what’s actually required to succeed in that, on a regular basis. You must get your transactions right not once, but twice, on the way in and the way out. And you must do so much more often than not. Good luck—especially once emotions come into play. They inevitably do, because every market brings moments of doom and gloom, and, as Alan Greenspan once said, of “irrational exuberance.” Both play on your emotions and drive bad decisions.

Everybody knows a crash or a correction is coming. But who knows when? We also know it’s possible to time stock purchases and sales perfectly. It’s just not probable. And so, just as the defendant who opts to represent himself has a fool for an attorney, so too the wealthy person, who thinks they can manage that wealth without help, risks it—needlessly.