Source: https://www.diversifiedassetmanagement.com/blog/category/Wealth+Management
Timestamp: 2019-04-22 02:50:31+00:00

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Will I Avoid the Social Security Windfall Elimination Provision?
The Windfall Elimination Provision (WEP) applies to Social Security recipients who have their own retirement savings as well as a pension from an employer who did not pay into Social Security. The purpose of WEP is to disallow for the collection of full Social Security benefits when a retiree has retirement savings and a pension from employers who opted out of Social Security (commonly local government). Read on to see if you could have your Social Security benefits reduced by the Windfall Elimination Provision.
Have you worked for an employer that did not withhold for Social Security (such as a govt. agency)?
If you have not, then the WEP does not apply to you and will be eligible for full Social Security benefits. If “yes,” then move on to the next question.
Do you qualify for Social Security benefits from work you did in previous jobs?
If not, then you will not be subject to the WEP. If you have, move on.
Are you a federal worker in the FERS retirement system and first hired after 12/31/1983?
If you are a federal worker who meets the conditions outlined above, you will not be subject to WEP. If you are not a federal worker or are a federal worker and do not meet the above conditions, you may be subject to the Windfall Elimination Provision.
The Social Security Windfall Elimination Provision is complicated and has a large influence on your retirement situation should it affect you. Check out this flowchart to learn more.
If you would like to schedule a call to talk the Social Security Windfall Elimination Provision to see if it affects you, please give us a call at 303-440-2906 or click here here to schedule a time to speak with us.
Can I Delay the RMD from the Traditional IRA I Inherited?
Traditional IRAs allow the owner several tax advantages: it allows for an upfront tax deduction as well as tax-deferred growth. Upon withdrawal of funds, the account owner is taxed at ordinary income rates. Inherited IRAs require the new account owner to begin taking withdrawals over their lifetime regardless whether or not they need the funds. Why? Because Uncle Sam wants to collect his share. Here are some potential strategies for delaying RMDs from Traditional IRAs as long as possible.
Are you the beneficiary of a Traditional IRA from someone other than your spouse?
If you inherited a Traditional IRA from a spouse, you are likely able to delay taking RMDs until you reach 70.5 years of age. Check out our “Should I Inherit my Deceased Spouse’s IRA?” flowchart. If you inherited the IRA from a non-spouse, move on to the next question.
Did the person pass away before their Required Beginning Date (April 1st, the year after turning 70.5)?
This allows you two options: electing the “5 Year Distribution Rule” or taking RMDs based on your life expectancy using the IRS Single Life Expectancy Table. The “5 Year Distribution Rule” means all assets must be out of the account at the end of 5 years. You could withdraw all funds immediately, spread them out over the 5 years, or take them all out just before the end of 5 years. Keep in mind you will need to pay ordinary income tax on the whole amount distributed.
If you take RMDs based on your life expectancy it will spread out the tax burden.
You will be required to open an Inherited IRA and take RMDs based on your life expectancy according to the IRS Single Life Expectancy Table. Depending if the deceased had satisfied their RMD for the year of their death, you may be required to take one this year.
If you’ve made it this far, you may be able to delay the RMD from your inherited IRA. Check out this flowchart to learn more.
If you would like to schedule a call to talk about the best strategy for delaying RMDs from Inherited IRAs, give us a call at 303-440-2906 or click here to schedule a time to speak with us.
· Time management is a critical skill set required to achieve success whether you’re retired, in your peak earning years or aught in the Sandwich Generation.
· Identify where you are spending your time each day that create the most success and happiness.
· Identify and remove the time bandits that steal precious hours and minutes from the activities that create the most success and happiness.
· Always heed the 4 D’s.
As many of you have just completed the annual rite of spring known as last-minute tax planning, procrastination and portfolio rebalancing, now might be a great time to hit the “pause” button for just a second.
Equity markets are at or near their all-time highs, interest rates are near their historical lows, inflation is in check and millions of Americans are expecting tax refunds. So why isn’t everyone racing out to purchase new yachts, cars and horses? Because they’re not all that secure, thanks to newfound uncertainty about trade wars, North Korea nukes the revolving door in the White House and interest rates poised to keep rising.
You probably don’t have time to go luxury good shopping anyway.
One of the most significant challenges we face in today’s fast-paced society is controlling our limited time. If you can develop better time management skills, you will have a leg up on your career, family relationships and/or retirement lifestyle. In addition to life coaches and time management experts, many wealth advisors can help you with time management as well—but it all starts with you.
Good time management is a two-step process. First, you must clearly identify activities that only you can do and that add significant value to your day. Second, you must identify the time bandits that steal your limited time from the activities that really matter.
Here are some of the most common time bandits and remedies we see in our work among successful individuals and retirees.
Plan and prepare for meetings, medical appointments media, even consultations with your tax and financial advisors with agendas, on-topic communication and hard stops for every meeting to respect everyone’s time.
As the old saying goes: “Everyone’s crystal ball is cloudy.” Why spend your limited time reading, viewing and participating in conversations related to forecasting?
Ever notice a long chain of emails attached to one email? This is a great example of where a scheduled call could save time over a group of people typing email responses. Schedule the call and keep the time short. Avoid sending emails for every communication.
It is difficult to guess how much time is wasted by moving piles of paper around a cluttered office. Searching through piles of desk clutter for the critical information needed for a call or meeting requires time. The time-saver is to move toward an efficient paperless office with a system that still allows you to take files with wherever you go.
Digital media usually starts out with a search for specific information, but it can quickly lead to a deep dark hole of distraction and procrastination. Instead, limit Internet browsing to a certain amount of time per day, much like a scheduled call or meeting. The way things are going, Facebook may be taking up less and less of your time.
Attempting to use technology before it is fully installed or before your training is complete is a big time-waster. If it does not work properly, it is a time-waster. Using technology in this way could cause loss of data or excess data retrieval searching. This applies to everyone from busy professionals, to busy homemakers to retirees.
Don’t do it if it is not worth anyone’s time.
Delegate it to someone else if it is worth doing, but not by you.
Defer if it can be done only by you, the wealth manager, but is also a task that can wait.
Do it now if it can be done only by you, but it must be done now.
The problem with administrative tasks occurs when we default to “do it now” without considering the other three options above.
Delete the email without reading it if it is from an unwanted sender.
Scan the email if you are unsure of its content, then take the appropriate action.
Read the email and determine whether a reply is necessary.
Reply to the email only if required.
File the email only if it needs to be saved.
Save the email if it contains sensitive information.
There is a great deal of competition for your time and attention no matter what stage of life you are in. We have found that the happiest and most successful people determine the most valuable use of their time and avoid the time bandits that prevent their success.
· Total Return Pooled Income Funds (TRPIFs) can be powerful tools for gifting, estate planning and minimizing taxes.
· TRPIFs allow you to make gifts of cash, publicly traded stock, closely held C Corps, unleveraged real estate, tangible personal property like art, cars, antiques and even LLC interests.
· TRPIFs have many similarities to charitable remainder trusts, but it’s important to understand the differences. Always consult with your financial advisors before signing on the dotted line.
Now that your tax returns are hopefully completed I thought I’d share with you one of the best kept secrets in estate planning and tax mitigation. It’s been around since 1969, but most successful taxpayers and their advisors still don’t know about it.
How about a strategy that completely eliminates capital gains tax, provides a gigantic income tax deduction, distributes all its income (maybe for three generations) and is completely legal? Sounds too good to be true. Well it’s not. Here’s why.
The Pooled Income Fund (PIF), created in code section §642(c)(5) in 1969, and long the red headed step child of planned giving tools, has gone “beast mode.” Thanks to a perfect storm of low interest rates, technology and charities now understanding the need to be responsive to CPAs and other professional advisors (and donors) has ushered in a new type of PIF called the Total Return Pooled Income Fund (TRPIF). This vehicle is one of the most flexible, powerful and thought-provoking planning tools you can deploy.
Yet not many advisors and philanthropically-minded individuals know about them.
With a TRPIF, you may make gifts of cash, publicly traded stock, closely held C Corps, unleveraged real estate, tangible personal property like art, cars, antiques and even LLC interests. Income can be paid for one, two or three generations of income beneficiaries if they’re alive at the time of the gift. Competitive TRPIFs pay out all rents, royalties, dividends and interest as well as all short-term gains and up to 50 percent of post-gift realized long term gains.
Charitable beneficiaries are decided on by the donor, not by the TRPIF trustee. That means the donation goes to any charities the family feels are worthy.
If you know a little bit about CRTs you’ll find that TRPIFs are similar. However, you and your advisor should be aware of some important differences. For instance, a donor can’t be the trustee of his or TRPIF as they can with their CRT. That may be a drawback. However, young donors (couples in their 40s), for instance, can’t even qualify for a CRT as they won’t meet the 10 percent remainder test. With a TRPIF, there is no such test. That means an income beneficiary can be any age. The charitable income tax deductions of a TRPIF can be greater than a CRT’s by a magnitude of four or five times. The methodology by which a new TRPIF (less than three years old) calculates its income tax deduction is governed by a complicated formula based on the ages of the beneficiaries and the assigned discount rate (1.4% for 2018). This is what produces the large deductions.
From a planning standpoint, TRPIFs can allow you much more planning flexibility than many other trusts. When selling a low basis security, for instance, it may be possible to leave more shares in the seller’s hands and still pay no tax because of the larger income tax deduction. And, low-basis assets are only one of the many opportunities that you may applicable to the TRPIF strategy. There are only a small handful of charities offering this new, competitive, Pooled Income Fund. Therefore, it’s important that you ask a lot of pointed questions to the charity.
DISCLAIMER: The views expressed in this article do not necessarily express the views of our firm and should not be construed as professional tax advice.
Am I Eligible for Social Security if I’m Divorced?
Social Security has a spousal benefit which is intended to provide payment for the spouse in a household in which there is only one income earner. This is essential for couples who have one stay-at-home spouse, as it allows them to still collect some amount of Social Security. Often times, divorcees are surprised to hear that they still may be eligible for Social Security benefits based on their ex-spouse’s earnings. Read on to see if you qualify for Social Security benefits from a previous spouse.
If you answered “yes”, move on to the next question. If your ex-spouse is deceased, you may still be eligible for survivor benefits. See the “Am I Eligible for Social Security Benefits as a Surviving Spouse?” flowchart here.
Were you married to your ex-spouse for at least 10 years?
If you answered “yes”, move on the next question. If your marriage lasted less than 10 years, you will not be able to collect spousal benefits.
Did you have more than one marriage that lasted more than 10 years?
If you answered “yes”, you will be able to pick the ex-spouse that provides the greatest benefit. If not, your benefits will be based off the ex-spouse you were married to for longer than 10 years. Either way, move on to the next question.
Did the divorce occur at least two years ago?
If your divorce was less than two years ago and your ex-spouse has not filed for benefits, you will have to wait until they file for Social Security before you are eligible for benefits. If the divorce was greater than two years ago and you do not have plans to remarry (remember you must not remarry to be eligible for ex-spouse benefits), then you can claim benefits if you are at least 62 years of age.
Collecting Social Security benefits from an ex-spouse is complicated, and there are a lot of different requirements. Check out this flowchart to learn more.
If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.
Studies show that one in four affluent people (23%) consulted with at least one advisor about charitable donations last year.
A confused donor is an unhappy donor.
Generally planned giving CRTs (charitable remainder trusts) and CLTs (charitable lead trusts) immediately come to mind. We seldom think about charitable giving in the context of non-charitable trusts, but according to Al W. King III, co-founder and co-CEO of South Dakota Trust Company, the amount of wealth that high-net-worth individuals own in trusts is surprising.
· The next 9 percent have 43 percent of their assets in trust,” observed King.
Families are also discovering strategies to incorporate charitable goals and objectives into trusts that were initially created with no charitable intentions. This is often achieved by changing the trust’s situs (legal jurisdiction), reforming or modifying the trust, or “decanting” in states with flexible decanting statutes that allow trustees to change the terms of an otherwise irrevocable trust, which may include adding discretionary charitable beneficiaries.
Dynasty trusts—Because of the long-term nature of these trusts, families often desire to make provisions and provide flexibility for both family and charitable goals and objectives.
Existing non-charitable trusts—Irrevocable trusts can sometimes be reformed or modified to allow for distributions to charitable organizations. Depending on the applicable state law governing the trusts, it may be necessary or helpful to change the situs of a trust to a state that has more flexible trust decanting laws.
Purpose trusts—Some trusts are created for a specific purpose, often to care for “something” rather than for “someone.” For example, a trust may be created to care for a pet; to maintain family property such as antiques, cars, jewelry or memorabilia; or to maintain a family residence or vacation home. Once the pet dies or the property is sold or otherwise disposed of, the remaining assets might pass to charity.
Health and education exclusion trusts—These trusts provide support to beneficiaries over multiple generations for certain education and health-related costs. As long as distributions to cover such costs are made directly to an educational or health care institution, then gift taxes and generation-skipping transfer taxes can be avoided indefinitely. However, in order for the vehicle to qualify as a health and education exclusion trust, one or more charitable beneficiaries must have a substantial present economic interest.
The donor’s charitable intent determines whether a gift is made. However, the tax benefits can influence the fulfillment of the giver’s charitable intent in terms of the asset that is ultimately given, when the asset is given, and the manner and structure through which the asset is given.
A confused donor is not a happy donor.
Some tax aspects of charitable giving don’t have good answers, some don’t have inexpensive answers and some don’t have any answers at all.
According to author and attorney Natalie Choate, an estate planning and retirement benefits consultant, advisors and many charitably inclined people are well-aware of the substantial tax advantages of giving retirement benefits to charity, particularly in a testamentary capacity. In addition to avoiding any estate tax liability that might otherwise apply, the charity also avoids tax on “income in respect of a decedent” that would otherwise result in the imposition of income tax on retirement benefits received by the owner’s children or other heirs.
· When using disclaimer-activated gifts to charity.
A recent study by U.S. Trust and the Philanthropic Initiative found that one in four wealthy individuals (23%) consulted with at least one advisor about charitable donations in the past year. In addition, nearly 70 percent of charitable remainder trust donors reported learning about the planning vehicle from their advisors.
These trends indicate a growing opportunity for investors and their advisors to have a regular dialogue about charitable methods that meet personal planning goals. Call us at 303-440-2906 if you or someone close to you would like to incorporate a strategic and regular giving strategy into your overall financial plan.
Should I Inherited My Deceased Spouse’s IRA?
When a spouse is the beneficiary of the IRA of their deceased spouse’s IRA, there are several options available. Each option has its own advantages, depending on the needs of the surviving spouse. Read below to see which option benefits you best.
Are you the sole beneficiary to your spouse’s Traditional IRA?
If you are not the sole beneficiary, your situation is a bit more complicated. Check out our “Can I Delay the RMD from the Traditional IRA I Inherited?” flowchart here . If you are the sole beneficiary, move on to the next question.
Consider electing the 5 year rule if you expect significant expenses over the next five years that will deplete the account. This allows you to take distributions at any time over the next five years of any amount, provided the account is depleted at the end of five years. Keep in mind you will need to pay ordinary income tax on all distributions in the year they are taken.
Consider inheriting the IRA, which will allow you to take distributions from the IRA penalty-free. You will be required to take RMDs based on the IRS Single Life Expectancy table. Of course, you can take any amount of distributions that you need as long as the distribution is greater than or equal to the RMD.
Consider rolling over the IRA into your own IRA. This will allow you to avoid taking RMDs until the year after you turn 70.5. If needed, you can take distributions as soon as you hit 59.5.
There are a lot of factors to consider when deciding which option is best for you. Check out this flowchart to learn more.
If you would like to schedule a call to talk about the best strategy for an IRA you have inherited, give us a call at 303-440-2906 or click here to schedule a time to speak with us.
· The IRS takes the definition of “global” seriously. All global income, including employee stock option plans, must be reported.
· There is an increased focus on offshore income tax compliance.
· The IRS also expects to hear from all U.S. citizens and green card holders living overseas.
· Taxpayers might be failing this compliance simply because they are not aware of the rules.
As you get ready to put the final touches on your tax return, here are some important things that you and your financial advisors should remember with respect to global income compliance.
If you are a U.S. resident or U.S. citizens (whether NRI, PIO or OCI), you must pay taxes in the U.S. on all global income. A U.S. resident is a green card holder and/or someone who has been physically present in the United States for at least 31 days during the current year and for at least 183 days during the three-year period that includes the current year and the two preceding years. To satisfy the 183-day requirement, count all the days that you were present in the current year, add one-third of the days you were present in the first year before the current year, and then add one-sixth of the days you were present in the second year before the current year.
Any salary partly received in another country.
Any income received overseas for freelance or consulting work.
Interest on bank deposits and other securities held overseas.
Dividends from shares and mutual funds.
Capital gains from sale of assets.
Remember, your global income will be taxed in the U.S. as per rules that apply to similar income in the U.S. For instance, while dividends may be tax-free in India, they are taxed in the U.S., and hence your dividends from India will be taxed in the U.S. The same goes for capital gains. According to U.S. law, the definition of “long term” is one year for all assets, but it may be different in other countries. When you file tax returns in the U.S., you must take into account this difference and treat overseas capital gains as per the time period specified in U.S. law.
If you have paid tax in the overseas country from which the income described above is derived, you must check the Double Taxation Avoidance Agreement to see if you are eligible to claim a foreign tax credit.
Tip: When you fill in Schedule B of your tax return Form 1040, pay close attention to line 7. Line 7 asks if the taxpayer had, during the tax year, held any financial interest in or signature authority over a foreign financial account (such as a bank account, securities account or brokerage account). Make sure you confirm that you indeed had overseas investments.
Did you exercise an employee stock option plan (ESOP) in 2017? If so, that’s one more thing you must declare on your U.S. tax return. In the U.S., the value of ESOPs granted is taxed at the time when the employee exercises the option.
You must add the total value of their ESOP compensation to your total income in the U.S. Since you may have also paid tax in the country where the ESOP originated, you will be eligible to claim a tax credit in their U.S. tax returns. You must refer to the Double Taxation Avoidance Agreement.
Tip: You can disclose this as other income in Form 1040. You can claim foreign tax credit using Form 1116.
In this connected world, you may be constantly on the move. This is a red flag.
Regardless of where you live, all U.S. citizens and green card holders must file tax returns in the U.S. based on their total global income. You must pay taxes on such foreign income unless a treaty or statutory exclusion or foreign tax credit applies to reduce your U.S. tax liability to zero.
In such cases, if you are a U.S. citizen or a green card holder residing overseas, on the regular due date of your return, you are allowed an automatic two-month extension to file your return and to pay any amount due without requesting an extension. So this year, the automatic two-month extension goes to June 15. But remember, while no penalty is charged, interest is still charged on the balance due between April 15 and June 15.
If you are unable to file a return by the automatic two-month extension date, you can request an additional extension to October 15 by filing Form 4868 before the automatic two-month extension date. However, any tax due payments made after June 15 will be subject to both interest charges and failure-to-pay penalties.
Tip: Filing U.S. tax returns from overseas can be quite a challenge. Not all software is equipped to handle foreign tax issues such as earned income exclusions—Form 2555, foreign tax credit—Form 1116, Form 8938, Form 8833 and so on. In such cases, you and your advisors will need to file a paper return.
Foreign income compliance is becoming increasingly important to the IRS. As the Foreign Account Tax Compliance Act (FATCA) gathers steam, opportunities to come into compliance without harsh penalties will diminish. The sooner you act the better.
In the next installment of this article series, we’ll look at the various additional forms that must be included with the 1040 to be compliant with global income reporting.
· The IRS simplified option for home office deductions five years ago and million or taxpayers are taking advantage. Just be careful if you do.
· This option can significantly reduce paperwork.
· However, the annual limit is $1,500, and those with higher home office expenses may still be better off slogging through the detailed Form 8829.
Introduced in tax year 2013, the optional deduction is designed to reduce the paperwork and recordkeeping burden for small businesses. The optional deduction is capped at $1,500 per year, based on $5 a square foot for up to 300 square feet.
Back in 2013, the IRS announced a new, simplified method for claiming home office deductions. According to the IRS, this safe harbor method is an alternative to the existing requirement of calculation, allocation and substantiation of actual expenses, including mortgage payments and depreciation that is done in Form 8829.
Moreover, there is an annual limitation of $1,500 under this new method, thus making this a viable option for those with offices in apartments or smaller homes. Still, there is merit to understanding this option now and evaluating the best course for your business deductions.
Before we look at the new option, let’s run through the existing method. The existing method involves several steps before you can arrive at the total for a home office deduction.
Divide the total square footage of your home that you use for business by the square footage of your entire house. That percentage is what you’ll need for Step 3 below.
This step involves the most paperwork. You need to list the various expenses such as rent and utilities or—in the case of ownership—mortgage interest, real estate taxes, insurance, repairs, utilities and the big one—depreciation. Lines 36 to 41 on Form 8829 involve going back and forth between the instructions several times to arrive at appropriate depreciation numbers.
You will use the percentage from Step 1 to figure the business part of the expenses for operating your entire home.
Now the new safe harbor option lets you claim a flat deduction of $5 per square foot of the home office, up to 300 square feet. That means if you use this method and have a home office of more than 300 square feet, you will be able to claim a maximum deduction of $1,500.
You drastically reduce paperwork and compliance burden.
If you itemize deductions and use the safe harbor method, those expenses related to your home, such as mortgage interest and real estate taxes, can be itemized without allocating them between personal and business expenses.
You can choose either method from year to year depending on which one is beneficial in a particular year. A change from using the safe harbor method in one year to actual expenses in a succeeding taxable year or vice versa is not a change in your method of accounting and does not require the consent of the IRS.
You are limited to claiming $1,500 per year irrespective of actual expenses incurred on the home office.
If you have a loss and cannot claim the entire deduction of $1,500 in a year, you cannot carry forward the home office expense to the following year. This would be possible if you claim actual expenses. Moreover, if you choose the safe harbor method, you cannot set off office expense carried forward from an earlier year.
· Must be used as your principal place of business.
· It cannot double as a place that you use for business as well as for personal purposes.
If you’re a professional, you may face various scenarios. You might be working from home for the most part of your practice, or you might be working from an office location but sometimes doing work at home. Each scenario is dealt with differently from a home office deduction point of view.
· Home as your principal place of business: If you work from home for the most part of your business or practice, that is, you perform all important activities at this place and spend relatively more time there, then your home would be your principal place of business. In such a case, you can claim a deduction for the portion of your home that you use regularly and exclusively for your business.
· Business at office location while doing some work at home: If you have separate office premises for conducting your business, then that would be your principal place of business. You cannot claim a deduction for use of your home during weekends or after office hours.
However, there is an important exception for professionals who also use their home for client meetings.
You physically meet with patients, clients or customers on your premises.
Their use of your home is substantial and integral to the conduct of your business.
The part of your home that you use exclusively and regularly to meet clients or customers does not have to be your principal place of business. Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home.
Do a back-of-the-envelope calculation of your home office expenses under both methods. Calculate the deduction under the safe harbor method by multiplying the area of your home office by $5 (limited to $1,500). If that is significantly less than the amount you claimed as a deduction in your most recent tax return, it might make sense to go through the trouble of filling out Form 8829.
If you have a loss from your business and would like to carry forward the home office expense, choose the actual expense method. If you have home office expenses from an earlier year that you would like to set off, use the actual expense method.
Claiming home office deductions is widely believed to be a common cause for an IRS audit. At the same time, genuine use of your home for business purposes can hand you a valuable deduction. The new method can significantly reduce paperwork and compliance burden for those with small home offices. But those with bigger spaces may want to choose the actual expense method. Cumbersome as it may seem, it might well be worth the effort.
﻿Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.
Antiques can generally be expensed and deducted when a small business owner uses them to conduct business and subjects them to wear and tear.
Because antiques typically appreciate over time, while non-antique versions of the same asset diminish in value, owning antiques can significantly increase your net worth.
All kinds of antiques can be used as business equipment and furniture, including cabinets, bookcases, rugs, conference tables, paperweights, clocks, cars and musical instruments.
However, Plain Jane versions of those same items may not be deductible, even if you paid top dollar for them.
What did the small business owner do wrong?
Ned Worth, an avid antique collector, is sorely tempted to bid $5,000 for an 18th-century Chippendale piece and use it as his office desk. But, alas, Ned needs to depreciate and expense his office desk for tax-deduction benefits. So he doesn’t bid. Ned winces when the auctioneer’s hammer comes down. The next day he spends $5,000 on a pedestrian desk from Office Depot-- the same $5,000 that he would have spent at auction.
What did Ned do wrong?
Strike 3: Makes him sad.
Grab some pine, Ned, yer’ out!
Desks are among the many antiques that small business owners can actually use to carry out their businesses. But what you may not be aware of is that these antique desks may be just as deductible as are desks that are not antiques.
Historically, the IRS has taken the position that antique desks and other business furnishings and equipment are not eligible for Section 179 expensing and/or depreciation. Why? Because they don’t have a determinable useful life. The IRS still feels that way, or so they said many years ago. But a number of federal courts have overruled the IRS.
Let’s go back to 1984 when a professional violinist named Brian Liddle walked into a Philadelphia antique shop and purchased for $28,000 a 17th-century bass violin made by the famous Italian craftsman Francesco Ruggieri. Mr. Liddle didn’t simply display his Ruggieri. He played it during performances.
Over time, the violin began to wear down. When the neck of the violin began pulling away from its body, Liddle had the instrument repaired by expert artisans. Alas, the Ruggieri never did recover its “voice.” So, in 1991, Liddle traded it for an 18th-century bass with an appraised value of $65,000.
On his 1987 tax return, Liddle had claimed a $3,170 depreciation deduction on the Ruggieri under the Accelerated Cost Recovery System (ACRS), as per IRC 168. The IRS denied the deduction and Liddle appealed.
While all of this was going on in Philadelphia, an eerily parallel series of events was unfolding up the New Jersey Turnpike in New York City. Richard Simon, a violinist for the New York Philharmonic Orchestra, purchased a pair of 19th-century French Tourte bows with an appraised value of $35,000 and $25,000, respectively.
On his income tax return, Simon claimed ACRS depreciation deductions of $6,300 on one bow and $4,515 on the other. The IRS said “no.” The Liddle case reached the U.S. Court of Appeals for the Third Circuit; the Simon case went to the Second Circuit. The courts treated them as companion cases and issued one ruling covering both.
In both cases, the IRS claimed the instruments weren’t depreciable because they actually increased in value over the time they were used. But previous court cases allowing depreciation deductions on assets that had appreciated in market value forced the IRS to back down from that argument.
So the IRS argued that the instruments were “works of art” that didn’t have a determinable life and thus couldn’t be depreciated. In fact, the IRS’s determinable life theory disallowing depreciation of antiques had been the law of the land until 1981.
Unfortunately for the IRS, things had changed since then. In 1981, Congress enacted a law called the Economic Recovery Tax Act of 1981 (ERTA) allowing for ACRS depreciation of business assets. As both federal courts noted, the purpose of ERTA and ACRS was to stimulate investment by making the rules governing deductions for depreciation of business assets easier for taxpayers to understand and apply. Accordingly, ERTA was meant to de-emphasize the complicated concept of determinable life. Assets would qualify for ACRS depreciation, the courts explained, as long as they were actually used in a trade or business and had suffered wear and tear.
Liddle’s Ruggieri violin and Simon’s Tourte bows met both tests, the courts reasoned. The taxpayers didn’t treat the instruments as mere show pieces or collector’s items; they actually used them as tools to earn their livelihood. And such use caused the instruments to wear down. In this way, the antiques were considered the same as any other business asset that wears down as a result of use.
Bottom line: Liddle’s antique violin and Simon’s bows were business assets subject to ACRS depreciation.
Such business use subjects the antique to wear and tear.
Caveat: In 1996—just a year after the cases were decided—the IRS issued a formal non-acquiescence, stating that it believed the cases “were wrongly decided” and that “the issue should be pursued in other circuits.” ACRS was meant to accelerate depreciation, not convert assets that weren’t previously depreciable, the notice argues.
This may sound ominous, but there are good reasons not to allow the risk of IRS denial to scare you expensing and deducting antiques you use for business purposes.
The Third Circuit, which includes Pennsylvania, New Jersey, Delaware and the Virgin Islands.
Further, very few, if any, cases have been reported in which the IRS has actually challenged Liddle and Simon and gone after a taxpayer for deducting and expensing an antique since the IRS issued its non-acquiescence way back in 1996.
Long story short, you can deduct and expense your antique office furnishings and equipment as long as they actually use them for business purposes and subject them to wear and tear.
· Behavioral finance uses theoretical and empirical academic research to explain why investors often fail to act rationally.
· Understanding both the “how” and the “why” of irrational investor behavior can save you millions over a lifetime.
· Research shows that many individuals are overconfident, under-diversified, short-sighted and easily swayed by the media.
If the world were full of “rational” individuals who could maximize their wealth while minimizing risk, there would be no need for wealth advisors. Rational individuals would assess their risk tolerance and then determine an investment portfolio that met their ideal level of risk aversion. However, we know that most individuals are not capable of being 100-percent rational, especially during times of stress. That’s why it’s so important to have a trusted coach, guide, consigliere or voice of reason to prevent you from being your own worst financial decision-making enemy.
Behavioral finance encompasses a body of theoretical and empirical academic research that seeks to explain why people, especially investors, do not act in a rational manner. Understanding behavioral finance can be invaluable to your investing and wealth building success. Think of the moniker “behavioral” as describing how and why individuals behave the way they do.
They invest in under-diversified portfolios.
They trade actively with high turnover and high transaction costs, which causes a significant drag on returns.
They are influenced by where they work and live. They invest heavily in the stock of their employers, and they tend to invest in stock of companies based in their home country, and even in companies located near where they live.
They are often influenced by companies that receive lots of media attention.
They tend to buy, rather than sell, companies that are mentioned positively in the news.
Men tend to trade more often than women do. The turnover and costs associated with active trading explains why men tend to achieve lower absolute returns on their money than women do.
Psychological research supports the theory that individuals are generally overconfident. This hubris explains why investors tend to trade too actively and to have dangerously under-diversified portfolios.
Research supports the theory that most investors believe they are “better than the average” investors, which makes about half the population delusional, not to mention overconfident.
Psychological research supports the theory that investing in stocks is a sensation-seeking activity for many individuals. It’s a form of entertainment and it provides many individuals with an adrenaline rush that’s akin to the thrill people get from gambling.
Behavioral finance literature serves as a reminder of why it is so important to protect yourself from your ego and emotions. That’s where a truly objective advisor with your best interests in mind comes in. The appropriate stewardship of your wealth is a responsibility to yourself, to your family, to your house of worship, your community and your country. As with so many things in life, enjoy your wealth, but do so responsibly. Don’t try to do it yourself.
If you or someone close to you has concerns about their financial decision-making process, please don’t hesitate to contact me. I’m happy to help.
Too many business succession plans don’t work out as planned, but smart owners can get back on track and stay that way for the long-term.
Most business owners create unnecessary risks for their families, employees and clients by failing to fund business succession plans.
Every business owner should establish a clear vision for his or her transition and look for ways to improve after-tax returns.
Business owners can reduce the costs of succession plans by 50 percent by using pre-tax dollars to pay for insurance.
Many successful entrepreneurs, especially Boomers, may be thinking that now is the right time to exit their businesses. Unfortunately, business transitions don’t usually go as smoothly as expected. The failure rate of succession plans is now at eyebrow-raising levels. But it doesn’t have to be this way.
What motivates most business owners to think about a business succession plan?
Scary stories about failed companies motivate business owners to consider implementing a business succession plan. Despite the obvious need, few plans are actually designed, drafted and funded properly. High professional fees and insurance costs often take the blame when business owners are asked why they did not implement a succession plan.
Why do so many succession plans miss the mark?
Most business succession plans fail. According to Harvard Business Review, only 30 percent of the businesses make it to Generation Two and a mere 3 percent survive to generate profits in Generation Three. Estate planning experts such as Perry Cochell, Rodney Zeeb and George Hester came up with similarly disappointing numbers. Given this dismal success record for family business transitions, it is no wonder that 65 percent of family wealth is lost by the second generation and 90 percent by the third generation. By the third generation, more than 90 percent of estate value is lost despite the efforts of well-meaning advisors. It does NOT have to be this way.
What is the biggest problem business owners face when they try to implement succession plans?
Unless a business succession plan addresses tax issues, company owners can lose much of their wealth to taxes on income, capital gains, IRD, gifts, estates and other taxes. In most successful businesses, the company will generate taxable cash flow that exceeds what is needed to fund the owner’s lifestyle. This extra cash flow is usually taxed at the highest top marginal state and federal income tax rates. When the after-tax proceeds are invested, the growth is subject to the highest capital gains rates. Ultimately, when the remaining assets are passed to family members or successor managers, there could be a 40 percent gift or estate tax applied.
How can owners and their advisors solve this tax problem?
Every business owner should establish a clear vision for his or her transition and look for ways to improve after-tax returns. Tax-efficient planning strategies are needed to guide decisions about daily operations and business exit strategies. An astute advisor can help you find ways to fund business succession agreements in ways that generate current income tax deductions while allowing the business to generate tax-free income for the business owner and/or successors.
What are some other ways to reduce taxes?
There are many tax-advantaged business succession techniques that give business owners a competitive edge. Qualified plans provide tax deductions in the current years, but they are not typically as tax-efficient for funding a buy-sell. More advanced planning strategies involving Section 79 and Section 162 plans can provide tax-free payments for the retiring executive or death benefits for family members, but limit the tax deductions when the plans are funded. There are very few options when owners seek up-front tax deductions, tax-free growth and tax-free payments to themselves and/or their heirs.
Advanced planning strategies allow business owners to fund business continuity plans more cost-effectively. Business owners should work with advisors who can design a plan that can convert extra taxable income into tax-free cash flow for retirement and/or the tax-free purchase of equity from the business owner’s estate.
Once the plan has been designed, experienced attorneys will draft legal documents to facilitate the tax-efficient plan funding. This integration of design, drafting and funding helps ensure effective implementation of the strategy as well as proper realization of benefits under a variety of scenarios. An experienced advisor should be able to help you quantify how planning costs are just a small fraction of the expected benefits. More important, these financial benefits bring peace of mind to the business owner, the owner’s family and to key executives. Great clarity and confidence results from having a business continuity plan that has been designed properly, drafted effectively and funded tax-efficiently.
· Changes in the rules for personal property under §1031 will limit many collectors, but those changes don’t mean all sellers now have to realize tax on their sales.
· The Federal long-term capital gains tax rate for real property is 20 percent, but it’s 28 percent for tangible personal property.
· Add state income tax and the loss of itemized deductions for most tax payers, selling collectibles just got much more onerous….but you still have options.
The landmark 2017 Tax Cut and Jobs Act contains sweeping changes to the entire tax system. Corporate, personal and estate taxes have been revamped entirely. Taxpayers and their CPAs are scrambling to adapt to the new rules. Simply understanding the changes and working through the variations of scenarios as they play out is a monumental chore. One important change that’s not attracting much attention, despite its potentially significant impact, are the revisions to §1031. This code section refers to “like kind” exchanges of property.
Essentially, a properly executed §1031 exchange allowed a property owner to defer the recognition of a gain until the property that it was exchanged for was ultimately sold. For many investors, like kind exchanges have been a very smart method for swapping their way to significant gains by delaying the taxes the owe. In the past, like kind included both real property and personal property. While the majority of the value of §1031 exchanges were in real property, those who collect valuable assets such as fine art, collector automobiles and antiques also utilized the §1031 exchange to enhance their collections. And, while the Federal long-term capital gains tax rate for real property is 20 percent, for tangible personal property it is 28 percent. Add state income tax and the loss of itemized deductions for most tax payers, selling collectibles just got much more onerous.
Certainly, collectors are passionate about their collections and often buy or sell in the heat of the moment. While this may be necessary at times, there are still planning considerations that can be implemented, especially before a planned sale. First, there are several charitable techniques that could be considered. One option is a Flip Charitable Remainder Unitrust (Flip CRT). With this technique, the owner creates a special trust and transfers his or her collectible to the trust prior to any sales transaction taking place. The trust then sells the asset and receives cash from the sale. At the time of the sale the donor will receive a charitable income tax deduction based on a number of factors: The donor’s age, the payout rate of the trust, the cost basis of the asset transferred and several other technical factors.
Note, with personal property donated to these types of trusts the income tax charitable deduction is limited by what the owner paid for the item (cost basis) [ }not its fair market value (what it sells for). Further, the deduction for personal property is limited to 30 percent of the donor’s Adjusted Gross Income (AGI) in any given year. However, any unused deduction is available to be carried over for five additional years until it is fully utilized. In this transfer, there is no capital gains tax realized at the time of the sale. However, the donor no longer has access to the cash or the asset but rather will receive and income stream for life based on the what the property sold for and how the trust payout is structured.
Yet another opportunity for tax savings is the “young” Pooled Income Fund (PIF). Similar to the aforementioned Flip CRT, a PIF is a vehicle for avoiding the capital gains tax on the sale of personal property while creating a charitable income tax deduction. Unlike the Flip CRT, the PIF must be established and maintained by a public charity recognized under §501(c )(3). So, it is important to identify the charity that will cooperate with this complexity. One of the major advantages of the PIF strategy is the size of the charitable income tax deduction, which in most cases is many times larger than can be accomplished via a CRT.
The reasons for this are many and unnecessary to explain here. Just know that since the deduction is likely to be much larger, there is more planning flexibility. Consider, for example, that it might be possible to contribute only 50 percent of the asset or less, and still receive enough deduction to make it worthy of consideration. Indeed, with good planning, it may be possible to leave an income stream for the next generation after the donor is deceased--all while avoiding the long term capital gains tax completely.
Ultimately, money left in the CRT or the PIF will transfer to charity, so make sure you and your advisor do some analysis before entering into either of these arrangements. An additional, non-charitable strategy is the monetized installment sale. While not widely known, a monetized installment sale allows the seller to sell and defer taxes for 30 years while receiving more than 90 percent of the sales proceeds. Unlike the aforementioned charitable strategies, the monetized installment sale can take place even after an agreement to sell has been negotiated and agreed to--something that’s prohibited with charitable planning. And while there is no income tax deduction available, the seller does retain the funds for personal use.
While changes in the rules for personal property under §1031 will limit many collectors, they don’t mean that all sellers will now have to realize tax on sales. For those who own their collectibles for more than a year, the long term capital gains tax can be deferred or eliminated. To do so simply requires different planning and well informed advisors.
Before you ring in another New Year, you may want to take time out of your busy schedule to observe another annual ritual: a review of your estate plan. If you're like most people, you probably stuck your will and other documents in a drawer or a safe deposit box as soon as you had them drawn up-and have rarely thought about them since. But changes in your personal circumstances or other events could mean it's time for an update.
Perhaps the most despised federal levy is the alternative minimum tax, which Congress passed in 1969 to prevent the loophole- savvy ultra-wealthy from shortchanging Uncle Sam.
Over the years, AMT's reach expanded to include households with more than $200,000 in AGI (adjusted gross income) annually and two- earner couples with children in high- tax states.
This is a good time to consider converting a traditional individual retirement account into a Roth IRA. Tax rates are low but unlikely to stay that way. Here's a long- term strategy that takes advantage of the current tax policy and economic fundamentals - a tax-efficient retirement investment and avoids a new twist in the Tax Cut And Jobs Act that penalizes widows.
While it may be better to give than to receive, as the adage contends, both givers and receivers should be happy with the new tax law. The annual amount you can give someone tax-free has been raised to $15,000, from $14,000 in 2017.
The Russian conspiracy to meddle in the 2016 presidential campaign relied on a common scam called "spearphishing." While the history-making scam may sound sophisticated, this form of digital fraud is running rampant. Anyone using email is likely to be attacked these days. Here are some tips to protect yourself.
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After logging strong returns in 2017, global equity markets delivered negative returns in US dollar terms in 2018. Common news stories in 2018 included reports on global economic growth, corporate earnings, record low unemployment in the US, the implementation of Brexit, US trade wars with China and other countries, and a flattening US Treasury yield curve. Global equity markets delivered positive returns through September, followed by a decline in the fourth quarter, resulting in a –4.4% return for the S&P 500 and –9.4% for the MSCI All Country World Index for the year.
The fourth quarter equity market decline has many investors wondering how equities may perform in the near term. Equity market declines of 10% have occurred numerous times in the past. The S&P 500 returned –13.5% in the fourth quarter while the MSCI All Country World Index returned –12.8%. After declines of 10% or more, equity returns over the subsequent 12 months have been positive 71% of the time in US markets and 72% of the time in other developed markets.
If you would like the pdf version of the report click here.
In 2018, the global economy continued to grow, with 44 of the 45 countries tracked by the Organization for Economic Cooperation and Development (OECD) on pace to expand. Argentina was the only country expected to contract. While market participants may consider the economic outlook of a region, it is just one of many inputs that determine realized market performance.
When considering individual countries, 46 out of 47 countries were down for the year. Using the MSCI All Country World Index (IMI) as a proxy, no countries posted positive returns among developed markets, and only Qatar managed a positive return among emerging markets. As is typically the case, country-level returns varied significantly. In developed markets, returns ranged from –24.1% in Belgium to 0.0% in New Zealand. In emerging markets, returns ranged from –41.3% in Turkey to 27.1% in Qatar—a spread of almost 70%. Large dispersion among country returns is common, with the average spread in emerging markets over the past 20 years of 90%. Without a reliable way to predict which country will deliver the highest returns, this large dispersion in returns between the best and worst performing countries again emphasizes the importance of maintaining a diversified approach when investing globally.
In 2018, the MSCI Emerging Markets Value Index (IMI) outperformed its growth counterpart (–11.5% vs.
–18.4%). In developed markets, however, this was not the case. The Russell 3000 Value Index underperformed the Russell 3000 Growth Index (–8.6% vs. –2.1%) and the MSCI World ex USA Value Index (IMI) underperformed its growth index counterpart (-15.6% vs. –13.8%). Small cap stocks generally underperformed large cap stocks globally. For example, the Russell 2000 Index returned –11.0% relative to –4.8% for the Russell 1000 Index. Similarly, the MSCI World ex USA Index outperformed its small cap counterpart (–14.1% vs. –18.1%), and the MSCI Emerging Markets Index outperformed its small cap counterpart (–14.6% vs. –18.6%).
The mix of relative performance of value vs. growth stocks within and across regions this year serves as a reminder of the importance of integrating premiums when designing and managing portfolios. Within US equity markets, when at least one of the size, value, and profitability premiums has been negative in a given year, at least one of the other factors was positive 81% of the time. Positive premiums can contribute to relative returns during time periods when other premiums are negative.
In the US, the yield curve flattened as interest rates increased more on the short end of the yield curve relative to the long end. The yield on the 3-month US Treasury bill increased 1.06% to end the year at 2.45%. The yield on the 2-year US Treasury note increased 0.59% to 2.48%. The yield on the 10-year US Treasury note increased 0.29% during the year to end at 2.69%. The yield on the 30-year US Treasury bond increased 0.28% to end the year at 3.02%.
Finally, if you would like the pdf version of the report click here.
 Declines are defined as points in time, measured monthly, when the market’s return since the prior market maximum has declined by at least 10%. Declines after December 2017 are not included, but subsequent 12-month returns can include 2018 returns. Compound returns are computed for the 12 months after each decline observed and averaged across all declines for the cutoff. US markets (1926–2018) are represented by the S&P 500 and Developed ex US markets (1970–2018) are represented by the MSCI World ex USA Index.
 OECD Real GDP Forecast, 2019. Accessed Jan. 4, 2019.
 Source: MSCI country investable market indices (net dividends) for each country listed. Does not include Greece, which MSCI classified as a developed market prior to November 2013. Additional countries excluded due to data availability or due to downgrades by MSCI from emerging to frontier market. MSCI data © MSCI 2019, all rights reserved. Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
 Measured from 1964 through 2017. In US dollars. Size premium: Dimensional International Small Cap Index minus the MSCI World ex USA Index (gross dividends). Relative price premium: Fama/French International Value Index minus the Fama/French International Growth Index. Profitability premium computed by Dimensional using Bloomberg data: Dimensional International High Profitability Index minus the Dimensional International Low Profitability Index. Profitability is measured as operating income before depreciation and amortization minus interest expense, scaled by book. Dimensional indices use Bloomberg data. Fama/French indices provided by Ken French. MSCI data copyright MSCI 2019, all rights reserved. The information shown here is derived from such indices. Index descriptions available upon request. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
 Dimensional Director refers to the Board of Directors of the general partner of Dimensional Fund Advisors LP.
Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. S&P and Dow Jones data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2019, all rights reserved. ICE BofAML index data © 2019 ICE Data Indices, LLC. Bloomberg Barclays data provided by Bloomberg. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, liquidity, prepayments, and other factors. REIT risks include changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer.
· Good advice is timely, holistic, personalized, grounded in empirical research and adheres to a high fiduciary standard.
· Financial advice isn’t worth much if it can’t help you enjoy life, protect the ones you love and reassure you in times of trouble.
· It’s not about making more money; it’s about having understanding the multifaceted parts of your financial life and the people and causes most important to you.
In Part 1 of this post, we explored differences between general investment advisors and truly comprehensive wealth advisors. We also walked through the five-step process that only wealth advisors are equipped to use in order to understand what makes their clients tick and serve them extremely well.
1. Good advice is timeless … and timely. At its essence, good financial advice never goes out of style. Its principles are permanent: It should be brave and true, and meant for you. At the same time, good advice must remain relevant in an ever-changing world. Your adviser should be able to help you embrace promising new opportunities and insights while avoiding the false leads and frightening challenges that are as formidable as ever in today’s markets.
2. Good advice looks at the parts … and the whole. Good financial advice helps you manage your investment portfolio and preserve or increase your wealth according to your goals. It also helps you plan, implement and manage your myriad related interests: taxes, insurance policies, estate planning paperwork, philanthropic pursuits, executive compensation, real estate holdings, business activities and more. Beyond that, what are your goals? How can you relate your total wealth to your relationships, resources and realities? Good financial advice should contain a comprehensive understanding of the multifaceted parts of your financial life and the people and causes most important to you.
3. Good advice is personalized … and persistent. Good financial advice is essential for making good decisions about your money, your interests and your life. It’s about being in a relationship with an adviser who is there for you, not only during the promising planning stages when everything makes sense, but when your resolve is being sorely tested in turbulent markets, or when life’s events or personal setbacks knock you off course. Good advice helps you find your way when you’ve been sideswiped by the unexpected and keeps you on course when seas are calm.
We look forward to a world in which good advice reigns supreme. Until then, we hope you’ll be open to good advice when you hear it – the kind that sees you through turbulent times, and keeps you on the right path toward your financial and life goals. If this advice sounds a little different from the status-quo stock tips or market-timing tactics you may be used to hearing, that’s because it is.
May we offer you additional advice about good advice? We hope you’ll schedule a second opinion discovery call.
· All kinds of people claim to be wealth advisors--research show only out of 16 really are.
· Does your advisor have the ability to see your entire financial picture and how your values, goals and people close to you fit into that picture?
· A wealth manager should be a personal CFO/financial consigliere who always has your best interests in mind.
· Before committing to working with an advisor, be 100-percent clear how they get paid.
In today’s climate of one-page financial plans, bargain-basement fund pricing and automated investment tools, you may wonder if it’s still necessary to have a human financial adviser. If you’re like most successful people, it is. As an accomplished business owner, professional or retiree, you financial life is too complex to be robo-cized and investments are just a small part of your overall picture.
It goes without saying that you want an advisor who is a true fiduciary; someone who always has your best interests in mind. You want someone who is not under pressure to earn commissions and who is free to recommend the very best products and solutions that meet your needs—not simply the ones that his or her employer is pushing at the moment.
All kinds of people can call themselves wealth advisors these days, but you’ll probably find that advisors with CFP®, CFA or CPA after their names. Those credentials aren’t just professional “vanity plates.” They’re not easy to obtain and require a level of skill, training, independence and fiduciary responsibility that a stock picker, investment consultant or algorithm isn’t required to have.
Also make sure you understand how your advisor is paid. True wealth advisors are paid on a fee-only model, rather than a commission model. In other words, they earn a fixed percentage of your assets under their management and do not get paid a commission each time you make a trade. If they help you grow your wealth then they earn more along with you. If your wealth declines under their guidance, then they earn less. Compare that to a commission based advisor (human or machine) that gets paid whenever you buy or sell an asset, regardless of whether that investment worked out for you.
As Nobel Laureate Eugene Fama once observed: “Academic research produces about three to five good ideas every 20 years. However, the financial industry packages and sells about 10 new ideas per week.” Note the emphasis on “new” rather than “good.
1. Discovery Meeting. At this initial meeting with a prospective client, a wealth advisor asks detailed questions to find out what is important to the prospective client in terms of values, goals, relationships, assets, advisors, interests and—very important—the extent to which they want to be involved in the process. Some clients want to be very hands on and others want to be hands-off. No two client situations are the same and a truly consultative wealth advisor can tailor his or her approach to each unique client preference.
2. Investment Plan (IP). The next step is to take the information from the Discovery Meeting, analyze it and craft an IP. The investment plan looks at where the prospective client is today in their personal and financial life, where they want to be ideally and what the gaps are between they are now and where they want to go. A truly consultative wealth advisor presents the investment plan at the Investment Plan Meeting and offers solutions to close that gap—solutions they are equipped to implement.
3. Mutual Commitment Meeting. If the prospective client is satisfied with the IP, then we move toward a meeting at which we mutually agree to work together. This is when the prospective client signs the paperwork to become a bona fide client.
4. The 45-Day Follow-up Meeting occurs about 1-1/2 months after the client has been on-boarded. At this very important check-in meeting, the trusted advisor reviews all the paperwork that a client has received and updates the client on the progress the firm has made toward the clients goals so far.
5. Regular Progress Meetings occur at a frequency with which the client is most comfortable. Some clients only want to meet for an annual or semi-annual checkup. Others prefer more frequent contact, often to bounce ideas off their trusted advisors—they don’t necessarily have to meet only when there is a crisis or major change in life circumstances. The trusted advisor and client review the progress and implementation of the wealth management plan and make mid-course corrections as needed. The meetings are generally built into the advisor’s annual management fee, so clients don’t feel like the “advice meter” is always ticking.
In addition to the five steps above, true wealth managers create a financial plan and an advanced plan that includes a comprehensive evaluation of the client’s entire range of financial needs and recommendations for going forward. The financial plan typically looks at where clients are now and what each one needs to do in order to retire on their own terms. The advanced plan focuses on wealth management items such as maximizing wealth, protecting wealth and tax-advantaged ways to give some of their wealth away to deserving heirs and causes.
If nothing else, your wealth manager should be your personal CFO/financial consigliere—a trusted advisor who functions as the noise cancelling headphones in your life. He or she should be someone who can help you filter out the noise of dramatic market swings and screaming headlines from the news media and the internet. A wealth advisor understands that your ultimate goal is not to make more money in the market; it’s to get to your destination in the most relaxed manner as possible and enable you to enjoy the life that your money intended you to live.
Advice is cheap. Good advice is worth its weight in gold. In Part 2 of this post we’ll look at what constitutes good advice from wealth advisors who are truly fiduciaries. If you or someone close to you is not sure about where to turn for financial advice, please consider scheduling a complimentary second opinion discovery call.
The fact is, family wealth—how it’s managed, transferred and used—can generate major drama among family members. As wealth grows, so does the potential for that money to foment conflicts and bad financial decisions that can reduce a family’s financial position and even ruin intra-family relationships forever.
The good news: We can look to the strategies used by today’s ultra-wealthy families to avoid or mitigate such negative outcomes—and find ways to adopt similar strategies in our own families.
One of the most effective tools harnessed by the ultra-affluent is the family meeting—which is used to educate heirs and potential heirs about sound financial decision-making, to identify shared family financial values and to maintain (and grow) family wealth in a unified manner.
What would happen if you or your child caused a car accident that resulted in serious injuries or the deaths of others?
How would you pay for the treatment and damages of someone who was hurt in your home and claimed negligence? What happens when they claim to have suffered greatly because of the injury?
What if your dog was attacked by a stranger on your property and bit the person in self-defense—but you were still sued?
These are questions that anyone could face. However, one component of a wealth protection plan that is often overlooked or underused—even by the affluent—is the umbrella policy.
Here’s why an umbrella policy can make sense if you have significant assets.

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