Estate Planning

Eradicating Entitlement

Even families that don’t consider themselves highly affluent can be raising “trustafarians” without realizing it

Key Takeaways:

  • Entitled people, especially children, don’t develop the capacity for self-reliance or independence.

  • Even in families of modest affluence, it’s essential for kids to learn about spending wisely, saving diligently and sharing generously.

  • Warren Buffet said, the perfect amount to leave your kids, is ''enough money so that they would feel they could do anything, but not so much that they could do nothing.'' 

The wordentitlement” has many negative connotations, but it wasn’t always that way. In the past, it was often about having a right, as in “I’m entitled to certain rights.” In reality, it’s a little bit of both. Many times successful parents become concerned about their childrens’ feelings of entitlement stemming from their family’s ritzy neighborhood, their high-end cars, their affluent school district or the expensive sleep away camp they attend.

Your children or grandchildren don’t have to be trust fund recipients (i.e. trustafarians) to exhibit signs of entitlement that can be difficult to shed in adulthood. We all want to do what’s best for our children. But, giving kids too many things at an early age can prevent them from developing self-reliance and independence as they get older.

Another danger of entitlement is that children become so self-absorbed (both personally and materially) that they have no what other people want or need, particularly those who are less fortunate.

As Warren Buffet famously said, the perfect amount to leave to your kids,  is ''enough money so that they would feel they could do anything, but not so much that they could do nothing.''

Real world example

One family I know, in which both parents are first generation Americans, created significant wealth for themselves. Their children enjoyed the fruits of that hard work. Naturally, the parents wanted provide their kids with more than their parents gave them --more experiences, more opportunities.

The parents were well intentioned, but even those good intentions can give the kids unrealistic expectations. For instance, both kids expected to receive a Mercedes upon graduating from high school—which they did--because that’s what many of their affluent peers received in their circles.

Despite their advantages, both kids started to act out, which teens of all backgrounds inevitably do. The boy even got in trouble with the law, but thanks to his family’s wealth, they were able to hire top attorneys to get the boy off the hook. Unfortunately, he was kept entirely out of the legal process so he never learned his lesson. Before long, he got in trouble again. The parents realized too late that their good intentions—to protect their child—preventing the boy from learning valuable life lessons about being accountable for his actions and suffering the consequences. It took him many, many years to get on the right track to responsible adulthood and caused his family significant pain.


Add inherited wealth to the list of addictions

The Latin root of the word addiction mean “is a slave to a master.” When people are addicted to something, say a drug or alcohol, they’re slaves to that master. In the same way, when heirs inherit wealth, they get used to the regular “hits” from their trust distribution “dealer.” They organize their lives around their family’s money flow, rather than forging their own path to adulthood and self-reliance.

So, how do parents prevent this from happening? Start with the process of “naming.” When we name something, we’re calling it out. To name something, we don’t want to clobber it in the head with a baseball bat and call it “entitlement.” Instead, families that succeed and create family harmony, unity and cohesiveness over the generations are ones that have meaningful conversations about what they have. They discuss the potential risks of their wealth also the potential benefits it can provide to themselves and to others. In many ways, wealth and money can be viewed as members of the family—and we always have to respect our relationship with those special family members.


The Thee S’s

In a family of affluence, it’s important for the kids to learn about Spending, Saving and Sharing. This can begin as early as age five or six. I know of a family in which the father gave a dime to his daughter when she was 7 or 8 years old and he said, “We have a lot of these dimes. And so what I want to do is give you this dime, and we’re going to decide how we’ll spend it, how we’ll save it and how we’ll share it.” That was the beginning of the daughter’s wealth and money education.

I often facilitate family meetings around the qualitative or emotional issues that accompany wealthy families. A three-generation family business had multiple liquidity events over a short amount of time. That was very new to them, and subsequently what they decided to do in addition to getting technical advisors to help them, they brought in a family counselor to help them have meaningful and respectful conversations about what they have and what they want do with it.

Conclusion

For children of privilege, wealth can be a tremendous tool for helping others and for achieving a life of fulfillment. It can also be a dangerous and highly addictive drug. It’s never too early to teach your children and grandchildren about the 3 S’s and the responsibility of money. Contact me any time if you have concerns about your gifting or estate planning.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Estate Planning: Don’t Forget Your Pet!  

If you are part of the 68 percent of U.S. households that own a pet[1], you probably think of it as a true member of the family—one you love and cherish. But what would happen to that cherished family member if you were to die suddenly? Have you taken any steps to ensure the family dog, cat, horse or other animal will be well taken care of if it outlives you?

If not, it’s probably time to think about how to make your treasured pet part of your estate plan. Even if you do have a plan, it might make sense to review and revisit it to ensure it’s still on track.

Here are some key steps to take and resources that can help.

Click here to read more:

Estate Planning: Don’t Forget Your Pet!

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Important Conversations for Family Gatherings

How you can help your family unlock its ‘soul capital’

Key Takeaways:

  • A legacy conversation is a frank discussion in which the older and younger generations share their views about what really matters to them.

  • Show and tell is a good technique for getting families to reveal their values in action.

  • Combining “soul capital” with financial capital will help families clarify their core values.


Now is the time of year when many extended families get together for some R&R at a family vacation home. While the bonding and elaborate meals can be great, living in close quarters, even for just a few days, can strain relationships among even the closest of families.


Throughout the course of our work with successful families empathy has been central to our practice. Empathy is about “feeling with” another person.

“Walk a mile in my shoes” is the old adage and listening—is one of the most important ways to do that. We spend so much time texting, tweeting and multi-tasking today, that listening has become almost a lost art. But, when someone listens to you, I mean REALLY listens, there is nothing like it. The rapt attention someone pays to you is a blessing and a gift. To be heard, seen and validated is a true gift.

All family members need empathy. Renowned psychologist Carl Rogers called this “unconditional positive regard.” It is the deepest form of acceptance.

When a family needs to address legacy issues, it’s important to be honest with each other about what really matters. For a family to do this there needs to be empathy.

When I was a kid in school, my favorite activity was show and tell. To bring some special personal object in to share with my classmates was a sheer joy. I also loved hearing about my classmates’ objects and the stories that filled my imagination. Each time, I learned something new, unique and often intimate about my classmates. And of course, when it was my turn, I beamed.

Talking about what really matters


What is a legacy conversation? It is a conversation in which the older and younger generations sit together and talk about what really matters. What really matters is each other; the family relationships and the way the family relates to each other and loves each other.

Money and other family assets are important because they sustain the family into the future. These things can be seen as giving stability or causing instability, depending upon how the family is doing with itself. If the family is good, wealth is good. If the family is not good, wealth can make it worse. So the show-and-tell notion related to legacy conversations has to do with honestly sitting together and talking about who we are, how we are and what we have. The family elders tell the stories about how they got here. They inform the “middlers” and the “youngers” what worked for them and what didn’t.

These conversations become sacred conversations because they contain wisdom. I use the phrase “soul capital.” Wisdom is different from knowledge. Knowledge is information and wisdom is deep and painstakingly won insight.

Wisdom is unique and particular to each family since every family dynamic is different. So when these kinds of conversations are held, they become sacred, as spiritual capital represents something bigger than the self and family—something that guides and protects us.

Legacy conversations are “show and tell” events as well. When grandfather and grandmother are sharing at a family gathering, the stories they tell are often gems from their past. Show and tell is a ritual that reveals a family’s values in action. As this sharing continues, the family begins to show and tell together. Over time, this simple sharing turns into what I believe to be sacred conversations. In these conversations lies true wealth.

Successful families that initiate and maintain conversations about legacy, values and related issues discover deep treasure. Why is it that most families don’t hold conversations like this? In a word: intimacy. When we become intimate with each other, we reveal. Vulnerability is uncomfortable.

Discomfort creates anxiety or pain. The paradox is that when a family is courageous enough to delve into these kinds of conversations, the discomfort passes over time, and what a family and its individual members find is unity. With family unity, anything is possible.

The soul capital of a family


Legacy conversations are sacred because they contain stories from the elders, middlers and newers that carry the “soul” capital of a family. Soul capital married with financial capital clarifies and empowers families to live their core values truly. Sacred conversations lead to true family flourishing.

I use the phrase “sacred conversations” because of the depth that lives in the inner world of family. At the core is love. Love is sacred; it is divine. In essence what lies in waiting for prosperous families is a different kind of wealth—soul capital.

Conclusion


When a family engages in family meetings to address legacy questions, it is good to begin with show and tell. Simple storytelling captures the essence of what brought a family to have a legacy to pass on.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Identity Crisis

There is no one-size fits all strategy for gifting or transferring assets. Make sure your advisors know your unique needs and motivations

 

  • Before you can ask your advisors for help, take some time to think about what’s most important to you and your family about giving back.

  • Sometimes volunteering time is more fulfilling than donating money. Make sure you and your advisors are in sync when it comes to mapping out your philanthropic and life goals.

  • There is no magic formula for deciding how much to donate vs. how much to pass on to your heirs. A skilled advisor can help you set the appropriate criteria.

 

Giving time and money to causes you support is one of the most powerful freedoms that wealth provides. But, just showing up to volunteer without a plan or just writing checks when the pleas flood into your mailbox, can leave you feeling unfulfilled with a trail of missed tax-saving opportunities in your wake.

Giving can be done effectively at any age, but as Boomers age out of careers, many are finding fulfillment in giving back to their community by volunteering. Also, with children typically grown and out of the house, Boomers generally have more capacity to give. If that sounds like you, use this period to begin to convert dormant assets into planned gifts and also to help increase community involvement.

One of the key findings in the latest U. S. Trust study is that affluent Boomers want to give more than they currently do, but they need help discovering what they are passionate about. A good advisor knows how to tap into your passions and values by asking the right questions about your financial and life goals—on an ongoing basis.

No two people (or families) have the same motivation to give. It’s important that your financial advisors don’t apply a one-size-fits-all approach to your philanthropic goals.

What research says about how and why we give

Both Fidelity Charitable and U. S. Trust conducted extensive national surveys about charitable giving trends among the affluent and soon-to-be affluent. Here are just a few of the ways that successful people differ when it comes to giving back:

Fidelity found that women tend to be more committed and strategic in their giving. They tend to volunteer more time, ask more questions about the financial aspects of their gifts and generally feel that giving to charity is a very satisfying aspect of having wealth. According to Fidelity, women tend to be more spontaneous; captured by a cause, a movement, or an empathetic response.

Parsing even further, Fidelity research indicated that Millennials seemed particularly motivated to give more than just money to the causes they believe in. Why these reactions occur is not entirely understood, but industry observers see both Millennial men and women wanting to see results and to measure the impact of their giving. The younger age cohort also seems to desire hands-on experiences and involvement, more so than other groups, sometimes even leading their own efforts ala Zuckerberg/Chan of Facebook fame.

Much has been written about how Millennials are re-shaping giving and our firm works very hard to understand the different populations we serve.

Further, different gifts make sense at different ages. In fact, some younger donors may not even qualify to implement a Charitable Remainder Trust (CRT)—a common tax-advantaged way to give to charities and beneficiaries--because the trust won’t qualify under the 10 percent remainder test.

The 10-percent minimum remainder value test says that all CRTs must have a remainder value that is equal to, or greater, than 10 percent of the funding amount.  If a CRT fails the 10 percent test, it does not qualify as a charitable trust and loses all the favorable tax treatment that a qualified CRT enjoys.

In terms of giving their time, U.S. Trust found that HNW volunteers are highly motivated to respond to needs (51% agree) and by the belief that their service makes a difference (49% agree). Other important motivations include: Personal values or beliefs (39% agree), concern for a particular cause or group (32% agree), and concern for the less fortunate (28% agree). Researchers found that women were significantly more likely than men to indicate that “responding to a need” is a top motivation for volunteering

Researchers also found that women and younger individuals were significantly more likely than other cohorts to say that education was a top public policy concern of theirs and they were more likely to express confidence in a nonprofit organizations’ ability to solve societal or global problems. According to U.S. Trust, African Americans were also more likely than other groups to give to religious organizations and both women and African Americans of both genders were more likely than other groups to give to women and girls’ causes and/or organizations. U.S. Trust also found that women and younger donors were more likely to give to causes that support animals and K-12 education. Younger individuals were significantly more likely to make giving decisions independently of their partners/spouses.  Finally, younger donors were significantly more likely than other groups to donate online or through crowdfunding.


If you don’t agree with all of the generalizations about giving patterns above, that’s okay. Just make sure your advisors do NOT assume you want to give along the lines of the findings in these widely cited reports about philanthropy and volunteering.

Conclusion

If philanthropy is truly one of America’s great freedoms, then it is incumbent upon your advisors to help you best enjoy that freedom. Make sure your advisors have a deep understanding of your life goals, family values and causes you support so they can help you structure the smartest way for you to give with the maximum impact. Contact us any time if you or someone close to you has questions about planned giving or legacy building ideas.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Exit Planning for Business Owners, Part 2

It’s not only about what to do next but when to do it. See our timeline for making the most of your exit

By Robert J. Pyle, CFP®, CFA, AEP®

Key Takeaways

  • Don’t get so immersed in selling your business that day-to-day operations start to slip.

  • The most important driver of your business valuation is recurring revenue and contracts.

  • Make sure your advisors have experience transacting a business like yours—and don’t wait until the last minute to inform them of your plans to sell.

As we discussed in Part 1, exit planning is a multi-year process, not a spur of the moment decision. Most experts say you need to start planning three to five years out. The last thing you want to be doing on the way to your closing is making frantic calls to your attorney or CPA to track down financial statements or contracts the buyer is demanding to see. I can’t tell you how many accountants and lawyers have told me this is how they first learn about a client’s intention to sell their business. Ouch!

Exit Planning for Business Owners Timeline Graphic 3 Revised.png

5 Years Out: Steps to consider

Obtain a professional valuation of your business

Approximately five years before you plan to sell, you should get a professional business valuation (BV) of your enterprise. You want a fair and objective value for your business so you can get a sense of how it compares to other businesses in your industry and how much you can expect to net from the sale. A BV should also tell you your business's market position, financial situation, strengths, and weaknesses (which you can hopefully correct before putting your venture on the market).

You want to find a BV specialist who focuses on valuing your specific type of business or someone who has helped sell a business similar to yours. The most important driver of BV is recurring revenue. The more contracts you have in place with recurring revenue, the better for your valuation.

Get your financials in shape

 

This is also the time to get all of your financial statements in order. Don’t be a do-it-yourselfer here. Hire a competent CPA or bookkeeper to ensure your financials are accurate and consistent. This is also when you have to STOP running lots of personal expenses through your business. Buyers want to see clean expenses for the business only. Don’t procrastinate. You need to go cold turkey here!

Having clean, well-organized books is critical for giving potential buyers an accurate picture of your business. When it comes time to sell, you will have to explain EVERY line item and whether the line item in question is a one-time expense or an ongoing charge. You also need three to five years of accurate financials so buyers can get a sense of any cyclicality or industry trends affecting your business. Your CPA should specialize in working with small business owners. A few designations to look for are Certified Exit Planning Advisor (CEPA) by the Exit Planning Institute and a Certified Valuation Analyst (CVA) by the National Association of Certified Valuator and Analysts.

Consult your financial and tax advisors 

The buyer is going to look at what you pay yourself in terms of W2 salary and, if you are an S-Corp, what your distributions are from the company. From there, the buyer can estimate how long it will take to get their money back on a discounted cash flow basis.

Get your advisory team in place

Start interviewing attorneys and accountants who are proficient in mergers and acquisitions. Strongly consider hiring an intermediary--either a business broker or an investment banker--to represent you and help you through the selling process. 

Hiring a good investment banker will usually result in a higher sale price and/or better deal terms for the owner. Investment bankers typically have industry expertise and knowledge of possible buyers, plus they can screen possible buyers for you. Investment bankers also know how to structure and negotiate the sale. A business broker may or may not have the skills of an investment banker, but he or she will be able to market your business, help you find the best buyers and set a realistic asking price.

 

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3 Years Out: Steps to consider

Organize your legal paperwork
 

Review your incorporation papers, permits, licensing agreements, leases, customer and vendor contracts, etc. The buyer will want to know about customer contracts you have in place and when those contracts expire. The buyer will also want to know about contracts you have with vendors, and when those contracts expire. Most buyers will be anxious to know when they can contractually change to their preferred vendors.


Start your succession plan
 

Retaining your top managers and sales professionals is critical for the success of your business post- sale. Employment contracts and bonuses are key to retaining these top performers. You also want non-compete and non-solicitation agreements in place, so your key people don’t leave and take your best customers/clients with them. This is especially true if your sale is contingent on an earn-out basis.

 

Know the true profitability of your business

Most privately held businesses claim a variety of nonoperational expenses. Make sure you have supporting documentation for these expenses. For example, your business may be paying for your personal automobile lease. Also, there may be infrequent expenses you have incurred during the past three years that should be excluded in a buyer's analysis of recurring cash flow.

There could be one-time expenses such as software conversion fees or location moves that should be excluded from the annual expenses.


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1 Year Out: Steps to consider

REALLY know your reason for selling
 

Buyers are always curious as to why a seller wants to exit a business. Owners have a myriad of reasons for wanting to sell, but it could be a simple as wanting to retire and see the world. Perhaps they know a relative who hung on to their business for too long, so they were never able to retire fully before they or their spouse got too ill to travel.

 

Keep your eye on the ball 

Don't let your business performance decline because you're overly focused on selling your business. A sudden drop in revenue will only give buyers additional negotiating power to lower their offer. If you are immersed in selling your business and focus exclusively on revenue rather than profit, you could make the common mistake of taking on high-maintenance new clients or customers that increase your topline revenue, but decrease your profit margin and thus will be a drain on your business. Focus on bringing in profitable new business only.

 

Spruce up your “curb appeal”


Make sure your place of work is clean and tidy, and that any necessary repairs have been made. If there is equipment required to run your business, make sure it’s all in working order. Make any outdoor improvements to landscaping, signage, etc.  


Conclusion


Selling a business is one of the hardest and most emotionally wrenching transactions you may ever do in your life…..don’t be a do-it-yourselfer or a Last Minute Louie. There are so many things to consider to prepare for the sale, and what to do after the sale, you need someone to help you through this transition. If you or someone close to you is considering selling their business, please don’t hesitate to contact me. I’d be happy to help.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

What Many Don’t Get About Insurance

Need is always predicated on thoroughly understanding your objectives

Key Takeaways

  • The cost of funding estate taxes, without insurance, is substantial.

  • Insurance cash values are similar to owning a long-term bond portfolio with no mark-to-market risk.

  • The “invest the difference” argument holds up only if you are young.



I recently sat down with a very successful professional who finally acknowledged that he needed life insurance to protect the value of his company for his family. He is under 50 and recently bought some term insurance. He was now willing to discuss funding a larger permanent plan that would pay out if he lives to his life expectancy or beyond.

My client had the usual objections I hear from HNW clients and prospective clients. His first objection was typical of someone who is contemplating a large policy:

1. “Do I really need it?

2. “How should I pay for it?

3. “Why shouldn’t I just stick with term, since it is so much less expensive?”

 

These mental hurdles come up frequently, and any top insurance advisor is able to delineate the issues and help you through the maze of confusion that shrouds this decision. What is the best solution? Let’s look at the first big consideration--need. Some of you don’t care that much about what happens after you die. Others of you want every nickel to go to your family. Still others don’t mind paying some tax, but you want to preserve your best assets and heirlooms for your family. If your goal in estate planning is to preserve your estate for the benefit of your heirs, keep in mind that the cost of paying the taxes and fees from cash flow or liquidity is a form of self-insurance. You not only lose the use of your funds, but you also lose the future earnings.

The cost of funding estate taxes, without insurance, is substantial. Who is going to finance the tax if you don’t have the liquidity? What is it going to cost your family to get liquid? The cost of insurance is a mere percentage of the true cost of the tax. But if you are self-insured, you not only pay the full cost of the tax, but you also pay “taxes on the tax” as well as an interest cost. Self-insurance is not cheap. This is something you have to understand and believe. Do the math. The “invest the difference” argument holds up only if you die young.

 

You set the rules


Buying term and investing the difference is like trying to compare incomparable asset class returns. This is like saying, “My stock portfolio will beat your bond portfolio.” If we go by historic returns, then this is a true statement most of the time. But there have been a few times when bond returns did beat stocks, even with mark to market risks.

Just think this through carefully. When you invest this difference, where will you invest that sum of money? Will you invest it in fixed return assets, with little or no downside risk, or will you invest it in risky assets that are illiquid and have the potential for total loss? Are you going to buy growth stocks and hope the long-term bull market never pulls another 2008 nosedive?” To make this discussion academic, we need to compare similar asset classes with similar risks. Insurance cash values are similar to owning a long-term bond portfolio with no mark to market risk.

Conclusion

Ask yourself, “Are all your assets deployed in high-risk, low-liquidity investments, or do you own any liquid, low-return assets?” If it’s the latter, then ask yourself if you would rather own the bonds in a tax-free wrapper that provides long-term discounted dollars, or in a taxable world where you can lose 10 to 20 percent of the value if interest rates rise?

If you or someone close to you has concerns about their life insurance coverage, please contact us any time. We’d be happy to help.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Incentive Trusts

Tips for handling the transfer of funds from one generation to the next

Key Takeaways:

  • An incentive enables parents or grandparents to financially reward heirs for desired behaviors.

  • Make sure your trustee is fully aware of your trust’s intentions and how the funds should be distributed.

  • Incentive trusts allow you to transfer assets to the next generation in stages—rather all at once—pending the beneficiary’s ability to reach certain life milestones.



Sometimes parents want to leave funds to their children, but they are concerned that their kids may not be responsible enough to manage those funds. Other parents or grandparents wish to ensure that inherited funds do not cause the beneficiaries to become lazy, financially reckless, or unproductive citizens.

To address this concern, funds from trusts are often distributed in stages, such as one-third at age 30, one-third at age 35 and one-third at age 40. For other families, in which the children are already somewhat older, but perhaps the parent is not fond of the in-laws, the funds can be distributed at intervals such as 50 percent upon the death of the parent and 50 percent five years later but not exceeding a date later than when the child attains the age of 65.

Parents and grandparents are typically concerned about education, morals and family values, business and vocational choices, and charitable and religious opportunities. In these types of situations, a parent or grandparent may want to establish what is known as an “incentive trust.” An incentive trusts allows the grantor of the trust to reward heirs for desired behaviors. Likewise, incentive trusts can be structured to penalize heirs for engaging in undesirable activities.

Common incentives

Incentive trusts may be used to provide extra support to the heirs who pursue advanced degrees or who focus on family life. For instance, the trust could be designed to provide enough income for an heir’s family so that only one of the two parents needs to work, thus enabling the second parent to stay home with the heir’s children until those children attain a particular age. There also may be a trust designed to provide funds to heirs who are committed to maintaining the family business, and additional financial support may be provided to beneficiaries who choose to work in lower-paying, but highly rewarding professions that help people, such as social service or teaching.

Finally, some family members may wish to encourage certain behavior in their heirs by requiring specific observances such as religious or charitable opportunities. So, if heirs are involved in a particular cause, such as missionary work, the trust fund will provide them with additional support for themselves and their families. And, they won’t have to worry about requesting additional funds from the trustee on a periodic basis.

When setting up an incentive trust, it is very important that the trustee is aware of the intentions of the grantor. Therefore, in addition to the usual provisions (such as having all income distributed with principal at the discretion of the trustee), the trustee should be given specific authority within the trust, and possibly even a letter of intent from the donor, explaining when and how much of the funds are to be distributed at any given time. It is also important to ensure that the trust does not violate any constitutional or public policy law or standard that would cause the trust to be in violation of a statute or regulation.

Conclusion

In short, it is easy to discuss the establishment of an incentive trust, but there are significant and complex legal, tax, and investment issues that also will arise when creating this type of document. Incentive trusts are not for everyone, and they should be used only in situations in which other types of trusts or investment vehicles are not appropriate. Always consult your advisors before setting up a trust. Contact us any time if you, or someone close to you, is interested in the possibility of setting up a trust to benefit future generations or causes you believe in.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Is Your Business Still the Right Entity Under the New Tax Rule? Part 2

More tips about determining the right corporate, partnership or other structure that’s best for your business—and where you are in life.

Key Takeaways:

  • The legal structure of your business operations can have a significant impact on your annual income tax and estate planning.

  • When you and/or your heirs expect to be at or near the maximum income tax rates, you will generally want to leave appreciated and appreciating assets in the taxable estate, rather than transfer them prior to death.

  • In general, assets with the potential to appreciate in value should not be placed into an S or C Corporation.

As many of you know, The Tax Act of 2017 created a host of changes and considerations for successful business owners in their families. There are six widely used business operating structure. In Part 1 of this article we discussed Sole Proprietorships (Schedule C), Limited Liability Companies (LLC) and Limited Partnerships. Here will take a closer look at the other three entities: General Partnerships, Subchapter S Corporations and Subchapter C Corporations.

4) General Partnership

The rules are similar to LLCs and Limited Partnerships discussed above, except that all of the partners will generally have more liability exposure.

The partners are subject to self-employment taxes on most of their allocable K-1 income, other than certain rental real estate/passive/investment/portfolio income. As noted above, Partnerships are eligible for the potential 20 percent deduction against Qualified Business Income.

Estate and Gift Tax – See Limited Partnership discussion in Part 1 of this article.

5) S Corporation

An S Corp is generally the least costly and easiest type of entity to set up and operate. Like an LLC, income and losses flow to shareholders, and tax is generally paid at the owner level rather than at the entity level.

One of the biggest tax breaks in this type of structure is that the S Corp shareholders can take a portion of the profits as distributions rather than as W-2 income, and payroll tax savings ranging from a minimum of 2.9 percent to 15.3 percent can be achieved.

Company-level debt does not factor into member tax basis here. Distributions must parallel the S Corp’s stock ownership. Shares can only be owned by U.S. resident individuals and certain trusts. S Corps have many restrictive rules and care must be exercised in keeping distributions in the exact proportion as stock ownership. Also, S Corps with excess passive income from rents, royalties and investments can lose their S Corp status. Further, an S Corporation may have no more than 100 members. As noted above, S Corporations are eligible for the potential 20% deduction against Qualified Business Income.

Estate and Gift Tax – Unlike in an LLC, when an S Corp shareholder dies, his or her heirs will only receive a revaluation in the “outside ” basis in their corporate shares – not on the underlying S Corp assets. This is also an issue for any potential buyers of the entity. This can create significant income tax problems for your heirs. Furthermore, complexities of retaining S Corp status can occur if an ineligible owner comes into the mix – e.g., an ineligible trust or nonresident alien.

6) C Corporation

C Corps are similar to S Corps with respect to the reasonable cost of formation and operation. The big difference between S Corps and C Corps is that C Corps pay tax at the entity level; however, the 2017 Tax Act dramatically dropped the C Corp rates to a flat 21 percent. C Corp shareholders will still pay taxes on W-2 earnings and certain dividends and other distributions made from the C Corp– making them vulnerable to the highly tax inefficient “double taxation.”

It is important to note that “personal service” businesses such as attorneys, doctors, accountants and consultants can operate as C Corps. Unlike the pre-2018 rules, the 2017 Tax Act will allow Personal Service Corps (PSC) to benefit from the new 21-percent rate on retained taxable income, rather than the maximum individual rate imposed under the old rules.

An unlimited number of shareholders are allowed and the C Corp can generally choose any tax year-end. Most other entities are generally limited to calendar year-ends.

Estate and Gift Tax – Similar to S Corps, a negative characteristic of C Corps is that upon the death of an owner, there is a revaluation of only the stock, not the underlying assets. Lack of restrictions on ownership make C Corps more flexible from an inheritance standpoint.

Conclusion

Congrats on building such a successful and rewarding business enterprise. Make sure you and your advisors evaluate specific facts and changing life circumstances to make sure the goals you have for yourself, your family and your heirs remains on track under the new tax landscape.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Three Questions to Answer Before You Purchase Life Insurance

Life insurance can be an extremely important, even essential, part of your financial plan. One of its most attractive aspects for many individuals and families is the death benefit of the policy—the money that the insurance company pays out in the event of the insured’s death.

 

But navigating the life insurance landscape can be tricky—and people often make costly mistakes. Three of the biggest we see regularly:

 

  • Buying too much—or too little—insurance due to a lack of understanding of their true financial needs

  • Paying for life insurance using a less-than-ideal method or executing that payment method poorly

  • Misunderstanding life insurance’s purpose and the reasons for having it

 

In order to make smart life insurance decisions, there are three questions you need to ask yourself and answer.

Click here to read more:

Three Questions to Answer Before You Purchase Life Insurance

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Do I Qualify for Social Security Disability Benefits?

Social Security can provide benefits long before you are at Full Retirement Age (FRA) if you are disabled.  In order to qualify for Social Security disability benefits, you must have paid into Social Security (typically 10 years, but situations can vary).  Read on to see if you qualify for disability benefits.

Are you legally blind?

If you answered “yes” and earn less than $2,040 per month, you may qualify for full or partial benefits.  In order to see what your potential benefit might be, you must apply.  Wage earners who make more than $2,040 per month will not qualify for any benefits.  If you are not legally blind, move on to the next question.

Do you make more than $1,220 per month?

If you earn more than $1,220 per month, you will not be eligible for Social Security disability benefits.  If you earn less, move on to the next question.

Did you pass the “Recent Work Test” and the “Duration of Work Test”?

If you passed the two aforementioned tests and have been limited in your ability to do basic work (lifting, sitting, walking, or remembering) and are unable to perform gainful employment, you may be eligible for Social Security disability benefits.  You will have to apply to know for sure.  If you did not pass the tests, move on to the next question.

Are you a widow or surviving divorced spouse of a worker?

If you answered “yes” and are between ages 50 and 60 and your disability started within 7 years of the spouse’s death, you may qualify for benefits.  You will have to apply for benefits to see what your benefit might be.  If you answered “no”, then you will not qualify for any disability benefits.

 

Collecting Social Security disability benefits 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.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Is Your Business Still the Right Entity Under the New Tax Rule? Part 1

What you need to know about corporations, partnerships and other structures under which you do business

Key Takeaways:

  • There are six widely used business operating structures. Each has pros and cons depending on the owner’s income and estate planning options.

  • Choosing the right legal form for your business is critical for both legal and tax purposes

  • The Tax Cuts and Jobs Act of 2017 (2017 Tax Act) made significant changes that should be factored into your entity choice.


As many of you know, The 2017 Tax Act made significant changes to the tax code. Most significantly individual tax rates have dropped and now cap out at 37 percent (vs. prior 39.6 percent). Here are some of the other highlights:

  • The C Corp tax rate has decreased from 35 percent to 21 percent

  • Flow-Through entities and Sole Proprietors are generally eligible for 20 percent taxable income reduction which results in a maximum tax of 29.6 percent (vs. 37 percent) on up to $315,000 of Qualified Business Income.

  • Estate and gift tax rates have decreased from 45 percent to 40 percent (but only on net assets exceeding $11.18 million per spouse for 2018 – nearly doubling the prior exemption). However, most of these provisions will sunset in 2026, making long-term planning even more important – and challenging.

One of the most common questions we get from clients and friends is: “Which legal structure should is best for my new or existing business? My standard answer is: “Well, it depends on your specific facts.”

There are a multitude of legal, tax and operating issues to consider, and one size certainly does not fit all. The general choices for operating a business include the following:

1.     Sole Proprietorship – Schedule C

2.     Limited Liability Company (LLC)

3.     Limited Partnership

4.     General Partnership

5.     Subchapter S Corporation

6.     Subchapter C Corporation

There are also other legal entities that may be worth investigating for certain operations, including trusts, cooperatives and joint ventures in unincorporated form.

Following is a general summary of the pros and cons of the most common forms of operations and how structure may impact income tax and estate tax planning.

1) Sole Proprietorship

This is by far the simplest form of doing business and requires very little in the way of startup costs. While legal liability exposure is highest in this form, owners can still have employees, pay themselves a W-2 and fund various benefits in a Schedule C business. As noted above, Sole Proprietors are eligible for the potential 20% deduction against Qualified Business Income, with limitations phased in once taxable income exceeds $315,000 per taxpayer (not available to certain “specified service businesses”).

Estate and Gift Tax – Upon the death of the owner(s), the legal entities’ business and personal assets will transfer to trusts or heirs as outlined in the taxpayer’s trust and estate documents. Various minority and marketability discounts available to other legal structures are not available in a Sole Proprietorship.

2) Limited Liability Company (LLC)

LLCs are by far the most popular form of doing business for a variety of reasons, including limited legal liability for other members’ bad behavior, as well as flexibility in modifying the tax structure as your business plan evolves. There are various federal elections available to treat the entity in a variety of ways for tax purposes – see IRS Form 8832. The remaining discussion assumes a Partnership election is made.

Taxable income and losses (as well as credits) flow through to LLC members (and retain their “ordinary” or “capital” character) and member tax basis is adjusted. In addition, both partner and third-party loans can increase member tax basis. Also, moving assets and members in and out of the LLC is generally easier from a tax perspective than it is for a Corporation. As noted above, LLC’s are eligible for the potential 20 percent deduction against qualified business income, with limitations phased in once taxable income exceeds $315,000 per taxpayer (not available to certain “specified service businesses”).

Estate and Gift Tax – The most significant estate tax advantage associated with operating as an LLC that’s taxed as a Partnership is that upon the death of an LLC member, both the “outside” tax basis in the LLC units inherited and the tax basis in the assets held by the LLC on the date of death will be revalued to their fair market values. This offers a very significant advantage to your heirs when the LLC has increased in value during your lifetime. As discussed later, this “step-up” in basis of the underlying assets of an LLC is not afforded to either S Corporations or C Corporations.

3) Limited Partnership

A Limited Partnership must still have a General Partner (GP). LPs are generally not subject to self-employment tax on their K-1 income as is the case with most GP and LLC members. As noted above, Partnerships are eligible for the potential 20 percent deduction against Qualified Business Income.

Estate and Gift Tax – The value of the general and limited units will vary much more than the LLC units, based on the specific partnership terms.

Conclusion

An LLC or Limited Partnership generally provides you with the most flexible lifetime and post-mortem planning opportunities for your business. But you and your advisors must fully evaluate your specific facts and options based on the type of business operations you own and your overall estate plan. It is not uncommon for successful owners to have a variety of entities to achieve the most beneficial operational and income/ estate tax results. In Part 2 of this article we will discuss the other three common entity options: General Partnerships, Subchapter S Corporations and Subchapter C Corporations.

If you or someone close to you has concerns about the tax implications of their business structure, please don’t hesitate to at 303-440-2906 or schedule a call by clicking here.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

What’s Keeping the Affluent Up at Night? Their Kids

It’s never too early help kids improve the financial literacy of the young people in your life.

Key Takeaways

  • Research shows that high-net-worth individuals care more about the impact of wealth on their heirs than how much (or how little) wealth will be passed on.

  • The average American college student graduates with $37,000 in student loan debt.

  • Two thirds of affluent Americans think the young people in their lives place too much emphasis on material possessions. Over half think they are naïve about the value of money.

  

Does great wealth really bring fulfillment? An ambitious study of the highly affluent by Boston College suggests not. The study found a surprising litany of anxieties: their sense of isolation, their worries about work and love, and most of all, their fears for their children.

Further reinforcing that finding, the biannual U.S. Trust Survey of Affluent Americans asked parents what they worried about most. Their primary worries had nothing to do with tax or wealth-transfer issues. No, their top six concerns were centered on the impact of wealth on their heirs!

  • 65 percent said: “Too much emphasis on material things”

  • 55 percent said: “Naive about the value of money”

  • 52 percent said: “Spend beyond their means”

  • 50 percent said: “Initiative could be ruined by affluence”

  • 49 percent said: “Won’t do as well financially”

  • 42 percent said: “Hard time taking financial responsibility”

Research found that the greatest  fear of affluent successful people is not about making more money, or protecting what they have—it’s about how their wealth will affect their heirs and their heirs’ families. Dr. Bob Kenny, the principal researcher of the Boston Study and also a visiting faculty member at the Institute for Preparing Heirs, stated that philanthropy is an excellent vehicle for discovering meaning and value in the wealth that heirs receive. Philanthropy he once said, “helps teach the giver that money sometimes carries its burden with it and can harm or unsettle a recipient if given without caution.”

Perhaps participating in the act of philanthropy gives an heir a clearer view of some of his or her own personal feelings about inheriting wealth.

You might say the big secret is that the rich consider their greatest treasure to be their children, not their financial assets. To hear that about the rich may alter conventional wisdom at a time when we are facing the largest transfer of wealth in history—almost $1 trillion dollars a year will be passed down to future generations for the next 50 years in the United States alone! Couple that with a historic post-transition loss rate of 70 percent and you have both a tragedy and an opportunity in the making.

Learn how to initiate conversations about the topic of money and its impact on the future generations in your family. It’s the primary concern of the parents (not just the latest tax regulations).

In the future, well-prepared parents and grandparents will help complete the second half of the estate-planning equation—preparing their heirs for the assets. That is the future of estate planning—and good parenting.  

Thanks to The Financial Awareness Foundation, (TFAF) April is officially Financial Literacy Month in the U.S. but there’s never a bad time to focus on financial education of the next generations. A lack of financial preparedness has huge societal costs, and in the coming years as Americans age, these costs will likely increase.

We need to educate all young Americans about the importance of starting early. For example, young workers will need to save close to $1,000 per month to remain in the middle class; $925 per month for 30 years at 8 percent grows to $1.26 million, but that amount saved for 20 years only grows to about $508,000. Young people are often surprised to learn that the few hundred dollars they’re saving each month may not be enough to retire into a middle-class lifestyle.

According to TFAF, too many young people and their families are burdened with excessive education debt and other forms of debt. Student loan debt exceeds $1.3 trillion and is the second largest class of consumer debt after mortgages. For instance, the college class of 2016 graduated with an average of $37,000 in student loan debt.

We need early financial education in the home, mainstream financial literacy programs starting at a young age, and government funding for a public awareness campaign much like those on public health and safety issues. It should be incorporated into school curricula, media campaigns, corporate wellness programs, and, most importantly, ongoing parental discussions.

The next step is for you to take action. Encourage the young people in your life to educate themselves about financial freedom. They can start by reading some articles, using a mobile budgeting app, or signing up for a personal finance class at a community college. Encourage them to try to live on less than they earn each month and automatically save the difference. While they may be able to save only a little, it is OK to start small and grow into a larger savings plan over time. The key is to start now!

Conclusion

By doing so, you and your heirs will have more financial freedom and personal choice—two worthwhile things that money can help buy.  Don’t hesitate to reach out to us for assistance with short-term or long-term financial goals you may have for yourself or your young adult children. We’re here to help.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

This Powerful New Tax Strategy Is a TRIP

Key Takeaways

  • 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.

Conclusion

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.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

 

Buy-Sell Agreements

20-plus issues for every closely held business owner to consider


Key Takeaways:

  • Buy-sell agreements come in three basic forms but must be individually tailored to suit the specific needs of your business.

  • Make sure the agreement meets your ongoing needs, including tax, retirement, insurance and funding issues.

  • Without appropriate “exit” plans in place, ownership changes can be worse than Hollywood divorces—bitter, expensive and devastating to all involved.



Almost all owners of closely held businesses put all of their time, effort and money into launching and growing their businesses. Tragically, they put little effort into protecting what they have built from devastation caused by one or more of the owners leaving the business. Without an appropriate “exit” plan in place, changes in business ownership can be worse than a Hollywood divorce—bitter, expensive and devastating to all involved.

Don’t be fooled! Changes in ownership happen every day in all types of businesses for a multitude of reasons: death, retirement, disability, divorce, voluntary and involuntary termination of employment, lawsuits, financial and economic setbacks, bankruptcy, and selling and gifting interests, just to name a few. The disruptions caused by these events usually result in severe financial consequences for everyone involved, including collateral damage to customer, supplier, banking and employee relationships as well as to long-term company goodwill.

Consider a buy-sell agreement from Day One


Perhaps the biggest tragedy is that most, if not all, of the aforementioned problems can be avoided by putting a well-drafted buy-sell agreement in place right from the start. That’s when all the owners are still in the “honeymoon” stage of the business and relations are most amicable. However, it is never too late to put a buy-sell agreement in place, and some honest thought and open communication will strengthen and protect the business and bring peace of mind to everyone involved. Remember, ownership changes are bound to happen, but having a plan in place to deal with those changes will always smooth out the road ahead.

Next steps


Now that you are convinced that a buy-sell plan is critical for the health and well-being of both the business and the individual business owners, where do you go from here? First, consult with an experienced business lawyer who can walk you through the process and help craft a plan that fits the specific needs of both the business and the individual owners. Second, understand that no two agreements are ever the same, although they generally fall into one of three categories:

1.      Cross-Purchase Agreements, which can be ideal for a business with a small number of owners. When a triggering event occurs, the remaining owners directly purchase the departing owner’s interests in the business.

2.      Stock Redemption Agreements, which can be simpler and easier to structure. Generally they can be better-suited for entities with more owners. With these types of agreements the entity purchases the ownership interests of the departing owner. The remaining owners receive an increase in the value of their interests, not in the number of interests they own.

3.      Hybrid Agreements, which are a combination of cross-purchase agreements and redemption agreements. Generally the entity has the obligation to redeem the interest of the departing owner, but the remaining owners have the option of directly purchasing the departing owner’s interests if the entity is unwilling or unable to do so.

In order to determine which type of agreement will best suit your needs, consider the following issues:

  1. How many owners does the business have today and will have in the future?

  2. Is the business family-owned or are third parties involved?

  3. What type of business is involved, and are there specific issues that need to be addressed relating to the entity’s business, such as professional licensing or trade issues?

  4. What is the legal structure of the business: corporation, S corporation, partnership, limited liability company?

  5. What is the age and health status of each business owner?

  6. Is each of the owners insurable?

  7. What percentage of the business does each owner hold?

  8. What is the value of the business, and how is that value determined?

  9. What are the tax implications of each type of agreement?

  10. What are the transfer implications of each type of agreement?

  11. What restrictions will be put on the transfer of interests?

  12. Will the interests be subject to rights of first refusal?

  13. How will the business be valued and the purchase price determined? How often will the business be revalued? Will the interests be valued differently depending on the specific transfer event?

  14. Will there be penalty provisions for violating the terms of the agreements and/or conduct damaging the business?

  15. How will the transfer of interests be funded? Will insurance such as life insurance and disability insurance be mandated, and if so, how will premiums be paid?

  16. How will the transfers be paid, all upfront or over time? If the payments are over time, what are the terms and the arrangements to secure payment?

  17. Is the agreement aligned with other important legal documents such as the entity organizational documents, employment agreements, business agreements and contracts, banking agreements, and the estate planning documents of the individual owners?

  18. Coordinate the agreement with related property that may be owned by each of the business owners. Examples include affiliated businesses, insurance policies, land and personal property, intellectual property, and leases.

  19. How will termination of the business be handled?

  20. How often will the agreement be reviewed? Doing so annually is a good idea.

  21. How will disputes related to the agreement be handled—litigation, mediation or arbitration?

The foregoing is not a complete checklist of every issue that needs to be considered, but it will give you a good platform to begin discussions between you and your legal counsel.

Conclusion


First, properly structured buy-sell agreements are critical to the survival of any closely held business; they are not an option. Second, these agreements must be tailored to the specific needs of the business. One size doesn’t fit all. Finally, businesses and relationships constantly change; consequently, buy-sell agreements must be reviewed and updated regularly. An out-of-date agreement is next to worthless.

 

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.



Start Your Own Charity

Don’t let a lack of available charities stymie your charitable passions (and tax savings opportunities)


Key Takeaways:

  • If you are passionate about a particular cause and there is no charity that supports it, you can start your own charity.

  • Charities can be set up to support overseas causes as well.

  • Self-started charities can be especially beneficial for those planning to donate over $10,000.

 

Let’s say you are at the stage in life when you want to start giving back in a more consistent and meaningful way. The only hurdle: There is no existing charity that supports the exact causes or initiatives you feel most strongly about. In the past, you’d have to take your checkbook elsewhere.

The good news: With the right planning, you can start a charity to support exactly the causes you care most about--anywhere in the world. There are many charities that are registered in the U.S. that support overseas causes. For instance, Help for Animals India, a charity based in Seattle, was started to help the animals of India. Many alumni groups also set up nonprofit organizations to support the educational institutes at which they studied.

Having said that, while such nonprofit organizations can be formed, the ultimate use of funds is determined by the board of trustees. Under U.S. rules, a domestic charity can’t be committed to give to a particular foreign organization. It can be formed with the intention of supporting a specific organization, but the U.S. board of trustees must make an independent determination that the overseas organization in question qualifies under U.S. rules.

So what does it take for you to set up your own U.S.-based charity, and what should you look out for?


Types of organizations that qualify

According to IRS regs, an organization may qualify for exemption from U.S. federal income tax if it is organized and operated exclusively for one or more of these purposes:

  • Religious.

  • Charitable.

  • Scientific.

  • Testing for public safety.

  • Literary.

  • Educational.

  • Fostering national or international amateur sports competition.

  • The prevention of cruelty to children or animals.

Examples include:

  • Nonprofit old-age homes.

  • Parent-teacher associations.

  • Charitable hospitals or other charitable organizations.

  • Alumni associations.

  • Schools.

  • Red Cross chapters.

  • Boys’ or girls’ clubs.

  • Churches.

To qualify, the organization must be a corporation, community chest, fund, foundation or other entity with articles of association. A trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify.

Set-up process

Step 1: The basics
The basics include:

  • Identifying a cause.

  • Selecting a name and checking with the state corporation office to see whether the name is available.

  • Formulating the mission statement.

Step 2: Incorporation
You and your advisor(s) will need to draw up articles of association and bylaws. The organization must be set up under a state not-for-profit statute. Experts strongly recommend using an attorney experienced in the formation of nonprofit organizations to do this. File the articles of association with the state corporation office.

Step 3: Tax formalities
First the charity will need to get an employer identification number (EIN). This ID is similar to an individual’s Social Security number.

Then you must apply for federal and state/local tax-exempt status as a private foundation. You will also need to fill out Form 1023 or 1024, depending on the type of organization you wish to form. This is by far the toughest and most expensive part of the process. The form runs up to 26 pages with questions that require detailed answers. All the correct documents must be attached to the application to make sure the process runs smoothly.

The user fee per application is $400 for organizations with gross receipts that do not exceed $10,000 annually over a four-year period and $850 for organizations with gross receipts that exceed $10,000 annually over a four-year period.

Further, it takes about a year to be approved. The organization must figure out how to operate while waiting for approval from the IRS. Most organizations say, “IRS tax-exempt status is pending.” The donor shouldn’t claim a tax deduction until IRS status is approved. Also, the organization needs to understand the documentation rules it must follow when other people give contributions.

Conclusion

Again, the upfront time and effort might be best for those considering donating amounts upward of $10,000. There is also an ongoing commitment of time and expense to comply with annual filing requirements at both the federal and state levels. Make sure you and your advisors have all your paperwork in place before getting started. But, most who’ve gone through the process will tell you it’s worth the effort to get it right from Day One. Once you do, you can focus your energies on what you do best—funding causes you believe in, not wrestling with tax rules and regulations.

Contact us any time if you or someone close to you is thinking about taking their philanthropic game to the next level.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Life Never Stops Changing

Neither do your giving and financial decisions


Key Takeaways

  • The most impactful gifts are often the result of personal tragedy or triumph.

  • We spend so much of our lives in the wealth accumulation phase that it’s easy to forget the positive impact that our money can have on others.

  • An astute advisor not only helps you optimize your investments, cash flow and wealth protection, but your legacy as well.

Meetings with your financial advisors bring to mind thoughts of balance sheets, net worth statements, stock options, investments, insurance policies and employee benefits. While these documents tell your various advisors what you have, they don’t tell them who you are, what you want or what truly motivates you.

I’ve learned over the years that after gaining a client’s trust, and after carefully opening the door to their personal side, we find out what truly makes them tick and what shapes the lens from which they see the world.

Often we come across tremendous stories of tragedy and triumph (or both). These are pivotal moments in an individual’s background – typically turning into a focus for future action. And sometimes that action is philanthropic – one that highlights the triumph or attempts to solve the problem that caused the tragedy.

For instance, a daughter’s death at the hands of a drunk driver left a family with such a need for a voice that Mothers Against Drunk Driving (M.A.D.D.) was brought into existence. Today, M.A.D.D. is the largest advocacy group in the country focused on preventing individuals from driving while intoxicated – its existence motivated by a heartbreaking loss.

Everyone deals and reacts to adversity in their own way – we must understand and accept that.

While tragedy is one side of the equation, there are also triumphs to celebrate – easier to discuss and just as big a motivation. Many years ago I worked with an extremely wealthy individual who kept telling me that he wasn’t charitable and that he didn’t really care about much of anything. He went on at length about how he was “self-made” and had come from nothing.

It wasn’t until when he revealed that he’d been raised in an orphanage that I realized how critical the orphanage had been to his upbringing and success. Today, that orphanage is endowed by a large gift by my client. It not only represents his personal victory, but an acknowledgment to the people who helped him triumph over his circumstances.

For some, it may be a coach, teacher or program that launches a successful athletic or academic career. It may be the person who helped you discover that you were good at math or the person who took the time to elicit your musical genius when no one else could see it. By doing so, we may discover a desire to make a gift, to return the favor, to pay it forward.

Life Never Stops Changing

Change is an inevitable part of life. We start new jobs, we send kids off to college, we lose a parent or gain a grandchild. Change can be daunting – but viewed through a different lens, it presents opportunity to raise the important questions about philanthropy.

In many circumstances, philanthropy can be the best solution to the change that’s taking place – if only we think to ask our advisors how.

Let’s look at some major life changes and see where you and your advisor might discuss gift opportunities at the appropriate time.

Suppose you are approaching retirement. Let’s assume you are the major breadwinner of your household and you are also hoping to downsize. As ordinary income (your paycheck) ceases, the desire to convert dormant or low yielding assets into supplemental income normally increases. This may be an opportunity to reposition low-basis assets into a pooled income fund (PIF), a charitable remainder trust (CRT) or even a gift annuity. Furthermore, the downsizing might free up additional capital with which to consider similar split interest gifts.

The birth of a grandchild may inspire a fund for college education. You can go the traditional 529 route or consider certain types of CRTs that turn into income in 18 years.

Widowhood is another significant life change that triggers emotional and financial upheaval, and often changes to family dynamics. If your late spouse was the main financial decision maker in your relationship, you may feel lost and frightened about the future. Perhaps the best solution is simplification and consolidation – taking multiple accounts and creating one large gift annuity, charitable trust or pooled income fund that delivers quarterly income. You should also examine gifts such as life estate agreements – which relieve the children of dealing with a house they usually don’t want anyway.

A serious illness is another major life change that brings a host of emotional and financial worries. But as you and your family delve into researching your loved one’s illness and treatment options, it can also motivate giving to support further research into curing or ameliorating that illness or disease.

Change is everywhere and change is constant. While some changes go unnoticed, others represent a prime turning point in our lives. We spend so much of our lives in the wealth accumulation phase that we sometimes forget the power our wealth can have to make lives better for others.

Conclusion

Just as an astute advisor can help you optimize your investments, cash flow and wealth protection strategies, he or she can also help you optimize the power of your giving.

All you have to do is email us or give us a call.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Health Care Decisions Factor into Comprehensive Wealth Planning

What you need to know about advanced medical directives, guardianships and durable powers of attorney


Key Takeaways:

  • Age, accidents or illness can prevent even the most well-organized and financially astute people from handling their own finances or health care decisions.

  • Thanks to advances in medicine, health and longevity, many people are living 30 to 40 years after their prime wealth accumulation years have ended.

  • Advanced medical directives deal with personal care and medical issues, including surgery, placement, medication, assisted living, full skilled-care living and end-of-life decisions.

  • If you don’t have the necessary documents in place, unfortunately these decisions will have to be made under a court-supervised process. 

Many people are diligent about planning for and protecting themselves against personal, legal, tax and financial problems. But health care, or the ability to make important decisions about long-term care, often gets overlooked.

Life insurance statistics show that a 50-year-old now has at least a 50/50 chance of living to 110. That’s right a century, PLUS another decade!

With an average U.S. retirement age between ages 60 and 65, you could realistically expect to live for 30 to 40 years after your prime wealth accumulation years have ended. In estate planning, we often talk about preserving wealth and passing it on to the next generation. But given the demographics of aging, inflation, health care needs, etc., it is quite possible that your wealth will run out before you do.

That’s why it’s so critical to appropriate estate planning documents in place, including wills, trusts, appropriate beneficiary designations and designations of guardians.

Unfortunately, because of age, accident or illness, many people may face the prospect of being unable to take care of their own finances or to make their own health care decisions. Therefore, proper documents need to be put in place to allow someone else to make appropriate decisions on your behalf.

Long-term health care costs
Because of health and aging, everyone faces the prospect of financing long-term health care needs, including the possibility of assisted living and full skilled-care living. If these costs are not planned for, they can be financially devastating.

We can’t fight the aging process or prevent unexpected events that impact our quality of life. However, proper planning and documentation can go a long way toward creating peace of mind. It’s very comforting to know we have put in place appropriate planning to eliminate, to the extent possible, financial, legal, tax, health care and other problems that, one way or the other, are bound to occur during our lifetime.

Appropriate lifetime powers of attorney
Regardless of age, health, assets and income, everyone needs to have in place a well-drafted “financial durable power of attorney” and appropriate advanced medical directives.

An advanced health care (or medical) directive is a set of written instructions that people use to specify the actions they want to be taken for their health in the event they are no longer able to make their own decisions due to illness or incapacity. The instructions appoint someone (an “agent”) make such decisions on the person’s behalf.

Advanced medical directives normally include health care powers of attorney, living wills and more. If you are unable to attend to your financial, personal care, or health care matters because of age, accident or illness, no one can make these decisions for you unless the decision-making authority has been specifically designated in writing.

Financial durable powers of attorney concern assets, income, other financial matters and dealings with government agencies. Advanced medical directives deal with personal care and medical issues, including surgery, placement, medication, assisted living, full skilled-care living and end-of-life decisions. If you do not have these documents in place, unfortunately these decisions will have to be made under a court-supervised process known as a “guardian of the person” (for personal care and medical issue decisions) or a “guardian of the estate” (for financial matters). Guardianships are expensive, personally intrusive and perhaps the worst way to manage any of the decision-making processes.

The proceedings can be very traumatic and expensive. Guardianships of the estate or person are easy to avoid if the appropriate documents are put in place. A final word of caution: Be careful about using simple forms! Simple forms often ignore many of the decisions that will have to be made throughout the course of a lifetime; the decisions that may be critically important to the family need to be specifically addressed in the documents.

Conclusion
You have six major types of estate planning needs—health care is one and avoiding guardianships another. We’ll discuss the other four in a future article. You need to be aware of these issues and of the significant dangers caused by insufficient planning. Nobody enjoys discussing the possibility of one’s demise or deterioration. But, the sooner you do, the sooner you can get on with the business of enjoying all that life has to offer, especially with those closest to you.

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

What Should You Do If You Strike It Rich?

If a few million dollars—or more—fell into your lap tomorrow, what would you do?

Sudden wealth isn’t a common or reliable way to get rich, but it can and does happen. Some big drivers of sudden wealth include:

  • Receiving a substantial inheritance

  • Getting a major settlement in a divorce or a lawsuit

  • Receiving a big payout because of stock options or the sale of your company

  • Winning the lottery

But while sudden wealth may sound like a dream come true, it’s often accompanied by serious challenges resulting from the “sudden” aspect of that money. With sudden wealth, everything about being rich—the good and the bad—happens all at once. In contrast, most people who build wealth slowly are able to address issues and concerns incrementally over time.

The result: Sudden wealth can be an emotionally charged and overwhelming experience. Sometimes there are emotional challenges because of the source of the money—a relative who died, for example. Feelings of panic or guilt can go hand in hand with the feelings of excitement. All those swirling emotions can cause recipients of sudden wealth to make bad—sometimes exceptionally bad—decisions about the money and about their lives.

Here’s a look at how you—or someone you care about, such as your children—can prepare to deal with sudden wealth effectively to realize amazing opportunities while avoiding the many pitfalls of “striking it rich.”

Click here to learn more:

What Should You Do If You Strike It Rich Flash Report

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.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

What is Good Advice from a Wealth Manager? Part 1

Investing should be just a small part of the conversation                                    

By Robert J. Pyle, CFP®, CFA

Key Takeaways

  • 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.

Diversified Asset Management Financial Advice Model.JPG

Commission-based advisors are still capable of making smart investment recommendations, but they don’t have a specific investment philosophy or for each client they serve. They frequently change philosophies when new ones come out each week from the “people upstairs.”

Whether human or machine, advice providers at the major financial institutions don’t normally spend time educating their clients about their philosophy or provide them with unique ideas to help them build their wealth. Their business model generally doesn’t allow them to invest the time in doing what’s in the very best interests of each client—they just need to make sure their recommendations are “suitable.”

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.


Wealth Managers/Trusted Advisors using the fee-only model  

By contrast, wealth managers use a disciplined process to interview a prospective client and are more selective about who they take on. The client is always at the top of the model and wealth managers determine the best solutions for each client using an in-depth method that I’ll share with you shortly. Of course that takes a special type of skill, independence and expertise. Research from CEG Worldwide shows that only one out of every 16 financial professionals (6.6%) are truly consultative wealth manager

If you’re still not sure how a wealth manager works with clients, let’s take a closer look that the process they follow. Here’s how it works at our firm:

Wealth+Management+Consulting+Process-DAMI+new+version.jpg

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.

Conclusion

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.

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.

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

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You Love Your Collection

Have you done the tax, estate and charitable math?

                                                                                                      
Key Takeaways

  • Collectibles are considered “tangible personal property” and are, therefore, taxed differently than other capital assets.

  • For collectibles, the long-term capital gains tax is at 28 percent (not 20 percent) as it is for stocks or real estate.

  • Gifting collectibles to charity requires a qualified appraisal and the recipients must be used for its charitable purposes. If not, you’ll have to take a less valuable deduction.

 

It is estimated that 30-percent of high net worth families collect art, antiques, coins, classic cars or other valuable assets that aren’t traded on an open exchange. Often referred to as passionate assets, they represent both a challenge and an opportunity for advisors and their clients.

Many enthusiasts don’t think of their collectables as they do their other assets – collectibles are loved, cherished, and coveted. They hold a meaning and identity that is incomparable to their economic value.

If you’ve ever been to a classic car show and stayed less than an hour, you did it wrong – to put it bluntly. Ask an owner about their gleaming, perfect specimen of a 1940 Duesenberg and you’ll get a detailed rundown of its history from the factory floor to present day, sparing no details in between. This is true for most collectors – be it toy trains, fine art or baseball cards.

That visceral connection is what makes planning for the “succession” of the collection so challenging. Yet, plan they must. Is the next generation even interested in the collection? Better find out. Who owns the collection? Better find that out, too. It’s the planner’s chance to make a huge difference in the final value to the family.

Tax considerations

VERY IMPORTANT: Collectibles are considered “tangible personal property” and are, therefore, taxed differently than other capital assets are. For collectibles, the long-term capital gains tax is at 28 percent, not 20 percent, like it is for stocks or real estate – that’s a significant bump. Furthermore, gifting your collectibles to charity gets complicated because you need a qualified appraisal of the collectible at the time of the gift. Further, the charity must be able to use the gift for its charitable purpose in order for the deduction to be at fair market value instead of the less valuable cost basis.

Proper planning can address these issues and you need to make sure your advisor can assist you properly, or have access to an expert specializing in this area. Keeping the collection in the family can be accomplished only with solid planning – as well as preventing a fire sale to create liquidity to pay estate taxes at the death of the collector.

What matters is aligning your goals for their collectibles with the tools and strategies that will accomplish them.

Make sure your advisors can help you with questions like these:

  • Do we use a pooled income fund to sell of the collection little by little?

  • Do we transfer to a private operating foundation and endow it with capital to keep the collection in the family?

  • Do we utilize monetized installment sales to defer capital gains tax for 30 years as we liquidate?

Any or all of these strategies may be applicable to your situation. If he or she hasn’t done so already, make sure you open the dialogue with your advisor(s) about your valuable collections.


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.

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.