Let’s just get this out of the way, right from the top: I am not an attorney, and I am not a CPA. I do not practice law or prepare taxes. However, due to my education and experience, I do know an awful lot about estate planning and taxes. My degree is in Trusts and Estate Planning, I am a CFP® professional, and I have worked at firms that prepared taxes for their clients, when I participated in tax preparation.
If you aren’t a football fan, forgive me; football just lends itself best to this analogy. Imagine your team has the greatest draft in history; you get Jerry Rice, Randy Moss, Barry Sanders, Travis Kelce, and Peyton Manning all on the same team (I know this isn’t possible, but just go with it). The best players at their positions you could possibly get! But there’s a problem; none of them know the play the other players are going to be executing. It doesn’t matter how talented the players on the field are, the team ultimately won’t be successful.
Great Players, No Playbook
Sometimes, your financial life can look like this. You have an amazing estate planning attorney, a great CPA, a competent investment manager, an insurance agent that covers what you need covered, and a budget that allows you to live how you want to live and still squeeze in some savings. That seems like the perfect situation! However, often what we find when we work with new clients is that the plans, while all individually very strong, aren’t working together. In fact, sometimes they can work AGAINST each other.
Putting a strong playbook in place is the best way to ultimately reach your goals. Our role in our clients’ lives is to make sure we have a playbook in place that they understand, are comfortable with, and is successful.
Preventing the Big Mistakes
Here are just a few of the ways that we have helped our clients over the years prevent some big mistakes that otherwise would have occurred:
1. Disinheritance
a. A really good trust or will is a must for every adult with even modest assets. And, you really do get what you pay for.
In some of our estate reviews, we have seen newly drafted documents that spell out an inheritance for children that will never happen. All your money is held in specific types of accounts; those accounts either go to your estate, or they have a beneficiary attached to them. A will only stipulates what will happen to your assets that go through probate. Any account that has a beneficiary on it bypasses probate. Your attorney could put together the BEST estate plan the world has ever seen; if your money doesn’t flow through that estate plan properly, some people are going to be left without an inheritance, or without a timely inheritance.
Takeaway: Make sure your team coordinates well when creating estate documents.
2. Missed tax deductions
a. We could write a book on this one. Whether it’s a business owner who isn’t getting their maximized benefit from the Qualified Business Income (QBI) deduction, large charitable gifts that are missed and the return needs to be amended, 529 contributions on a state tax return, to missed depreciation deductions or real estate tax deductions, we’ve seen just about all there is to see. The reality is this: taxes are incredibly confusing. Even an excellent CPA can benefit from a second set of eyes, especially when that second set of eyes is a Certified Financial PlannerTM who knows your entire financial situation, not just what your tax statements say once a year. The amount of taxes saved by our clients when we have caught these mistakes has not been insignificant.
Takeaway: Make sure tax planning is a part of your annual financial planning activities.
3. Missing insurance coverages
a. Two of the most common insurance coverages that we see missed are life insurance (not having enough) and umbrella liability insurance. An integral part of our planning process is not just to make sure that your money is working hard for you, but also to make sure that you get to keep that money, regardless of what the future holds. A car accident can have a severely negative impact on your financial life if you do not have the proper coverages in place. Thankfully, we have helped our clients find and plug the insurance holes that they have before a significant issue has arisen.
Takeaway: Get an insurance checkup that considers all facets of your financial life, so you can make informed choices.
4. Improper investment holdings and allocations
a. This is an extremely common issue. In many instances, this can come down to working with a professional who is compensated for selling certain investments or funds. We have seen clients come to us with no taxable income, invested in tax-free investments that don’t pay the highest income possible, because their broker made more money on the tax-free investment than on a higher returning investment.
An investment allocation is also something that should be tailored to the individual. Your allocation should support your overall plan, it shouldn’t be selected in a silo or just with the question, “how aggressive do you want to be?” We regularly see investment allocations that are very much out of line with the person’s risk tolerance. This can end up having a significant psychological impact if the stock market performance is out of line with the person’s expectations and comfort level.
Takeaway: Make sure you work with a Fee-Only, fiduciary CFP® professional who can develop a portfolio that is in your best interest.
5. Misdirected savings
a. It should be stated: any type of savings is good. Depending on the situation, some types of savings are better than others. Prioritizing tax-deferred savings can lower a tax bill in a particular year, but it can also result in a larger lifetime tax bill. Retiring with funds only in IRAs and 401(k)s results in all portfolio withdrawals being taxable. That can mean that your tax rate stays high. There are several tax issues that this can cause!
Cash reserves are important, but excess cash can have a negative impact as well. Funds meant for long-term investment can make a higher return than what can be achieved in cash or a cash equivalent fund. Waiting on the sidelines of the stock market for the “ideal” time to invest has had a strongly negative impact on a lot of long-term plan. Saving is an exceptional habit that sets someone up for financial success, but it needs to be directed well to have its full impact. Conversely, having insufficient cash reserves can result in selling investments if cash is needed. When the market has declined, that can hurt your ability to support long term goals. When the market is up, selling investments can result in capital gains taxes.
Takeaway: Make sure you allocate your savings across account types that meet your near- and long-term needs.
Dave J. O’Brien is a Certified Financial Planner™ professional (CFP®) and NAPFA-registered financial advisor. EVOadvisers is a fee-only financial advisor based in the Scott’s Addition area of Richmond, Virginia. EVOadvisers also has an office in Irvington, Virginia to better serve clients in the Northern Neck of Virginia. If you have any questions about financial planning and would like to talk with one of our Certified Financial Planner professionals, check us out at www.evoadvisers.com or call (804)794-1981.