It's a Good Friday for Estate Planning

Photo by Richard Hemmer

Today is Good Friday, the Christian holiday remembering the crucifixion of Jesus Christ. It is a day of fasting and charitable deeds by the faithful. It also marks the beginning of Easter weekend which culminates on Sunday with the celebration of the Resurrection, and for some of us, Easter egg hunts. But this holy day can also serve as a practical reminder that death is a certainty in life, and that the vast majority of us will not rise again a few days later. With that knowledge, we can plan accordingly.

Planning for death is not a light topic, nor is it one that many of us care to discuss unless we experience events that jar us into action. For example, it is common to buy life insurance upon the birth of a child or create a will upon the death of someone close to us. But there are many other considerations that we should regularly take into account, and today is a "Good Friday" to take a look at our own plans.

It isn't that we purposely do things that create estate planning complications for our heirs, it is more the dynamic nature of our lives that lead to unintended consequences. Take for example a story relayed to me by Austin estate planning attorney, Julia Nickerson, of Nickerson Law Group.

This month a client called our office. His mother passed away. His parents had made their estate plan fifteen years ago and hadn’t made any updates since. Their financial advisor had changed firms and when that happened, their accounts were not titled properly. They had purchased a vacation home and it wasn’t titled properly.  Also, this client’s mother had changed the title to certain accounts so that they were payable on death to her minor grandchildren. This client’s family was facing probate, guardianship and unnecessary
income tax due to the outdated estate plan. It’s reasons like what happened to this client’s parents why your estate plan should be reviewed on an ongoing basis.

All of the issues facing Julia's client were essentially simple administrative issues, until the mother passed away. At that point, it became much more burdensome and expensive for the heirs to deal with lawyers, judges, and the IRS.

I asked Julia if she would share the biggest mistakes she most commonly sees in her clients' plans and she provided a list of "10 Common Flaws in Estate Planning" that all of us can use as a handy checklist.

One: Beneficiary Designations aren’t Compliant  
Life Insurance and retirement account beneficiary designation forms are frequently not compliant with a will or living trust.   
 
Two: Out of Date Documents
Your estate plan should reflect your current wishes—not your wishes from 20 years ago.  Sit down with your attorney every few years to ensure what you think is taken care of actually is.

Three: Too Many Amendment and Codicils
If you make a change, you should have your attorney draft a whole new document.  Codicils and amendments are confusing and cause confusion after you die.

Four:  No One Knows About It, or even worse, You Did It Yourself
Your family should know who your estate planning attorney is.  Find a person you like and trust and develop a relationship with them.     

Five:  Lack of Liquidity
Don’t leave your children with masses amount of debt or illiquid assets.  Invest in life insurance to ensure there is liquidity.

Six:  Loans to Children
If the grantors have made loans to their children, clearly spell out in the will or living trust whether the loans are forgiven or not—and if not, keep clear records of the principal and interest still owed

Seven:  No Plan for Incapacity
Chances are you will become incapacitated before you die—your estate plan should include an incapacity plan that keeps your family out of an expensive and administrative nightmare guardianship.

Eight:  Asset Titles that aren’t compliant with the plan
Title to your assets play a large part in how they will pass upon death  Living trusts are a great tool.  If you have one, take the time to fund it.
  
Nine:  No Second Spouse Protection
Ensure your children receive their inheritance, even if your spouse remarries after your die—but, do this in a tax effective method.
    
Ten:  Joint Tenancy with Rights of Survivorship (JTWROS) 
Adding a child’s name to your account may be a good idea at first, but what happens to the assets in that account if you die?  Will your other kids be upset since it all legally goes to just one child?  What if the child you name as an owner has lawsuit or creditor issues.  There are other solutions besides just JTWROS.

If you would like to review your plans as they relate to your investments, contact an estate planning professional or get in touch for a free portfolio review. Happy Easter!

ACTION REQUIRED! Sustainable Accountability

"ACTION REQUIRED!" read the email caption. "Protesters targeting several US Investor Centers", the heading continued. As a branch manager at Fidelity Investments, I received dozens of these emails over the years. The actions being required typically consisted of notifying corporate security if the protesters actually showed up (which was rare), and reviewing the company's policies for speaking to the press in case a reporter were to arrive at the scene (which was more or less forbidden).

The protesters' causes ran the gamut. There were calls to divest from countries with objectionable government policies, like Sudan. Then there were the demands to eliminate support for businesses that received ill-gotten gains (in the protesters' opinion). Tobacco, oil companies, and utilities were frequent targets. More recently, it was about sharing with "the 99%" that apparently had the time to camp out for weeks on end while "the 1%" worked for a living. 

While activists will continue to use tactics such as protests to bring attention to their cause, other forms of activism have gone more mainstream. Last year, California’s Public Employees' Retirement System and California State Teachers' Retirement System, two of the world's largest pensions, were ordered to divest from coal companies by mid-2017 through a law (SB 185) passed by the California legislature. While similar laws are unlikely to be passed any time soon in Texas, individual investors increasingly are investing with their conscious as much as they are with their wallets.

In my own experience, individual investors have historically been agnostic about how their investments went about generating profits. Over time, however, the requests for investments that fit into the customer's world view have became more and more frequent. According to a 2014 report from The Forum for Sustainable and Responsible Investment, from 1995 to 2014, the amount of assets invested in the US sustainable and responsible investing market universe increased 929%.

Nowhere is this more evident than concerns about climate change and our contributions to it. The unscientific view from my Austin Westlake window as I write this week's Accountable Update suggests that consumers are putting their money where their mouth is when it comes to sustainability. From my perch, I can count over a half dozen neighborhood homes with rooftop solar installations. On a recent drive to my office downtown, Tesla Model S drivers outnumbered Hummers 7-0.

I know that some of you readers are thinking, "Yeah, yeah, yeah, but you live in the Peoples' Republik of Austin with all the other salamander-huggers." It is true that the central core of ATX is one of the few reliably "Blue", or liberal, parts of the Lone Star State. But the west side of Travis County where I reside quickly turns "Purple" as you move towards the more conservative "Red" suburbs. If my neighborhood and commute are any indication of how the moderate middle feels about sustainability, then it suggests that the trend is, well, sustainable and likely not a passing fad.

At ATX Portfolio Advisors, Accountable Wealth Management is our practice of not charging advisory fees when our clients' accounts lose value. What may not be as well known is that we also offer Accountable Portfolios that incorporate sustainability and/or socially conscious practices. You could call it Sustainable Accountability!

When a client requests it, we will build them a portfolio with mutual funds from Dimensional Fund Advisors that emphasize those practices to address issues important to them, like sustainability. The best part is that we can do this while continuing to offer broad diversification and focusing on capturing the higher expected returns of small, value, and profitable stocks. 

If you have concerns about the sustainability or accountability of your investments, the only "ACTION REQUIRED!" is to get in touch for a free portfolio review.

Play Ball! Ace the Tax Test (and others too)

Photo by Edwin Martinez

Ever heard of Vern Law? No, it’s not a facet of some state or federal legal code, financial rule of thumb, nor some scientific observation of the way the universe works. In fact, it’s not a law at all. Vernon Sanders Law, was a pitcher for the Pittsburgh Pirates from 1950-1967. He is probably most noted for winning the Cy Young Award in 1960, which also happened to be a year the Pirates won the World Series.

If you know me, you probably also know that just about anything to do with baseball interests me. When I can find an excuse to include America’s pastime in my daily routine, or the Accountable Update, I will do so. Case in point, for many years I have coached youth baseball and softball. People often thank me for volunteering or sacrificing my time for the sake of their kids. What they may not realize is that this activity has offered a welcome respite during what is frequently one of the most hectic times of the year in financial services, also known as tax season. I often feel like it is me that should be thanking them for having kids that play the game!

So, what does this have to do with Vern Law? It’s something he is credited with saying, “Experience is a hard teacher because she gives the test first, the lesson afterwards.”

About a year ago, ATX Portfolio Advisors opened for business. As a first time business owner, I have learned several lessons during the latest lap around the sun. The ones that were tested most often weren’t what I knew or didn’t know. The most frequent were those that exposed what I didn’t know that I didn’t know!

With tax (and baseball) season in full swing, I recently had the opportunity to chat with Chris Thomas, an Austin partner and CPA at the accounting firm, Tidwell Group.  We discussed what lessons that he most frequently found himself teaching, after the test, to their clients. Chris and his colleague, Ryan Nevill, shared the following wisdom.

What is the most common mistake you see business owners make when it comes to minimizing taxes?

“The most common mistake business owners make when it comes to minimizing taxes is not planning ahead. The business owner's tax preparer should be consulted throughout the year in order to prepare for tax filing. A tax professional can often find ways to minimize taxes, including taking advantage of credits the owner may have not been aware of.” 

What other mistakes do you commonly see?

“Other common mistakes include not being aware of new tax laws, not communicating transactions accurately and timely, and not being flexible with structuring or seeking out tax professionals that are experts in specific areas.”

What are a small business owners best practices for keeping their taxes down?

“The best way for a business owner to keep their taxes down is to be proactive. Take the time to learn the general tax laws relevant to your industry, and become familiar with the guidelines presented in your organizational documents. Identify extraordinary business events before they happen and know when to consult your tax preparer. Being proactive instead of reactive is the best way to keep taxes down.” 

Maybe not surprisingly, all of these responses have very direct applications to overall financial planning as well. Lacking a plan, not seeking expert guidance, and not staying current with ever changing rules and laws are probably the most common mistakes I encounter.

The main reasons for these mistakes, in my opinion, are lack of time and interest in dealing with what can sometimes be detailed and mundane topics. As another baseball great famous for quotes, Yogi Berra, once said, “In baseball, you don’t know nothing.” If you start with that realization about everything else, you will be well on your way to passing the next test.

If your financial plan isn’t making a passing grade, let’s play ball.