A few years back, a certified public accountant called, asking me to reach out to a married couple to discuss their personal finances. For the sake of privacy, this article will refer to them as John and Rose Smith.
It was the middle of tax season and the CPA had just completed the Smiths’ tax returns. John and Rose were both in their late 70s and John’s health was quickly declining. To add to this, the family finances were spinning out of control.
In addition to taking care of her ailing husband, Rose needed to manage the entire household, including the finances. This had never been the case in the couple’s 50-plus years of marriage. John provided for their family and managed the financial affairs, while Rose ran the household and raised the children.
Because Rose was overwhelmed by the care that she needed to provide for her husband, the finances became a burden. To minimize the stress, she filed the incoming mail in various drawers, tucking it away, out of sight, out of mind.
John and Rose’s CPA called me because the couple had neglected to take their required minimum distributions from their individual retirement accounts the prior year. The penalty for missing an RMD in a tax year is significant — 50% percent of the RMD amount. The overlooked RMD was a sign the couple needed more assistance with their finances than the CPA could offer.
After meeting with the Smiths and identifying their needs, it was clear their CPA and estate planning attorney should be included in some of the future meetings. The couple had opened more than 50 different bank, stock and brokerage accounts over their lifetime and never closed any of them. The accounts were titled incorrectly, data was not reported on the tax returns, RMDs were missed and their estate plan was outdated.
Many people have multiple professionals — from financial planners to lawyers to tax advisers — on their financial teams. It’s the job of these professionals to ensure clients have the best financial, legal and tax advice. But often, they do not work together or know what the others are doing. Because of this lack of communication, it is possible to miss out on important tax planning or estate planning strategies.
In the case of John and Rose, after their CPA discovered they needed help, their team of financial professionals worked together to identify their assets, risks, concerns and objectives while coordinating and implementing strategies to assist the family with simplifying their finances. A system was established to manage the mail, bills, bank and brokerage statements and tax forms. The assets were consolidated and titled correctly to avoid probate and estate taxes. Additionally, the estate planning documents were updated.
In the short term, John and Rose had peace of mind. And, in the long term, the family saved thousands of dollars by avoiding probate, estate tax, and future penalties.
Who should be on your team?
Financial adviser: Financial advisory firms fall into one of two broad categories: registered investment advisors (RIAs) and broker-dealers. Depending on their size, both register with the Securities and Exchange Commission.
RIAs are held to a fiduciary standard; they must put their client’s best interests first. Broker-dealers are bound by the know-your-customer rule. An adviser who is registered as an RIA must also disclose any possible conflict of interest to their clients.
Broker-dealers are held to a suitability standard, meaning their advice must be suitable for a client, but not necessarily what is best for the client. Both types of advisors can hold the certified financial planner designation. These are the top credentialed financial advisers in the industry.
An RIA usually charges a flat fee or a fee based on a percentage of assets. Broker-dealers, in contrast, may receive a combination of flat or asset-based fees or commissions based on the investment products they recommend and sell.
Accountant: A CPA can make your life much easier at tax time. If your finances are complicated, talk to your accountant during the year to review your income and discuss tax planning. Tax planning should not be something you think about only in the months of January through April. A CPA will help you develop year-round and long-term strategies to improve your short- and long-term tax efficiency.
Estate planning attorney: An estate planning attorney will prepare the legal documents you should have in place to avoid costly probate, as well as instructions to provide for your care if you become incapacitated. In most cases, the attorney prepares a trust, will, power of attorney and healthcare directive.
Estate planning can help ensure that you are prepared for end-of-life scenarios and provide direction for your family, while minimizing taxes and avoiding future fees due to probate.
Insurance broker or agent: Insurance is a tool to assist us with managing your risk and is integral to managing our estate. An insurance broker acts as an intermediary between you and an insurer. Armed with both your background and their insurance know-how, he or she can find a policy that best suits your needs for a reasonable price.
A captive agent represents one insurance company, while an independent insurance agent can represent more than one insurer. Agents are also able to bind a policy or provide temporary coverage before a policy is finalized and issued. An insurance broker will generally work with an agent or insurer to bind a policy.
As your wealth grows, having a team in place that is aware of your finances to work together will help ease the transition as you age.
John and Rose were lucky because their CPA identified a problem and reached out for help. By doing so, he saved the family members years of time, stress, and money that would have been essential to settle the estate. The advisers came together to achieve a common goal, the wise and effective management of a client’s financial assets.
Teri Parker is vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at Teri.parker@captrustadvisors.com.
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