An Introduction to Estate Planning

By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you'll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you'll need to use more sophisticated techniques in your estate plan, such as a trust.

To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek the advice of your financial advisor and personal finance team to help implement the right plan for you.

If you’re over 18

Since incapacity can strike anyone at anytime, all adults over 18 should consider having:

• A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.
• An advanced medical directive: The three main types of advanced medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

If you’re young and single

If you're young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don't, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).

If you’re unmarried but committed 

You've committed to a life partner but aren't legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you might consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.

If you’re married 

For many years, married couples had to do careful estate planning, such as the creation of a credit shelter trust, in order to take advantage of their combined federal estate tax exclusions. A new law passed in 2010 allows the executor of a deceased spouse's estate to transfer any unused estate tax exclusion amount to the surviving spouse without such planning. This provision is effective for estates of decedents dying in 2011 and later years.

You may be inclined to rely on these portability rules for estate tax avoidance, using outright bequests to your spouse instead of traditional trust planning. However, portability should not be relied upon solely for utilization of the first to die's estate tax exemption, and a credit shelter trust created at the first spouse's death may still be advantageous for several reasons:

1. Portability may be lost if the surviving spouse remarries and is later widowed again
2. The trust can protect any appreciation of assets from estate tax at the second spouse's death
3. The trust can provide protection of assets from the reach of the surviving spouse's creditor
4. Portability does not apply to the generation-skipping transfer (GST) tax, so the trust may be needed to fully leverage the GST exemptions of both spouse

Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (but a $143,000 annual exclusion, for 2013, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.

If you’re married with children

If you're married and have children, you and your spouse should each have your own will. For you, wills are vital because you can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them. You may also want to consult an attorney about establishing a trust to manage your children's assets.  You will likely also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

If you’re financially comfortable and looking towards retirement

You've accumulated some wealth and you're thinking about retirement. Here's where estate planning overlaps with retirement planning. It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).  You may even consider speaking with your financial advisor about converting some IRA assets to a Roth IRA.

If you’re wealthy but worried about estate taxes

Depending on the size of your estate, you may need to be concerned about estate taxes.  If this sounds like you, I certainly recommend conferring with a seasoned financial advisor. 

For 2013, $5,250,000 is effectively exempt from the federal gift and estate tax. Estates over that amount may be subject to the tax at a top rate of 40 percent.  Similarly, there is another tax, called the generation-skipping transfer (GST) tax, that is imposed on transfers of wealth that are made to grandchildren (and lower generations). For 2013, the GST tax exemption is $5,250,000 and the GST tax rate is 40 percent.  Whether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.  

If you’re elderly or ill

If you're elderly or ill, you'll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them. 

Advantages of Trusts

Why you might consider discussing trusts with your attorney

• Trusts may be used to minimize estate taxes for married individuals with substantial assets
• Trusts provide management assistance for your heirs.
• Contingent trusts for minors (which take effect in the event that both parents die) may be used to avoid the costs of having a court-appointed guardian to manage your children's assets
• Properly funded trusts avoid many of the administrative costs of probate (e.g., attorney fees, document filing fees).
• Generally, revocable living trusts will keep the distribution of your estate private.
• Trusts can be used to dispense income to intermediate beneficiaries (e.g., children, elderly parents) before final property distribution.  This is particularly important for minors and incapacitated adults who may need support, maintenance, and/or education over a long period of time, or for adults who have difficulty managing money.
• Trusts can ensure that assets go to your intended beneficiaries. For example, if you have children from a prior marriage you can make sure that they, as well as a current spouse, are provided for.
• Trusts can minimize income taxes by allowing the shifting of income among beneficiaries.
• Properly structured irrevocable life insurance trusts can provide liquidity for estate settlement needs while removing the policy proceeds from estate taxation at the death of the insured.

Conducting a Periodic Review of Your Estate Plan

With your estate plan successfully implemented, one final but critical step remains: carrying out a periodic review and update.

Imagine this: since you implemented your estate plan five years ago, you got divorced and remarried, sold your house and bought a boat to live on, sold your legal practice and invested the money that provides you with enough income so you no longer have to work, and reconciled with your estranged daughter. This scenario may look more like fantasy than reality, but imagine how these major changes over a five-year period may affect your estate. And that's without considering changes in tax laws, the stock market, the economic climate, or other external factors. After all, if the only constant is change, it isn't unreasonable to speculate that your wishes have changed, the advantages you sought have eroded or vanished, or even that new opportunities now exist that could offer a better value for your estate. A periodic review can give you peace of mind.amount, whichever is smaller) should review your plan annually or at certain life events that are suggested in the following paragraphs. Not a year goes by without significant changes in the tax laws. You need to stay on top of these to get the best results.

Every five years for small estates: Those of you with smaller estates (under the applicable exclusion amount) need only review every five years or following changes in your life events. Your estate will not be as affected by economic factors and changes in the tax laws as a larger estate might be. However, your personal situation is bound to change, and reviewing every five years will bring your plan up to date with your current situation

Upon changes in estate valuation: If the value of your estate has changed more than 20 percent over the last two years, you may need to update your estate plan.

Upon economic changes: You need to review your estate plan if there has been a change in the value of your assets or your income level or requirements, or if you are retiring.

Upon changes in occupation or employment: If you or your spouse changed jobs, you may need to make revisions in your estate plan.

Upon changes in family situations: You need to update your plan if: (1) your (or your children's or grandchildren's) marital status has changed, (2) a child (or grandchild) has been born or adopted, (3) your spouse, child, or grandchild has died, (4) you or a close family member has become ill or incapacitated, or (5) other individuals (e.g., your parents) have become dependent on you.

Upon changes in your closely held business interest: A review is in order if you have: (1) formed, purchased, or sold a closely held business, (2) reorganized or liquidated a closely held business, (3) instituted a pension plan, (4) executed a buy-sell agreement, (5) deferred compensation, or (6) changed employee benefits.

Upon changes in the estate plan: Of course, if you make a change in part of your estate plan (e.g., create a trust, execute a codicil, etc.), you should review the estate plan as a whole to ensure that it remains cohesive and effective.

Upon major transactions: Be sure to check your plan if you have: (1)received a sizable inheritance, bequest, or similar disposition, (2) made or received substantial gifts, (3) borrowed or lent substantial amounts of money, (4) purchased, leased, or sold material assets or investments, (5) changed residences, (6) changed significant property ownership, or (7) become involved in a lawsuit.

Upon changes in insurance coverage: Making changes in your insurance coverage may change your estate planning needs or may make changes necessary. Therefore, inform your estate planning advisor if you make any change to life insurance, health insurance, disability insurance, medical insurance, liability insurance, or beneficiary designations.

Upon death of trustee/executor/guardian: If a designated trustee, executor, or guardian dies or changes his or her mind about serving, you need to revise the parts of your estate plan affected (e.g., the trust agreement and your will) to replace that individual.

Upon other important changes: None of us has a crystal ball. We can't think of all the conditions that should prompt us to review and revise our estate plans. Use your common sense. Have your feelings about charity changed? Has your son finally become financially responsible? Has your spouse's health been declining? Are your children through college now? All you need to do is give it a little thought from time to time, and take action when necessary. 

As always, please do not hesitate to contact me with any questions pertaining to this article or your own financial planning needs. 

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com

According to the College Board, the cost of higher education has been steadily increasing by a rate of 6% annually.  Have you considered what the college cost for you child or children might be?  There are various college costing calculators online, I like using both the US News Net Price calculator as well as the savingforcollege.com online college cost calculator.  Both will give you a quick general sense of what you can expect to shell out for your child's college education.  Let's do a quick analysis using my oldest son as an example.   

The calculator asks for my son's age, 2.  It asks for the current price of tuition at my selected school, 39,122 (I'm using the current out of state tuition cost from my alma mater, the University of Michigan - Ann Arbor).  You can use the following link to look up a specific school and find a breakdown of relevant tuition costs.  It also asks how long my child will be attending, 4 years, and on a full time basis.  

There are some other inputs this particular calculator asks, and for this example, I'm going to assume that I wish to cover 100% of the total college cost by the time my son finishes school, that I have $0 currently saved for this goal, that college costs will continue to rise at 6% annually, and that I am able to earn a 6% after-tax per year.

The result: my oldest son's college education will cost $434,765.  Quite the expense!

So what is a 529 and does it make sense for me?

A 529 plan is a tax advantaged investment vehicle in the United States, operated by a state or educational institution, and designed to encourage and help families set aside funds for future college costs.  It is named after Section 529 of the Internal Revenue Code, which created these types of savings plans in 1996.  There are two types of 529 plans, prepaid and savings plan. The prepaid plans allow you to pay tuition at the current price and attend in the future. The saving plans invest in stock and bond funds.  The big flaw with the pre-paid plan is that one never truly knows what school their child will attend.  By contrast, the savings plan is far more flexible.

What are the key 529 benefits?

1. State tax benefit:  Many states offer tax deductions for 529 contributions, you can see what your state offers here.  In New York, where I reside, contributions to a New York 529 plan of up to $5,000 per year by an individual, and up to $10,000 per year by a married couple filing jointly, are deductible in computing New York taxable income. 
2. Federal tax benefit: The actual distribution of funds to pay for college costs are tax-free.  This assumes that the government will keep it this way.
3. Transferability: If your child declines to go to college, the fund can be transferred to other qualified members in your family, even to the parents.
4. Estate planning considerations:  Grandparents looking to contribute to their grandchildren's education can contribute up to $14,000 ($28,000 for married couples) per child, tax free, every year.  Additionally, a grandparent can contribute a lump sum in one year and elect to treat the contributions as if they were made ratably over five years instead of all in one year.  This strategy enables the contributed money to benefit from additional years of compounding.
5. Financial aid calculation benefits:  A 529 saving accounts held in the child's name is treated as the parent’s asset, similar to the way a custodial account is treated.  Since only 5.6 percent (or less) of the 529 is used in the expected contribution calculation used in financial aid decisions, this is particularly good news for families seeking financial aid.
6. Automatic investment options: This is actually a pro and a con.  You can set up automatic contributions and investments so you don’t have to worry about them annually, but they are often paired with sub-par age-based funds.  This feature provides added convenience, but at the cost of higher fees and inferior performance. 

What are the problems with 529 plans?

1. Limits on reallocations: You are only allowed to reallocate funds once per year in a 529 plan.  While this may not be a huge problem for individuals with long-term horizons, it does present limitations in active management of these funds.
2. Limited investment options:  Depending on your state, you may be limited to only a few investment choices in the particular 529 plan, including age-based or target-date funds.
3. Restrictions and penalties for improper withdrawal:  The earning portion of money withdrawn from the 529 that is not spent on college expenses will be taxed at ordinary  income rates, an additional 10% federal tax penalty will be assessed, and there may be the possible recapture of any state tax deduction at the time of withdrawal. 
4. Suitability: Depending on your financial circumstance, you and your advisor may have other and often more sophisticated planning tactics in mind.  A 529 plan is not a one-size fits all answer to college savings.  

Be sure to speak with your financial advisor about whether a 529 would be suitable for you.  In general, I recommend that individuals max out their retirement contributions first before contributing money to a 529 plan.  I also suggest that these plans tend to get the "most bang for the buck," when large initial deposits are made to the account (ex: a grandparent makes a lump sum deposit as party of their estate planning).  This front-loaded outlay enables the 529 account to benefit from maximum compounded interest, as discussed above.

I hope this information is helpful to you.  Please contact me with any questions or to discuss how a 529 plan might fit into your own financial plan.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com

For those unfamiliar, these products aim to provide a low-maintaince and singular retirement plan option.  These funds, which are also referred to as life-cycle or age-baed funds, crossed the $500 billion threshold in 2013 as reported by Morningstar (Reference).  They are designed, through the rebalancing of its asset-allocation, to become more conservative as the target date (usually retirement) approaches.  The demand for these products appears to remain strong.  In fact, Casey Quirk (an asset management consulting firm), predicts that target-date funds will account for nearly half of all U.S. defined contribution plan assets by 2020 (Reference).

While these retirement plan options do indeed make long-term investing easy, I do caution my clients that these funds are anything but simple, and my not really serve the purpose to which they are intended.  Here's why:

1. They are exceptionally complex products.  Each target-date fund comes with its own set of fees, risks, and mix of assets.  Comparing funds against one another is cumbersome task that requires a full understanding of each differentiating factor.  Measuring performance between funds is even harder.  
2. They are typically too generic to meet your needs.  Because these funds do not account for risk tolerances, they typically do not reflect the optimal asset mix.  Because they lack flexibility, these funds tend to underperform more constructive and customized retirement portfolios crafted to meet your unique needs.
3. They are expensive.  With an average target-date fund expense ratio of 0.70 percent (Reference), investors should seriously consider return erosion, or the impact that fees have on returns.  As noted above, many of these funds will lag the long-term results that can be achieved with a more individualized portfolio.  The added fees of these funds widen the gap.

Most investors select these target-date funds through their employer-sponsored 401(k) plan without ever considering the points noted above.  Be sure to do your diligence and resist selecting a life-cycle fund just because it's easy.

If you need any help analyzing your options, feel free to contact me.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com

As we approach year-end, we should take a moment to consider retirement planning.  I urge my self-employed readers to start a retirement plan if one is not already in place.  Depending on your current circumstance, a cash balance pension plan (type of defined benefit plan) or a SIMPLE IRA (type of tax deferred employer-provided plan) might be suitable for you.  I will discuss both of these (and other retirement vehicles) in future posts.  For this entry, however, I'd like to focus on two popular and available options for the self-employed; the SEP IRA and the solo 401(k).

The SEP IRA
A Simplified Employee Pension Individual Retirement Arrangement (otherwise known as the SEP IRA), is typically adopted by business owners who seek to provide retirement benefits for the business owners and their employees.  

• There are no significant administrative costs for a self-employed person with no employees.
• All employees must receive the same benefits under the SEP plan (assuming the business has employees)
• The account can be opened at most major custodians and it offers the same investment flexibility as a typical IRA
• You can contribute up until your tax filing date (this includes the extension filing deadline of 10/15)
• Your contributions is limited (for 2013) to 25% of your compensation, or $51,000
• All contributions are made from the business.

The Solo 401(k)
A Solo 401(k), which is also known as a Self Employed or Individual 401(k), is a retirement savings vehicle designed specifically for employers with no full-time employees other than the business owners and their respective spouses.  A key element of this particular type of plan is that it covers only the business owners and their spouses, thus not subjecting the 401(k) plan to complex ERISA (The Employee Retirement Income Security Act of 1974) rules.

• Contributions include both employee and employer deferral components
• Contribution limits (for 2013) are $51,000, or $56,500 to "catch-up" if you are 50 years of age (or older) at any point during 2013
• These retirement vehicles can be opened at most any major custodian
• These retirement vehicles limit participation to sole owners, business partners and their spouses

So how do you choose between the two options?

Consider cash flow

• When you use a SEP-IRA with your employees, you will need to contribute the same percentages for your employees as you defer for yourself. This becomes an expensive proposition.  I generally recommend this plan for the self-employed with no employees.

• SEP-IRA contributions are calculated as a percentage of compensation, so if this amount varies significantly year to year, so will your allowable contribution.  A Solo 401(k), by contrast, allows you to defer the lesser of $17,500 ($23,000 if you're 50 or over) or 100 percent of your 2013 income plus the profit sharing contribution.  This flexibility may provide a better option for those with variable income and cash surplus.

Consider timing

• Both plans allow for contributions up to the tax filing deadline (including extension deadlines if you have extended your tax return).  The Solo 401(k), however, must have been established during the calendar year in which you would like to participate.

Consider features

• Loans are available from Solo 401(k)s but not from SEP-IRAs

• You may be able to enable a Roth feature on a Solo 401(k) if you plan documentation allows for it.  This is not currently possible with a SEP-IRA

• Both plans can be established at most custodians, and most custodians have a prototype plan document that can be used if you do not have your own.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com

I've discussed the various compensation models that financial advisors use. An understanding of these models is clearly helpful when trying to select an advisor or create your personal finance team, but what about the true impact to you and your portfolio's performance? Do you feel that you have a clear sense of what your investment costs amount to? Are you using a full-service broker or insurance agent to help you invest? If so, you're almost certainly paying too much.

Let's examine mutual funds. These funds are used heavily by large brokerage firms because of the high fees that are generated by them and the ease in which brokers can allocate client accounts. Most broker-sold mutual funds come with a variety of commissions and fee's that are often overlooked by the client. With exception of the trading costs which are listed on your brokerage statement, these other fees are not reflected seperately on the brokerage statement. As a result, many investors are clueless as to the true amount they are spending.  Here are some of the most common additional mutual-fund fees:

Front-end loads: These are commissions to investment intermediaries as sales commissions upon the purchase of the mutual fund. These sales charges are not part of a mutual fund's operating expenses.  In mutual funds with separate classes of shares, these fees  are found within Class A shares.

Back-end loads: These sales charges are used with mutual funds that have share classes, and are assessed upon sale of the mutual fund. These commissions are paid to a financial intermediary as a sales commission, and like front-end loads are not included in a fund's operating expenses. In mutual funds with separate classes of shares, these fees are found within Class B shares.

Level-loads: These sales charges are not assessed at purchase or sale, but rather applied annually as a fixed percentage of a mutual fund's average net assets. Unlike front-end and back-end sales charges, these 12b-1 fees are included in a fund's operating expenses, and are present in class C shares of a mutual funds that have separate classes of shares.

12(b)1 fees: The annual marketing or distribution fee of a mutual fund paid as a reward to selling fund shares. There are many critics of these particular fees as it is currently believed that commissions paid to salespersons have nothing to do with enhancing the performance of the fund -- the initial premise for the creation of this type of fee.

Management and administrative fees: to compensate the funds investment advisor for investment portfolio management and administrative fees not included in the funds' "other expenses" category.


Trading costs: the cost of buying and selling securities through your broker. These fees can range significantly from broker to broker.

While I like to give advisors the benefit of the doubt, I am constantly surprised that most stockbrokers, so called 'wealth advisors'/'financial advisors' with large brokerage firms, and insurance salespersons are unable to provide clients with a clear picture of how much they are paying in total investment costs. I suspect that the reason these individuals are unable to provide such detail is that they probably don't know the answer, and may not have the adequate information  information accessible to provide an reasonable response.  To calculate the true investment costs paid, one would need to review the investment prospectus for every product in a portfolio, calculate the total cost for each, add sales fees based on each transaction in the account, and then include the asset-management fee charged separately (and usually on a quarterly basis).  

All of these fees seriously degrade your investment performance. Take an initial $10,000 investment in a mutual fund that has an 8% annual return on investment, a front-end sales charge of 3% and annual operating expenses of 1.25%. Lets say that you pay a $60 commission to purchase the fund and you pay your wealth manager 1% of assets under management, per annum, for investment management services.

So, you would pay $300 in commission to purchase the fund and operating expenses of $131 throughout the year. At the end of the first year, assuming an 8% return on investment, you would be left with an account value of $10,345. But we didn't deduct the $60 transaction charge nor the $100 in annual advisory fees paid on this particular account.  The net result is $10,185 or a 1.85% return on invested capital. I'm pretty sure we can all think of better ways to generate 1.85% on our money without giving away over 6% of our 'theoretically earned return' to do so.  The math gets even worse when you consider that transactions costs, as well as investment management fees are generally deducted in advance (quarterly, in advance, for investment management fees).

Mutual fund fees are likely only one of the myriad of ways you are overpaying, however. Have you purchased whole-life insurance policies or annuities with their incredibly high mortality expenses and surrender penalties?  What about wrap fees?  The list goes on and I'll certainly tackle these items in a future post.

So how do you invest with more prudence? For starters, I'm not suggesting that all mutual funds are bad, in fact many of them perform quite well. Be sure to review prospectuses carefully and fully understand how fees are being assessed. If you are managing you own money, look for low cost funds. Vanguard offers funds with an average expense ratio of 0.19%, or 83% less than the industry average of 1.11% (source), and do not come with 12(b)1 fees.  If you are looking for more professional guidance and a customized and tactical approach to fit your needs, be sure to work with an independent and fee-only investment advisor who will be sure to keep your portfolio low-cost and true to its intent.

Best regards,

Jason M. Gilbert CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com

What do highly successful people have in common?  Many of their shared traits have been well documented, as have their behaviors and routines.  We've heard of some: waking up early, adhering to a calendar, and making sure to fit in time for exercise.  However,  what about the activities we don’t read about?  I have had the unique luxury of working with some extremely successful individuals in my advisory business and I've observed the evolution ‘the personal finance team,’ as a relatively new and powerful planning strategy.  So what is a personal finance team, and why is it so important to highly successful people?  

What is a personal finance team?

A personal finance team is a small group of professionals who work in collaboration to advise on both business and personal affairs.  This group consists of, at a minimum, a financial advisor, a CPA, and often an attorney.  Occasionally, a personal mentor or business coach is added to the team.

So why build a personal finance team?

Centralize expertise

A personal finance team can centralize all financial decision-making and provide an efficient and effective way to tackle important issues and keep on track with achieving financial goals.

An emphasis on focus

In order to stay focused on productivity, highly successful individuals have come to rely on their personal finance teams to handle critically important financial decisions in their absence.  

A comprehensive viewpoint = better decision-making 

A personal finance team provides for a comprehensive and holistic understanding of financial circumstance which in turn leads to far better decision-making.  Just imagine the value you could derive by having your CPA and financial advisor sit down to discuss a financial strategy for you.

An increased sense of control

Many highly successful individuals are naturally control centric.  They have high conviction in their own abilities, and they find it difficult to delegate responsibly to others.  By building a team of highly skilled and trusted individuals, highly successful people are able to feel more in-control of their financial affairs, and feel that they are making more informed and intelligent decisions.  

So how does one go about building this all-star team?

Understand your circumstance and evaluate your needs

A good starting point is to select a CPA and financial advisor.  You can always add to this core team based on your needs for, say, an insurance broker.  If your starting team is strong, you can always ask them for recommendations.

Always use referrals

I've come to realize, both professionally and in my own personal capacity, that referrals are best.  Ask your family and friends for good recommendations, interview the professionals, and make sure they are a good personal fit.  Can you see yourself talking about every-day matters together?  If you can relate to your advisors on personal matters, it's like you'll be able to discuss business matters.

Find someone who understands business and thinks like a business owner

This is a pretty important point as many advisors (especially CPAs) often fall into the trap of thinking like accountants.  Make sure your advisors understand the specifics of your business and are able to discuss the continuity of your business plan and risks associated with it.  

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
O: 516-665-7800
E: jason@rgaia.com

We live in a world where information is easily accessible and relatively inexpensive.  In this day and age, we can all be curators of information, research analysts, or self-proclaimed experts on just about any topic.  Personal finance and investment recommendations abound, and a simple Google search for "how should I invest my money" uncovers dozens of articles touting the very best way to do so.  With all of this information at our disposal, how do we determine what financial advice makes most sense for our own individual needs?  Which "author" do we trust with the right combination of stock and bond recommendations for our Roth IRA?  And should we seek our professional guidance, or simply implement all this free investment advice ourselves?  

These are all loaded questions, and there is no "real" right answer when it comes to information you find on the internet.  There are a lot of very qualified professionals and academics who use blogging and other forms of paid authoring as an outlet to explore topics of interest, and even supplement their own income.  My suggestion is to read as much as you possibly can.  Follow authors on twitter and engage in conversations.  Ask questions.  This process will not only be educational, but it will help you sift through the vast universe of information in order to weed out salesy and biased publications.  

The same process should be implemented when searching for a professional advisor.  If you're in the market for an advisor, learn as much as you can about them, and weed out those who do not appear to have best interests in mind.  Get to know the advisors capabilities, credentials, and affiliations.  Read any work they have authored, ask insightful questions about their financial planning approach and investment philosophy, and become familiar with how they are compensated.  An advisors fee speaks volumes about the advice you can expect to receive from them. 

I discussed fees in an earlier post, but here is a more complete breakdown of how advisors get compensated:

Commission only: These advisors receive commissions on the sale of financial products (such as mutual fund front-end loads, back-end loads, 12(b)1 fees, and trading charges).

Commission and fees: This is called fee-based, and is the most popular form of compensation for advisors.   These advisors receive a fee for developing a financial plan and then receive commissions (see above) after selling you insurance and investment products recommended in your financial plan.

Salary plus bonuses: These advisors are compensated with a salary plus an incentive that reflects any new business the advisor has brought to the business.  These advisors may receive higher bonuses by recommending or selling certain products and services over other options.

Fee-only: These advisors provide advice and/or ongoing investment management and are not registered representatives of any financial services company.  These advisors have no financial stake in the recommendations they provide to you and they are required to advise only products they believe are in their clients financial best interest.

So which compensation model do you think yields the most independent and unbiased investment advice?  The clear answer is the one whereby the advisor isn't beholden to commissions, and one in which the fee-structure is clear and transparent.  A fee-only advisor is incentivized by increasing the value of his or her client accounts.  Most operate with a flat fee-structure that bills against a clients assets under management (AUM).  By increasing the base (AUM), a fee-only advisor can generate a higher aggregate fee.  This alignment of interest between client and advisor is the cornerstone of a sustainable financial advisory relationship.  Be sure to keep it in mind when shopping for a financial advisor. 

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
Tel: 516-665-1940

Preparing for the arrival of a new baby is an enormous undertaking; mentally, financially, (and sometimes physically).  I am fortunate to work with a number of expectant parents at our advisory firm.  While circumstances vary and lifestyle/career changes are inevitable, first-time parents can certainly take proactive steps to plan for the financial undertaking that awaits them.  While this post contains a far from an all-inclusive list, it can the provide necessary steps to build a terrific foundation for your growing family. 

Get your estate-plan in order!

I've spoken about wills before.  No one wants to think about their own mortality, let alone sit down and actually have to discuss it.  This is the time to do some real planning, however, and the sooner you get it done, the sooner you can stop thinking about it.  I suggest consulting an estate-planning attorney to help you prepare a basic will, which should contain a testamentary trust (this is a trust created for the benefit of the child that goes into effect only if both parents die).  The key is to actually put a will in place.  If the path of least resistance is to prepare it yourself using an online website then go for it.  You can always redraft a will with an attorney when your budget allows for it.

Buy life insurance:

Term life insurance is the least expensive and most prudent way to go.  I generally recommend that expectant parents shop for these policies early during their pregnancy (and preferably even before getting pregnant) to avoid postponed decisions by the insurance company.  Pregnancies can often be complicated and insurance companies may wish to delay coverage decisions as a result.  Be sure shop for a 20 or 30 year policy with fixed premiums that does not require additional medical examinations, and one that carries an option to convert to permanent insurance.

Get disability insurance: 

Disability insurance will pay a portion of your salary for a period of time in the event that you get disabled.  It is often overlooked by expectant parents, but certainly worth exploring.  Group policies offered through your employer typically cover about 60% of your paycheck.  If your employer doesn't offer you disability insurance as part of your benefits package, you can secure it independently but it may expensive.  Be sure to review policies carefully to ensure that pregnancy and potential pregnancy-related complications are covered.     

Go easy on the baby stuff:

New parents have a propensity to overspend on baby-stuff, like cribs, strollers, and top of the line baby furniture.  These items can easily run into the thousands of dollars.  Baby gear, especially those high-end items, have very comparable (and most likely better) equivalents in the market.  Baby clothing can almost always be purchased on sale.  Subscribe to online mailing lists (most retailers have them) and wait for those 30% coupons to arrive in your inbox, you'll be glad you had that little bit of extra patience.  

Get that emergency fund in order, then contribute to a 529:  

The emergency fund is a cornerstone of a sound financial plan.  It is even more important now that you are providing for one extra person.  You may even wish to maintain 6 months of living expenses (rather than 3) in it.  Be sure to have this account fully funded, and then start directing additional monies to a 529 plan.  This education saving plan can be opened as soon as you have your baby's social-security number.  As long as you use the money for higher education you are not required to pay tax on capital gains.  Currently, thirty-three states (plus DC) offer tax deductions on the 529 plan and withdrawals are tax free.  

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
Tel: 516-665-7800

Personal financial planning can be a complex process that requires discipline, focus, and patience.  That said, it is far from rocket science, and most people can be highly successful in implementing a sustainable plan with the right framework in place.  While your circumstance may require some modification to items listed below, I think the following personal finance "best practices" encompass just about all of the financial 'wisdom' one needs to stay on the right financial footing.

Save and invest 20% of your income

Many advisors advise that clients save at least 10% of their income.  I suggest that my clients strive to save 20% of their income. This increased savings goal provides for some wiggle room in months that have additional and unexpected expenses.  The other reason I recommend 20% is that the additional savings made today enables you to harness the power of compounding (i.e. this money is invested and its’ earnings are further reinvested year-over-year).  It's far better to save and invest more now then try to catch-up later.

Keep at least 3 months living expenses in safekeeping for emergencies

This money should be kept in reach and accessible, but ideally far enough away that you do not feel compelled to spend it.  By emergencies, I am referring to out of the ordinary events that would put a significant strain on your monthly cash flow (for example, your car breaks down, you endure a flood in your home not covered by insurance, etc.).  I recommend that this money be put in a high-interest bearing account that has debit-card access.  That way, in the case of an emergency, you don't have to rely on a credit card to cover an unexpected expense. Please refer “6 saving strategies you can start using today” for specific bank recommendations.

If you have kids: Draft a will and buy term-life insurance worth 10-20 times your household income

Protecting your family should be priority #1, and both a Will and term insurance policy provides for the direction and protection to accomplish this goal.  If you don't have adequate funds to hire an attorney (wills can cost anywhere from $1,000 and up), you can use sites such as Legal Zoom to draft your own will using a standard template.  

Term insurance is inexpensive and will provide the security your dependents need.  A healthy individual in their 30’s can secure a $500,000 term policy for less than $350/year.  You should plan on shopping for policies that cover anywhere from 10-20 times your household income (so a family with combined income of $100,000 should look for between $1-2MM). I tend to recommend higher amounts of term-insurance coverage as there seems to be a natural break point in how these policies are priced. Each incremental dollar of coverage over $500,000 costs less. For example, say a $500,000 policy costs $325/year, a $1MM policy may only cost $475. Stay away from whole life, universal life, or other forms of permanent insurance.  These kinds of policies are more appropriate for estate planning once you have already exploited and maxed out your tax advantaged accounts.

Put at least 20% down and always choose a conforming loan

Avoid paying Private Mortgage Insurance (PMI), a fee you will incur if you put less than 20% down on a property.  Also avoid non-conforming loans, which generally carry higher interest rates, additional upfront fees, and insurance requirements.  You will accomplish both of these by purchasing a home you can afford. 

Pay off high-interest debt first and pay your credit card off each month

Revolving high-interest debt is a sure fire way to cramp your cash flow, preclude the ability to save, and ensure that you will be making interests payments for a very long time.  The best way to avoid high interest debit is to not spend money that you don't have in the bank.  This "golden" rule has proven itself over and over again.  Those who master it find themselves on far better financial ground.  Pay off that high-interest debit first, avoid using credit for “float”, and pay that credit card balance off in full each month.

Max the match on your 401(k) and maximize tax-advantaged saving vehicles like Roth IRAs, SEPs, and 529 accounts

As I pointed out in an earlier blog post, a match on your company-sponsored 401(k) is essentially free money and it would be silly to pass it down.  You should also take advantage of other saving vehicles provided you are eligible to do so.  You should discuss these saving vehicles with your advisor or CPA to determine which (if any) is most appropriate for you.

Invest invest invest!  But pay attention to fees, avoid actively managed funds, and hire a financial advisor who is committed to the fiduciary standard

The key to wealth accumulation is to make constructive use of the money you save regardless of your income.  Be smart about how you invest and be keenly aware of fees, which are sure to erode your performance.  Vanguard target funds are a good DIY approach if you are just getting started out.  If you are at the point where professional insight would be of value, be sure to hire a financial advisor who is committed to the fiduciary standard (please read more about this standard on my earlier blog post: "How to choose the right financial advisor for you").

This list is not meant to be all-inclusive, and your individual circumstance may require some more tactical guidance.  Be sure to confer with your financial advisor about your specific needs.  If I can be of any assistance, please feel free to contact me.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
Tel: 516-665-7800

There is no doubt that many of us would like some guidance with our finances.  Between our busy work days, personal endeavors, and everything in between, our financial goals often get sidelined.   Keeping on track with our broader financial goals, and formulating how to best reach them, sometimes requires the help of a qualified professional. But how do you determine which one is right for you? 

Here are a few tips to choose the right financial advisor:

Consider Compensation:

Financial advising is really a pretty general term that encompasses a wide range of different services and compensation models.  Some financial advisors receive their compensation mainly in the form of commissions from products and services they recommend.  These individuals act very much like sales agents, and they earn their living by making recommendations based on products they consider "suitable" for you.  These advisors generally work for large brokerage houses (think UBS, Morgan Stanley, etc.).  

Others receive a percentage of the assets that they manage for you (so the better you do, the better they are paid). Still others charge hourly fees, or flat rates.  In both cases, these advisors are generally called fee-only, and they typically have more transparent free structures.  These advisors generally work independent of a brokerage house, and are often found at a Registered Investment Advisor, such as my firm (RGA Investment Advisors LLC).

Of course, there are financial planers who receive compensation from both commissions and fees.  These advisors are generally affiliated in some way to a broker dealer, and they may also sell insurance products.  The key point is to determine how transparent and forthright an advisor is about disclosing his or her fee, and whether or not you feel comfortable with the idea of paying commissions.  While I firmly believe that fee-only advisor maintains a compensation program that is more aligned with that of the interests of his or her client, there are certainly very competant advisors who are paid via commission, or through some sort of hybrid method.

Consider Credibility 

There is a myriad of self-proclaimed financial advisors in the United States.  Of them, only a small subset of advisors have what I consider to be adequate or credentialed backgrounds.  You should vet a potential financial advisor according to their credentials, including what certifications are held, and to which professional organizations they belong.  Make sure that the advisor is properly licensed in your state, and that they maintain the proper securities licenses if they will be managing your money and/or selling you products.

There are a few professional designations I'd like discuss here, as clients have so often cited their confusion in comparing and contrasting between them: 

• CFP (Certified Financial Planner): The CFP is perhaps the most widely recognized credential in the financial planning industry.  In order to qualify, an applicant needs complete an academic component consists of five courses covering insurance, estate, retirement, education, tax and investment planning plus ethics and the financial planning process.  Once the academic requirement is complete, students must sit for the board exam. This is a 10-hour, 285-question test that spans two days and includes two comprehensive case studies.  Once a passing grade has been achieved, prospective certificants must also complete at least three years of professional experience and get a bachelor's degree in order to obtain the CFP designation.   
• CLU (Chartered Life Underwriter) and ChFC (Chartered Financial Consultant): Both of these designations were originally created by the life insurance industry.  The CLU designation requires the same five core courses as the CFP designation, plus three additional elective courses.  The ChFC designation has the same requirements, except that it tends to cover more specific general financial planning issues as opposed to the CLU, which focuses more closely on life insurance and its laws and regulations. There is no comprehensive board exam required for either credential.  Many prospective advisors choose to enroll in a ChFC program and self-study for the CFP designation as much of the course material overlaps.
• CPA (Certified Public Accountant): The CPA is by far the oldest and most established financial credential in the United States.  CPA requirements vary by state, but generally candidates for the licensure are required to have 150 semester hours of undergraduate level courses plus a bachelor's degree or higher in order to sit for the 19-hour, two-day exam. There could be other requirements such as a minimum number of credits in accounting and business, or even business law.  This comprehensive CPA licensing exam covers accounting, financial statement analysis, auditing, management account, taxation, and ethics, among other topics.  The CPA designation has long been widely recognized by the public as the definitive credential of tax expertise. 
• CPA/PFS (Personal Financial Specialist): CPAs with extensive financial planning experience can pursue the PFS designation from the American Institute of Certified Public Accountants.  The requirements for the Personal Financial Specialist (PFS) credential are established by the PFP Division staff at the AICPA, the National Accreditation Commission, along with the PFS Credential Committee, and accurately reflect the depth and breadth of experience and technical expertise required to hold this credential.  Beyond the requirements of obtaining a CPA license,  a CPA/PFS candidate must earn a minimum of 75 hours of personal financial planning education within the five year period preceding the date of the PFS application and must have at least 2 years of full time work-experience in providing financial planning services.  Only after these criteria are met is the candidate able to sit for the 7 hours 15 minutes board examination.
• CFA (Chartered Financial Analyst): The CFA is widely considered to be one of the most difficult and prestigious credentials in the financial industry, at least in terms of investment management.  The academic requirements for this designation are second only to those for CPAs.  Three years of coursework must be completed that covers a range of topics and disciplines such as technical and fundamental analysis, financial accounting and portfolio theory and analysis.  Those who earn this designation often become portfolio managers or analysts for various types of financial institutions.

Beyond these credentials, be sure that your advisor has experience providing guidance for your specific needs.  Some advisors have more experience with retirement, while others specialize in business succession planning and self-employment issue.  It's not easy to find an advisor that has a comprehensive suite of skills, so be sure to interview around for that perfect fit.

Consider Your Best Interest

The last point I'd like to make is on whether the advisor acts as a fiduciary or not, that is, whether he or she has your best interests in mind.  This is a critical point in making an informed and thoughtful decision in who you will hire to help care for your financial well-being.  A fiduciary is a legal and ethical relationship of trust between two parties.  The fiduciary is obligated to the fiduciary standard (or fiduciary duty), which is the highest standard of care that anyone in financial services (or law, or accounting, etc.) can provide.  It means that an advisor acting as fiduciary is morally and legally bound to act in the best interest of his or her client.  This is an important criterion when selecting an advisor.  Many brokers, registered representatives of brokerage firms, or financial planners who sell products are not subscribed to this fiduciary standard.  Instead, they adhere to something called the 'suitability standard,' which in essence means that recommendations made are consistent with the best interests of the underlying customer.  There is wide gap in the requirement of care between these two standards.  Be sure that you fully understand to which standard your advisor adheres.  

I hope this information is helpful.  Please feel free to contact me with any questions.  Good luck with your search!

Best regards,

Jason M. Gilbert CPA/PFS, CFF
516-665-1940