If your financial life is particularly complicated, you may need to work with several types of financial planning professionals in addition to a basic financial planner (who may or may not be a CFP).
Another type of financial planning professional is the Investment Adviser (IA) or the Registered Investment Adviser (RIA). IAs and RIAs specifically advise their clients about securities (stocks, bonds, and so on). Any IA who manages at least $25 million in assets must register with the Securities and Exchange Commission (SEC), and you can check this information out at www.adviserinfo.sec.gov.
Chartered Financial Analysts (CFAs) are typically portfolio managers or analysts for banks, mutual funds, or other institutional clients (in Wall Street lingo), but some CFAs also advise wealthy individuals and families who have particularly complicated investment situations. CFAs take a series of examinations covering portfolio management, accounting, equity analysis, and other subjects and must have at least three years of professional experience in investments. CFAs are also required to sign an ethics pledge every year.
A Certified Investment Management Consultant (CIMC) works with the wealthiest of the wealthy — high-net-worth private clients. A variety of examinations and continuing education plus at least three years of professional experience are required.
A Certified Fund Specialist (CFS) works with clients on mutual funds. (Some CFSs also provide general financial planning services.) Examinations and continuing education are required to retain CFS status.
You can check with the Financial Planning Association at www.fpanet.org or search for planners by state, city, or zip code or call 404-845-0011 (toll-free 800-322-4237). You can find financial planners who have the CFP credentials. You can then verify a planner’s CFP
status with the CFP Board of Standards at www.cfp-board.org. You can regularly check Money Magazine, Smart Money, and other personal finance publications for the latest information and even problems and scandals in the profession.
Make sure you clearly understand how your financial planning professional — CFP or otherwise — gets paid. Some financial planning professionals get paid on a “fee-only” basis, meaning that they don’t receive any commissions for selling you financial products. They are compensated only for advice (basically, they’re consultants).
Fee-based financial planning professionals earn fees not only from the advice they give you but also from commissions for selling you financial products, while commission-based financial planning professionals make money only from the products they sell you.
You can certainly find both ethical and unethical people (not to mention competent and incompetent) in any of these three categories. However, always pay particular attention to
recommendations from fee-based or commission-based financial planning professionals. Perhaps those investment choices are the perfect match for you, but you need to make that decision, not your financial planning professional who stands to benefit financially from selling you some type of product.
Knowing what to expect from your accountant for your estate planning
Your accountant can do a lot more for you than fill out your tax returns for the previous year.
Businesses use accountants for planning purposes, trying to steer what happens in the future for tax purposes by doing certain steps today. Plan on working with an accountant on your estate planning for those very same reasons, even if you do your own income taxes and haven’t really worked with an accountant before.
Make sure the accountant on your estate-planning team presents you with scenarios of what can likely happen, based on recommendations from other members of your estate-planning team. If your CFP recommends certain investments or insurance products, then what are the tax
implications when you die? What are the tax implications if you die tomorrow versus dying ten years from now?
Your accountant can also have a more active role in your estate planning, suggesting certain tactics with an eye toward reducing your overall estate tax burden, giving gifts in particular.
Never do any financial gift giving (as contrasted with birthday gift giving or holiday gift giving) without consulting with an accountant for all the tax implications.
Seek out an accountant who is a Certified Public Accountant (CPA), meaning that the accountant has passed the American Institute of Certified Public Accountants (AICPA) examination.
You may also consider combining two of the roles on your estate-planning team — the financial planning and accounting specialists — by working with someone who is a Certified Public Accountant/Personal Financial Specialist (CPA/PFS), in other words, a CPA who also provides overall financial planning and has passed the PFS exam. Check out
www.cpapfs.org.
Your insurance agent and your estate
Depending on your particular estate-planning needs, various forms of insurance (life, disability, liability, and other types discussed in Book 3) may play a key role. Most people who have
dependents (particularly a spouse and children) wind up working insurance into their estate plan to meet the “protection” objective of estate planning.
Therefore, consider your insurance agent a part of your estate-planning team. For example, when you discuss life insurance and make decisions between different types of life insurance policies, make sure your insurance agent is aware of any estate-planning strategies, such as trusts, so you can make sure that your policy beneficiaries are listed correctly.
Some insurance companies are agentless, meaning that unlike traditional insurance companies where you have an assigned insurance agent, your contact with the company is through any one of hundreds or even thousands of customer service representatives, almost always over the phone or the Internet. In these situations, ask one of the customer service representatives whether you can speak with or even work with anyone at the company on estate-planning matters. Chances are the representative will say yes, so even though you don’t technically have an insurance agent, you may still have access to short-term estate-planning assistance when you need it.
Working with your attorney
Even though your attorney is last on the list of the members of your estate-planning team (courtesy of the “L for Lawyer” used in the FAIL acronym), he or she could quite possibly be the most
important member for one simple reason: Your attorney keeps you from inadvertently making very serious mistakes.
All kinds of problems can trip you up and cause serious headaches in the future, if not headaches for you because you’ve already died, then headaches for someone else. For example:
How should your will read to make sure that your significant other (to whom you are not married) receives what you want out of your estate?
How should the deed to your home be written to make sure that your unmarried significant other isn’t forced to move if you die first?
If you have an elderly parent who needs to go into a nursing home, what are the implications to
your parent’s estate and your own?
Basically, think of your attorney as your “scenario-planning specialist.” Your attorney takes all kinds of information about you and your estate into consideration. He or she then presents you with options, based on various scenarios, such as you dying suddenly next week (morbid, but definitely an eye-opener for many people when first doing their estate planning) versus you dying at the ripe old age of 134 (courtesy of advanced biotechnology), having outlived everyone else in your
family.
Beyond the scenario planning, make your attorney your primary adviser for your will, trusts, legal implications for your business, and pretty much any other legal matter that directly or indirectly relates to your estate planning.
Chapter 2
Bean Counting: Figuring Out What You’re Worth
IN THIS CHAPTER
Determining the value of your real and personal property Including your debts in your estate’s value
Reducing and controlling your estate’s value through gift giving
Figuring out adjustments in your estate’s value after your life changes
Quick: How much are you worth?
You may think you have a pretty good idea of what your estate is worth — within 5 to 10 percent, give or take — but you may be very surprised when you actually sit down and start taking stock of your assets.
If you’ve ever filled out a loan application for a new car or a home mortgage, chances are that when you began listing your assets, you thought of several items beyond your savings accounts and mutual funds that turned out to be quite valuable. What about that wardrobe of $2,000 custom suits? And how about all those antiques from trips to Europe? Even families with more modest tastes usually have the family silverware, jewelry, household furniture, and several other items that add up to a decent amount of money.
Therefore, to be accurate in your estate planning, you need to know how much all your estate is really worth. And if you’re like most people, you need to dig beneath the surface and beyond the obvious — factoring in your debts and the future, too. This chapter tells you how.
Calculating the Value of Your Real Property
Your real property (your home and other real estate–related investments) may very well be the most valuable part of your estate. You need to carefully determine the value of all real property, especially if your estate plans call for dividing the value of that real property among more than one beneficiary. You want to be fair, and you want to have a good idea of what each beneficiary will receive, particularly if some beneficiaries will get other (non-real property) parts of your estate and you’re trying to divide your overall estate as equally as possible.
Your home on the range
If you recently purchased your home (say within the last year or two), you have a pretty good idea of your home’s worth, even if you live in an area where real estate prices are rapidly going up.
However, if you purchased your home a long time ago, you may have no idea of your property’s value. For example, maybe you never purchased your home at all — perhaps you’re living in the family’s ancestral home that’s been in your family since the early 1900s.
Either way, you need to get an official idea of your home’s value, and you can do so in one of two ways:
You can hire a real estate appraiser who does nothing but determine property value. A paid appraiser is likely to give you the most thorough and accurate idea of your home’s value because you pay for that service.
If you don’t want to pay an appraiser, you can do what real estate professionals call “checking comparables.” You can find the sale price of a comparable property in or near your
neighborhood with the same floor plan, the same exterior design, roughly the same lot size, and other characteristics nearly identical to your home.
In most suburban settings, prices and values for nearly identical properties can vary widely depending on what neighborhood the house is in, even if those neighborhoods are right next to each other. So make sure that if you decide to determine your home’s value based on comparable properties yourself, you understand the differences in property values between popular, highly coveted neighborhoods and others not quite so prestigious.
If you live in a home that’s unique in any way — a farmhouse set on hundreds of acres or a two- centuries-old brownstone in a downtown neighborhood, for example — then you should definitely hire an appraiser. Otherwise, you can be way off in determining what your home is worth.
That time-share in Timbuktu and other hideaways
If you own a second home of any kind, from a beachfront bungalow to a condominium at the foot of a prestigious ski resort (or even a part of a second home, such as a time-share), you can figure out what that property is worth in much the same way as you do your primary home.
Your investments as a landlord
If you have any investment real property, such as a rental duplex or a share of an apartment
building or office complex, then you probably have some background in how to value residential or commercial real estate. (At least you should, because you had to decide whether the investment you were considering making was a good deal or not.)
If you do your own finances for your real estate investments, you’re familiar with terms like net operating income and capitalization rate, which are used to calculate how much your investment is worth. But if you don’t do your own finances for your real estate
investments, don’t worry. Whoever manages your investment for you does know these terms,
so just ask your investment manager how much your investment is worth. If, however, you invested $50,000 ten years ago in rental property because your brother-in-law told you it was a good idea and you have no idea about operating expenses and cap rates, then take the easy way out: Contact a commercial real estate appraiser and get your investment property
appraised.
If you hire an appraiser for commercial investment property, make sure the appraiser is experienced in valuing the type of property you have. (Don’t hire a residential home
appraiser to tell you what your 20 percent of a commercial farming operation is worth.)
Your real estate partnerships
You may have an investment in real property that isn’t a direct investment but rather is an
investment in a Limited Liability Company (LLC) or Limited Liability Partnership (LLP). (LLCs and LLPs are just methods of ownership that have gained favor over the past years primarily because of their tax advantages.)
The value of some LLCs and LLPs can vary greatly from year to year. Additionally, you usually have restrictions on how you can sell or otherwise transfer control of your ownership portion of an LLC or LLP. Those restrictions often result in a valuation discount, meaning that your portion of an LLC or LLP is actually worth less than you would calculate using your share of the income minus your share of the expenses. Consequently, you need to keep current
— usually through regular statements you receive from the LLC or LLP — and adjust the value of your estate accordingly.
For example, if you have an investment in a shopping center through an LLP, the shopping center’s value can be dramatically affected if an anchor (main) tenant files for bankruptcy and shuts down the location at your shopping center. The property’s revenue decreases, which in turn decreases the net operating income, ultimately decreasing the shopping center’s value when you divide the net operating income by the cap rate.
You typically use LLCs and LLPs to own shares of more valuable investment real properties (such as large office complexes or an apartment complex with hundreds of apartments) rather than shares of properties you invest in directly (such as smaller office buildings or a duplex residential site).
Therefore, the value of LLCs and LLPs is likely to fluctuate more than any direct real estate investments you have. Monitor them closely, not only for estate-planning purposes but also for personal investment purposes.
Calculating the Value of Everything Else: Your
Personal Property
Get out the notepad or the spreadsheet program, and get ready for some long lists of your tangible and intangible personal property. You need to be as thorough as possible so that you can
accurately figure out what your estate is worth.
Tangible personal property — items you can touch
You will likely see an interesting paradox with regards to your tangible personal property (cars, jewelry, and other household items). You probably have far more individual items of tangible personal property that you need to catalog and value than the other types of property in your estate (real property and intangible personal property). However, for most people, tangible personal property has the smallest overall value.
Some of your personal property may be almost (or even totally) worthless in a financial sense, but you still need to catalog those items and decide what you want to happen to them after you die. For example, who do you want to get the lucky Liberty nickel that your grandfather carried over on the boat when he came to the United States in 1898, the one that was handed down to your father and then to you? Maybe the nickel isn’t worth much more than a nickel even though it’s more than 100 years old, but it still carries great family sentimental value. So which of your four children will you leave that nickel to, and what other sentimental goodies will you leave to the others?
You could, of course, let your children, grandchildren, and other family members “put in a claim”
on some or all your “trinkets” while you’re still alive — sort of a grab-bag approach to giving away part of your estate. But even if you decide to take that approach, you need to have everyone’s
“wish lists” and make sure that your will reflects all those who-gets-what decisions.
But even leaving aside small-value personal property, the rest of your tangible personal property can add up. Just take a look around your living room at the furniture and antiques, or in your den at that autographed 1927 New York Yankees’ baseball and your collection of first-edition
Hemingway novels.
So get cracking. You need to figure out what your property is worth, after you first figure out what you have. Overwhelmed at the thought? Here are a few tips to help:
Combine your estate planning-related valuation of your tangible personal property with the same activities for insurance purposes. Most homeowner or renter’s insurance
policies require you to provide a list of your jewelry, collectibles, and antiques to be included beyond your basic coverage (often more than a certain dollar amount, or for certain types of items). If you need to spend the time cataloging those items and determining what they’re worth for your insurance company, use those efforts for your estate planning as well!
Cataloging hundreds of items can be tedious, and even if you aren’t prone to procrastinating, you can often find some way to stretch out the process as long as possible. But if you have a
video camera, you can take a guided tour through your home (as well as your second home, if you have one) and narrate the tour into the camera’s microphone: “Here is that first-edition Batman that my idiot husband insisted be framed and hung over the sofa in the living room instead of the painting that I wanted to put there; it’s worth …”
Appraisal fees can really add up, especially for hundreds of items. You can get a pretty good idea of what your tangible personal property is worth by using eBay or another online auction service for research. Look for the identical item (or one close enough and in more or less the same condition) that you have and check the final winning bid of recently closed (completed) auctions, or current bids of active auctions about to close.
Intangible personal property — bank accounts, stocks and bonds
Your intangible personal property — your paper financial assets, such as your bank accounts, stocks, mutual funds, annuities, and so on — may make up a substantial portion of your estate, particularly if you’ve invested your money wisely and diversified your assets.
Fortunately, figuring out what most types of your intangible personal property are worth is fairly straightforward. (More about what’s not so straightforward in a moment.) You can
Check your bank statements for the value of your checking accounts, savings accounts, certificates of deposit (CDs), Individual Retirement Accounts (IRAs), and so on.
Consult an interest payment schedule to get the current value of savings bonds.
Look up the current prices of your stocks in the newspaper or check any of the many online financial websites that give you stock prices, and multiply that price by the number of shares you own.
Read the paper each morning and find the net asset value (NAV, a mutual fund term meaning the actual value of each share) of the mutual funds you own, and multiply the NAV by the number of shares you own.
Ask your broker for the value of your government or corporate bonds, or more complicated investments like call-and-put options and commodities futures.
If you use a computer program to track your portfolio’s value, you probably already have the information described at your fingertips; just consult the program you use to figure out the value of those investments.
You may have some intangible personal property that is a bit more complicated when it comes to figuring out its value. For example, you may have stock options from your employer. (Stock
options give you the right to purchase shares of your company’s stock at some point in the future at a guaranteed price per share, no matter how much higher — you hope, anyway — your company’s stock price goes.)
If you’re one of the “Head Honchos” at work and have a sizable stock option package, consult