Financial services giants make financial planning and wealth management sound very simple in slick TV ads, but it’s not. Managing wealth requires knowing a lot about technical highly topics, like math, taxes and finance as well as history, psychology and how to communicate with loved ones about sensitive issues. This article highlights many of the topics of knowledge needed to manage wealth and why it’s so daunting without the help of an independent personal financial advisor.
Estate tax is in flux. The $12 million personal exemption from estate tax is set to revert to $5 million on January 1, 2026. However, this could change, depending on Congress and financial, economic and political events.
Income tax brackets are also uncertain, and income tax planning includes watching Washington and acting strategically after the November 2022 election results are decided.
Charitable strategies are always important just because giving back is the right thing to do. Supporting a cause can build on your legacy and inspire the next generations in your family to keep your causes top of mind.
IRAs are more important than ever in creating a strategic financial plan because that is where Americans save for retirement. After retiring, assets in 401(k) accounts can be managed by you in IRAs. IRAs, for income tax purposes, are treated the same as 401(k), 403(b) and other federally qualified retirement accounts. They grow tax-free only until you withdraw money and withdrawals are taxed at your ordinary income tax rate. However, Roth IRAs are totally tax-free. Even withdrawals are tax-free.
Converting a 401(k) to an IRA, converting a traditional IRA to a Roth IRA and planning how your IRA accounts will be distributed to loved ones or charity upon your demise requires understanding the federal laws on qualified retirement accounts and knowledge of financial economics.
Psychology’s pivotal role in financial decisions has come to be recognized only in the last two decades. The burgeoning field of behavioral finance is now part of the investment knowledge needed to avoid making mental mistakes, reacting emotionally to bad news, and recency bias.
Modern families have spawned new legal and accounting strategies to protect family members from horror stories in estate planning. People are living longer than ever and are wealthier than ever. With half of all marriages ending in divorce, families are split asunder by injustice and argument over assets.
After a 50-year marriage and raising two children, Edith, a 75-year-old succumbed after a long battle with cancer. Ed, her 75-year-old spouse, could not stand to live alone and remarried a server he met at the casino. A year after marrying Rita, a 50-year-old with two children, Ed dies. Rita, and her children, inherit Ed’s $3 million portfolio and two homes. His children get nothing because he never created a Will.
Another example is the couple who, upon the marriage of their child, give the newlyweds a $1 million down payment on a home. Ten years later, when the child is divorced, the value of the home must be split evenly with their child’s spouse.
Trusts, prenuptial agreements, insurance, and qualified retirement accounts must be structured to protect your children, spouse, and other loved ones from losing control of assets you give them when you die. That’s part of the new landscape of financial planning for modern families
Business owners contend with a unique set of circumstances involving:
corporate form of business or entities, (LLC, S-Corp, or Corporation, etc.)
business and personal liability for debts and other risks
income earned annually
taxation of the business
Real estate investors and doctors have all of the same variables to consider but they have some added twists. For instance, owners of apartment buildings with swimming pools may face a large liability if someone drowns. Protecting yourself from slip-and-fall lawsuits and other risks inherent in developing and owning real estate is just one aspect of knowledge needed to invest wisely in real estate. Successful business owners often find it advantageous to purchase a building to house their business by setting up a real estate entity that owns the building and leasing it to the existing operating business. This is a common real estate strategy for doctors as well as business owners.
Investing is thought by many individuals to be the only knowledge or by far the main knowledge topic required to manage wealth and make a sound financial plan, but it is only one aspect of the job. Investing is important but the other aspects listed above are often just as important.
Retirement is a mashup of all of the topics previously discussed. To create a smart retirement plan requires knowledge of investing, tax, and the full range of topics mentioned here which may be required or come in handy.