5 Year-End Tax Strategies You Don’t Want to Miss

The end of the year can be a hectic time. With the holiday season in full effect, we find ourselves cooking, shopping, and entertaining friends and family. But one thing many people forget about is taxes. While there is plenty of time after the holidays to prepare your taxes, some of the best tax strategies you should be considering must be implemented before the last day of the year. Here are five things you may want to consider before year-end to help reduce your tax liabilities now or in the future:

1. Set Donations Aside With a Charitable Remainder Trust (CRT) 

There are great tax incentives for charitable donations. However, many people don’t take advantage of this tax benefit because they believe the money must be given away immediately. With a charitable remainder trust, you can maintain control of the asset and take income from it while you are still alive. At the same time, you will enjoy a tax deduction in the year you transfer the asset to the trust even though the charity doesn’t receive the funds until you pass away. And, as an added bonus, you can transfer highly appreciated assets (like real estate or stocks) and sell them within the charitable trust without realizing an immediate capital gain. This means you can use this strategy to sell investments with a lot of unrealized growth and spread the capital gains taxes owed (potentially reducing the total taxes paid on those gains).     

2. Offset Capital Gains Taxes With Tax-Loss Harvesting

This strategy involves realizing gains or losses (or both) in your investment portfolio for tax purposes. If this is done properly, the investor can minimize the taxes paid on capital gains and maximize the tax benefits of capital losses. This can also help reduce future tax liabilities, which is a concern for people who think their capital gains taxes may be higher down the road. But be careful; there are a number of rules you must pay attention to when it comes to tax harvesting (like the “wash sale” rules). (For related reading, see: Pros and Cons of Annual Tax-Loss Harvesting.)

3. Contribute to a Health Savings Account

You must be part of a qualified high-deductible health plan (HDHP) to receive the tax benefits of a health savings account (HSA) contribution. But if you do qualify, this is one of the best tax advantages available. The tax deduction is an above-the-line deduction similar to an IRA contribution. However, unlike an IRA, the funds can be taken out tax-free if they are used for qualified medical expenses. This means you receive the tax deduction upfront, the money grows tax-deferred, and it comes out tax-free for qualified medical expenses. 

4. Convert Retirement Account to a Roth IRA

It is never easy paying more taxes than you need to. But for people in lower tax brackets who believe their tax rates may be higher in the future, Roth conversions can make a lot of sense. Partial conversions are allowed, meaning the entire sum of the retirement account does not need to be converted. This means you can calculate the exact amount that should be converted each year to minimize the taxes due. Also, the taxes owed on the conversion can be offset using some of the strategies discussed above. Remember, all the growth in a Roth will be tax-free if the rules are followed properly. This can be very powerful if/when taxes are higher in the future.  

5. Take Advantage of Tax Forecasting

Everyone has a unique tax situation. By working with a professional who can offer tax forecasting software and services, you can clearly see the net effect of implementing some or all of these strategies. A tax forecast is an extremely valuable tool that should be used near the end of the year to help you make educated decisions on your tax plan.

December can be a busy time of year and it is always easy to procrastinate, especially when the subject is taxes. But for some people these strategies could mean thousands of dollars in tax savings. And after all the holiday spending, that extra money in the beginning of the year can be even more important. So, don’t wait any longer—all of the strategies discussed here need to be implemented by the end of the year.   

(For more from this author, see: How to Manage Risk With Bonds in Your Portfolio.)

Disclosure: Kinetic Financial & Insurance Solutions, Inc. and Kinetic Investment Management, Inc. are two separate entities. Insurance products and services are offered and sold through individually licensed and appointed agents in all appropriate jurisdictions under Kinetic Financial & Insurance Solutions, Inc. Investment Advisory Services are offered through Kinetic Investment Management, Inc., a registered investment adviser.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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Ways to Give Gifts That Keep Giving Financially

It’s the season of gifts again. What if you chose some gifts that would literally keep giving, and keep that Santa Claus warm fuzzy feeling going for a long time?

Accounts for Children and Teens

For children or teens, don’t forget the college savings accounts that you as a parent or grandparent can set up. Consider the tax and financial aid treatment of each type of account before settling in on strategy for contributing on a one time or continuing basis. While a 529 account can be tax free if the holder withdraws for qualified education purposes, other accounts can be considered as financial assets available to the child for covering educational fees and tuition fees once accepted to college. (For related reading, see: Choosing the Right 529 Education Savings Plan.)

Delaying a custodial account’s inheritance until age 21 from the usual 18 years of age may help but many young adults may still be in college at that age. Custodial accounts, however, can hold a variety of assets and are not limited to mutual funds as a college 529 account is. 

Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts can serve as a poor man’s trust, and hold title to assets in the name of a child until the age of majority. The UTMA account differs from the UGMA account in that it can hold title to non-bank assets as well, such as real estate. This may be a consideration as minors cannot inherit directly. A trust or UTMA account can hold assets on the child’s behalf that are managed by the named custodian or guardian until the child matures. Families with assets should think about how these can be protected for children if the parents pass away before the children attain the age of majority.

Termination age may vary from one state to another but generally, for the UGMA trust, the termination age is 18 years, while for the UTMA trust the termination age is 21. Depending on the state, assets in UTMA accounts can be held for up to 25 years, allowing parent more control over the timing for turning over the assets to their child. Unlike a college 529 account, a UTMA or UGMA account is not transferable to another child.

Custodial accounts can be established at a bank, mutual fund company or brokerage services company, as well as directly with a trust company serving the shareholders of a specific corporation. Direct investment programs allow incremental month by month purchase of blocks of stock using checking account withdrawals and allow the giver to literally give monthly to accumulate shares in a variety of dividend-paying companies. The dividends are reinvested to accumulate even more shares during the holding period and fees are usually quite low. The one downside is that concentration in a single company stock can be subject to wider swings than the general stock market.  (For more, see: A Closer Look at Custodial Accounts.)

If you decide to investigate direct investment one idea may be to choose companies that your children or grandchildren understand, such as major consumer brands which the child has experience with. In this way, children learn early on about investing, assets and the possibilities for dividends and growth. The account becomes theirs at the designated age of majority.

Check with your tax advisor about taxation of the account and the dividend income and the effect on your returns. There is a deduction available to the child for the first $2,100 or so of unearned income. The amount received thereafter can be taxed at the child’s rate or the adult’s rate, depending on the age of the child. For more information on taxes visit this page of the IRS' web site.

Charitable Giving

When thinking about gifts to charities many people like the idea that their gifts continue to give over time. For instance, a gift to Heifer International can buy goats, cows, chickens, ducks, honeybees and many other animals that procreate. Heifer donates these animals to farm families in underdeveloped countries who in turn can manage their animals to create income for their families.

Donor advised funds are another way of giving and you decide the frequency of distributions. Your local community foundation, a 501(c)(3) nonprofit organization, is a resource. These foundations support a variety of local nonprofits and create pools of donor funds for quarterly or annual distributions. Better yet, you may get a gift back in the form of a tax deduction for amounts you initially gift to the community organization. It’s worth a conversation and you may like to involve your children or grandchildren in the process to learn about the importance of giving during one’s lifetime. The community foundation can also advise you about the tax benefits of donating appreciated stock to support the donor fund or other charitable goals.

End of the year tax planning is paramount. Many changes to the tax code are before our current seated Congressional delegations. Many of these changes could take effect in the new year. Luckily charitable deductions don’t yet seem to be on the chopping block. They can be useful in managing your overall tax liability for this year when filing in 2018. (For more from this author, see: Putting Your Money to Work for the Greater Good.)

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How Small Business Owners Can Create Cash Flow

After all the planning and preparation that has gone into your business, you think you’re in the clear once you turn a profit. While business owners traditionally evaluate a company’s financial performance based on net income, your continued efforts to generate new sales and trim costs might not be enough to save you from financial disaster. Profits are important, but cash flow is key in determining your company’s viability.

Profitability and cash flow are not the same and poor cash management is the top reason most businesses fail. Without proper cash flow, you won’t have the resources to pay your bills or your employees - the fast track to going out of business. Think your business is safe? While there’s no guarantee, keeping these factors in mind will help to manage your cash flow and sustain your business when times are lean. (For more, see: Asset Protection for the Business Owner.)

Self Financing Cash Flow

As a business owner, you put everything on the line to grow your business. Self-financing your startup can seem like the formula for immediate success. After all, you won’t have to deal with banks or investors. Plus, when your own money is on the line, you’ll look at your business differently than if you had borrowed it.

The truth is, while half of all businesses survive five years, most won’t make it to the 10-year mark. When cash flow stalls, it’s tempting to dip into funds earmarked for personal goals. This is especially true if you self financed your startup because you won’t have the necessary outside financial resources to lean on for your business. But doing so increases personal debt and your risk of bankruptcy.

For long-term success, avoid using your personal savings account or personal credit cards and lines of credit to supplement your cash availability. Mixing your personal finances may seem straightforward now, but you’ll pay the price later. Keeping separate bank and credit accounts for your business gives you a more accurate picture of the financial health of your business, and it also helps shield your credit score if your business takes an unfortunate downturn.

Financing Cash Flow

When cash flow becomes a problem for your business, it’s best to look at outside funding options. Whether it’s for growth opportunities like opening a new location, increasing inventory in anticipation of a busy season, or for supplementary cash flow, an estimated 99.95% of small business owners seek debt financing.

Traditional banks offer larger loans at a lower APR, but the application process can take months. Unsecured loans will get you money faster, though lenders will limit the amount you can borrow and your APR will likely be very high. That’s why, when it comes to financing cash flow, a cash flow loan is a good balance between the application process time and the cost of APR. (For more, see: Six Steps to a Better Business Budget.)

Here’s a look at the five most common types for your business:

Business Credit Cards

Using a business credit card is a popular option because of the relatively easy access to securing funding. Higher APR and lower borrowing limits make it an impractical option to cover large cash flow gaps. But if you’re a new business, need short-term purchasing power, and can pay it back in full within a month or two, this could be a good option.

Lines of Credit

Though similar to a credit card, lines of credit require a more formal agreement between borrower and lender. A line of credit is great for small business owners because it gives rolling access to cover seasonal cash flow gaps and can help to cover large cash payments to suppliers, vendors and contractors that don’t accept payments by credit card.

Term Loans

Similar in structure to a mortgage or car loan, a term loan for business lets you borrow a lump sum upfront and pay it back according to a fixed payment schedule. Most term loans require a business to have operated two years or more, a personal credit score of at least 640, and a minimum $200,000 in annual sales, making term loans a good choice for established small businesses.

Invoice Financing

Invoice financing lets you borrow money by managing your accounts receivable to cover gaps in cash flow. This is especially useful if you land a larger contract and need help coming up with cash up front to meet the large order. If you have a long history of credit sales and can collect within 60 to 90 days the majority of accounts receivable, this might be a good option.

Merchant Cash Advance

While not a loan, a merchant cash advance offers advance payment using your business’ future income as collateral. Terms can range from 90 days to 18 months and are repaid automatically using a percentage of your daily credit card receipts. This option is ideal for small businesses that lack a strong business credit score, though you must readily demonstrate a steady cash inflow stream to qualify.

Selecting the best way to finance cash flow is a complicated decision. You’ll need to understand your business’ finances in-depth to know if using a credit card, line of credit, merchant cash advance, or another method is right for you. While no one knows your business better than you do, a fee-based financial planner can help determine what financing options may make the most sense for your business. (For more from this author, see: Exit Strategies for Business Owners.)

Disclosure: The information being provided is strictly as a courtesy. When you link to any of these web-sites provided here, you are leaving this site. Our company makes no representation as to the completeness or accuracy of information provided at these sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, sites, information and programs made available through this site.

Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc. Member FINRA, SIPC, and Registered Investment Advisor. AspenCross Wealth Management is independent of Signator. 1400 Computer Drive Westborough, MA 01581

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The Pitfalls of Not Coordinating a Financial Plan

From taxes to investment to insurance, managing all aspects of your financial plan can be overwhelming. After all, it’s ultimately up to you to make sure that your investments, retirement plan, estate plan, insurance policies and taxes are all on track and working efficiently. That can be an intensive task for a financial professional, let alone for someone with limited knowledge about each of these areas. But, even if you’ve successfully implemented strategies in each of these areas, are you sure that each strategy is working together the best that it can?

It is typical for individuals to hire a wealth or investment advisor, an accountant, an attorney, an insurance agent or two and maybe even a banker for you lending needs. However, how often do these individuals get together and discuss your entire situation? Unfortunately, the answer is usually, never. (For more, see: Starting Early With Financial Planning.)

Not coordinating your financial plan comes with consequences that includes real dollars. Here are three pitfalls of not properly coordinating your financial life:

1. The Tax Pitfall

Should you do a Roth conversion? Should you take an IRA distribution a year or two early? What is your forward-looking tax bracket projected to be? Should you take some capital gains this year versus leaving for the future? What is the best retirement plan to initiate for a self-employed person?

Most of these scenarios outline opportunities to reduce tax liability. However, it takes a proactive approach to identify these opportunities. Without coordination, an accountant wouldn’t know the amount of realized capital gains in an investment account for the year. It is typical for them to assume something similar the year before. However, while that may be sufficient in some years, it certainly seems to make sense to get an accurate number for the current year, in case the realized number is significantly lower or higher than expected.

Some accountants will work with wealth advisors to find opportunities for clients to take capital gains in the current year while avoiding increasing tax liability due to a year with low reportable income.

These are simply just a few of the key issues that can be resolved by simple coordination between your wealth advisor and your accountant. Accountants will often look in the past as a barometer to make decisions. They will compare the current year to years passed. A wealth advisor can use detailed cash flow projections, using all of your financial information (income, Social Security, investment accounts, etc.) to look years into the future. Together, with all the information, they can make your financial plan more efficient.

2. The Estate Planning Pitfall

So, you hired an estate planning attorney to draft your important documents like your trust/will, power of attorney for healthcare, power of attorney for property, etc. Your attorney did all this great work in drafting your documents, but did you follow up with your investment advisor or insurance agent to change beneficiaries or move certain accounts into the name of a trust? (For more, see: Your Annual Financial Planning Checklist.)

Unfortunately, this mistake is all too common. By not properly following through and changing beneficiaries or retitling accounts, all of the estate planning work done by your attorney can be made void. Many think that simply creating a will or trust document that labels beneficiaries will trump whatever beneficiary designations are in place, which is, of course, not true. Some attorneys will advise on how to change your beneficiaries, but I have never witnessed one that would go so far as to fill out beneficiary forms with their clients after drafting documents.

Advisors and financial planners are there to make sure those changes are made and that beneficiaries and trustees are updated along the way. With coordination, the advisor can communicate directly with the attorney to make sure there are no errors in the designating of beneficiaries or titling of accounts.

In addition, an advisor can also help remind attorneys of certain trust provisions that may need to be included, such as the need to retain benefits of inherited IRAs by setting up a see-through trust. And, getting documents drafted in the first place can be like pulling teeth at times. An advisor can often facilitate that process as well.

3. The Insurance Pitfall

Do you need life insurance? Should you have more life insurance? What about long-term care insurance? Are your policies current? Have you reviewed your insurance policies lately? Are they on track to perform as they were designed to on the day they were issued?

Life insurance agents, unlike financial advisors who advise on retirement plans, are not bound to a fiduciary standard when it comes to making recommendations for insurance policies. And, once policies are written, it is rare to find an agent who will actually review those policies over time to make sure they are still helping the client achieve the objective that they initially set out to achieve.

Why aren’t policies reviewed? One might say it is because most insurance policies pay advisors a front-end commission. In other words, it doesn’t pay the advisor to monitor those over time (this is something the insurance industry is trying to solve). The result is that over time, as goals change, and as life changes, these policies may need to be updated, altered, or even removed altogether.

A good advisor will monitor your insurance policies to make sure they are still achieving the objectives originally desired. If not, the advisor can communicate with the insurance professional in order to make alterations that best suit the client. Sometimes, the advisor and the insurance agent might be the same person, which could make things even simpler.

It is common that an insurance agent may not know the full complexity of your situation. They may not be looking at your entire financial picture, considering future cash flows to foresee what's ahead for you, or, how your portfolio may offset your insurance needs. An advisor might point out that due to the increased value of your portfolio, you might consider an umbrella policy. Or, you may now be able to self-fund any potential liabilities in the case of death or a long-term care event. Coordination can allow an advisor and an insurance agent to work together to get more defined on what's best for you.

Be Proactive When Coordinating Your Financial Plan 

Coordination can be complex, especially when you are trying to coordinate between two or more complicated topics like the ones mentioned above. For the average individual, this is a daunting or even impossible task. This is where an individual might recognize the benefits of hiring a financial planner to oversee all aspects of their financial plan. An advisor with the right credentials, can oversee all aspects of their financial plan. They will be trained in all of these areas and should be able to effectively work with the subject matter experts (like your accountant or attorney) to arrive at the best solution for you.

So, if you’ve been proactive enough to begin to address each of these areas, you’re probably ahead of the pack. What's your next step? Make sure that what you’ve done in each area works best with the rest of your plan, so you can feel empowered to achieve your personal financial goals. (For more from this author, see: Don't Make Your Beneficiaries Search for Your Assets.)

Disclosure: All articles are provided by CarsonAllaria Wealth Management (CAWM or firm) for informational purposes only. By accessing or otherwise using this Article, you agree to be bound by the terms and conditions set forth below. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the Article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the Article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment strategy. In addition, this Article shall not constitute the provision of personalized investment, tax or legal advice, and investors shall not assume this Article serves as a substitute for personalized individual advice. Information contained in this Article may have been derived from third-party sources that CAWM believes to be reliable; however CAWM does not control such information and does not guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Links or references to third-party websites are provided as a convenience and do not constitute an endorsement by CAWM, and the Firm is not responsible for the content of any such websites. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

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7 Questions to Ask a Potential Financial Advisor

There are plenty of investment advisors who are willing to take your money and invest it, but how do you know if they are making the best decisions for you? Rather than telling an advisor how to manage your money, ask them good questions before hiring them so you can completely trust them to manage your money.

Here are some questions you should ask an advisor to determine if they are a good fit for you:

1. Why Did You Become an Advisor?

Find out why your advisor wanted to become an advisor in the first place. What you are looking for is what motivates him or her get out of bed and come to work in the morning.

2. How Do You Make Investment Recommendations?

Find out what kind of research the advisor engages in and how much time per week they spend doing it. You want an advisor who is picking stocks after researching them, not on a whim or by what is trending.

3. What Is Your Educational Background and Experience?

There is no set educational or career path for financial advisors, but knowing they have some formal education and certifications and/or licenses can help you trust the decision they would be making with your money. (For related reading, see: The Alphabet Soup of Financial Certifications.)

4. Where Is Your Money Invested and Why? 

If the advisor is willing to answer this question it can increase your confidence if the holdings are the same investments he or she is recommending for you. However, keep in mind your advisor may have different financial planning goals than you.

5. How Would This Investment Fit Into My Financial Plan?

Seek out an advisor who looks at your entire financial picture, not just what you have for them to invest. To make this question worthwhile, you’ll need to understand your own financial objectives, risk tolerance and future goals.

 6. How Do You Get Paid, and Do You Have a Sales Quota?

Knowing how your advisor gets paid is extremely important because advisors earn money in different ways. Some are paid hourly, some earn fees based on investments, which may lead to conflicts of interest, and some are commission-based, meaning they earn a percentage of the profit on specific products they sell. You want to find someone who makes recommendations based on what is the best investment for you, not on what will compensate them most. (For related reading, see: How Your Financial Advisor Gets Paid.)

7. Are You Required to Do What's Best for Me, or Only What's Suitable?

Understand the difference between the fiduciary and suitability standard when choosing a financial advisor. The fiduciary standard requires an advisor to put clients’ interests first. This standard is adhered to by registered investment advisors (RIAs) and enforced by the Securities and Exchange Commission (SEC) or state securities regulators. The suitability standard requires a broker to make suitable recommendations based on a client’s situation. However, the standard does not require the advice to be in the client’s best interest.

Brokers, also known as registered representatives, are held to the suitability standard, which is enforced through a self-regulated organization called the Financial Industry Regulatory Authority (FINRA). In addition to the “clients’ interest first” difference, the fiduciary must disclose any potential conflict of interests that might arise as a result of advice (i.e. commissions on a product), whereas a broker does not have to disclose this conflict.

Find an Advisor Who Is Right for You

Some people are not always completely honest or trustworthy when it comes to managing our money, but fortunately, many advisors are. If you don’t fully understand your future financial goals, your advisor should ask you questions and work with you to craft a solid financial plan for your future. If you are satisfied your advisor understands your desires, you can be more confident in their investment decisions on your behalf and feel comfortable sticking to your plan.

(For related reading, see: Find a New Financial Advisor Who's Right for You.)

Important Disclosures: The information provided here is of a general nature and is not intended to answer any individual’s financial questions. Do not rely on information presented herein to address your individual financial concerns. Your receipt of information from this material does not create a client relationship and the financial privileges inherent therein. If you have a financial question, you should consult an experienced financial advisor. Moreover, the hiring of a financial advisor is an important decision that should not be based solely upon blogs, articles, or advertisements. Before you hire a financial advisor, you should request information about the financial advisor’s qualifications and experiences. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative (or “informational”) purposes only and not intended to be reflective of results you can expect to achieve. Judy Hulsey (“Judy”) works with Allgen Financial Advisors, Inc. (“Allgen”), which is an investment advisor registered with the SEC. Neither Judy nor Allgen provide personal financial advice via this material. The purpose of this material is limited to the dissemination of general information regarding the services offered by Judy and Allgen. It is not intended to be a solicitation or offer to sell investment advisory services to residents of any state in which Allgen is not currently authorized to do so. The Disclosure Brochure, Form ADV Part II, which details the business practices, services offered, and related fees of Allgen, is available upon request.

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Financial Advisors: It's Okay to Say "I Don't Know"

One of the earliest, and most important, lessons I learned when I became a financial advisor was that it’s okay to tell a client you don’t know something. Of course, you need to make it clear that you will find out, and it’s all-important to actually get the right answer, but too often in our industry, the impulse is to confidently rattle off what amounts to your best guess and hope you got it right. It sounds like a simple thing, but it is actually quite counter-intuitive, particularly for an advisor who is relatively new to the business.

For years I had a tax preparer whom I loved. She was actually the mother of a childhood friend, and had gotten into the tax planning business very late in her professional life. Because of this, she had never become bored or jaded with the business, and had this enthusiasm about tax issues that was delightful and infectious, if not a bit odd. Not only in preparing my taxes, which were fairly simple, but when I would call to ask a tax question for a client, she would often tell me she didn’t know the answer off the top of her head, but would do some research and find out. It never bothered me that she didn’t know something immediately, what mattered was she was honest about it and got me the right answer. Give me someone smart and curious who’s willing to do the investigating work any day.

Financial Advisors Are Asked Questions on Many Topics

Financial advisors are expected to be proficient in a wide variety of subjects, and the good ones pride themselves on being the go-to person for their clients when any financial matter comes up. In that role, one is faced with a seemingly inexhaustible number of questions on such a vast range of topics that it can be daunting. We get tax and estate planningquestions, investing and budgeting questions, insurance, benefits, lending and debt questions, and the list goes on. Each of these areas is worthy of singular expertise, yet we may be expected to address them all in a single day. It’s virtually impossible to know everything there is to know about all of those subjects, yet so often, advisors will hazard their best guess rather than admit to not knowing the answer. It takes a lot of confidence to admit one’s own ignorance of something, and to me that confidence tends to come with experience.

It’s one of the things that makes it so hard starting out as a financial advisor. You’re being asked all of these difficult questions across multiple disciplines, and without the experience of repetition, and years of addressing the same issues under your belt, you already feel as though you’re short on answers. It’s so hard to repel the instinct to try to respond confidently, even if we aren’t 100% sure of our answer. The problem is, that’s when serious damage can be done to clients.

Advisors Who Seem to Know Everything

So, if you’ve been with an advisor for a while now, and have never been told he or she doesn’t know something, he or she is either a genius, or isn’t being completely forthcoming. My money’s on the latter. The truth is that everyone makes mistakes, and we’ve all been guilty of giving an answer we were sure was right, only to find out later was wrong. It’s so important though, if there’s even an inkling of doubt, to step back and have the courage to admit it, in order to get to the right solution.

We have a saying we use quite a bit: “We know what we don’t know.” We don’t know what the market will do tomorrow, and we don’t know what tax rates will be in 20 years, but we do know that if we’re honest with our clients when we are unsure, and work to get the right answers on their behalf, they will be much better off in the long run, and respect us all the more for knowing what we don’t know.

(For more from this author, see: 3 Steps to Avoid Investing Mistakes.)

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3 Financial Planning Steps for New Families

My son, Noah, is nearly two years old. It has been an absolute joy to watch him grow up. It’s amazing to see where he is now developmentally compared to just a few months ago. Watching him change since birth is unlike anything I’ve ever experienced. I knew having a child would be special, but I wasn’t prepared for how profoundly the experience would affect me. And if what I’ve been told is true, I expect it will only get better as the months and years pass. However, looking back, there are three steps I would have taken to prepare financially for the birth of my son and my new life as a father.

Whether you are an expectant parent, thinking about having a child in the next few years or already have a young child, think through these three items and take action.

1. Buy Life Insurance and Make Sure Your Beneficiaries Are in Order 

Sorting through the different insurance options available in the marketplace (universal life, whole life, variable life, etc.) can be a bewildering process. In my opinion, purchasing insurance, much like investing, should be simple and easy to understand. As I’ve written before everyone’s personal situation is unique but I believe that term life insurance is an excellent option.

But purchasing life insurance is only half the battle. An often overlooked aspect of life insurance is making sure your beneficiaries are accurately noted. For instance, most people list their spouse as the primary beneficiary and child (or children) as the contingent beneficiary (or beneficiaries) on their life insurance policy. Where this becomes problematic is in the event that you and your spouse die before your contingent beneficiary (e.g. your child or children) reach the age of majority, which is either 18 or 21 years of age, depending upon your state of residence. Until the age of majority, your child is considered a minor and cannot receive the insurance proceeds. If your child needs the money, he or she may have to go through probate, which is an expensive, time-consuming process where an estate guardian will have to be court-appointed to oversee the insurance proceeds until the child reaches the age of majority. (For related reading, see: Who Should Be Your Life Insurance Beneficiary?)

To avoid this unnecessary complication, you can designate that the insurance proceeds be paid to an adult custodian for the benefit of the minor child to be held in a Uniform Transfers to Minors Act (UTMA) account. By creating a UTMA account and listing it as the contingent beneficiary on your insurance policy, you place a trusted relative (or friend) in charge of the insurance proceeds. Please be aware, however, that a UTMA is not customizable like a trust, meaning that once your child obtains the age of majority the insurance proceeds are his or hers to manage. Some parents might not feel their child is capable of responsibly managing the financial windfall an insurance policy provides at such a young age. They may therefore opt to establish a trust which, along with being able to be extended beyond the age of majority, provides the opportunity to engage in more detailed planning. It is important to note, however, that a trust, while providing more flexibility than a UTMA, can be costly to establish, whereas a UTMA is more cost-effective and easier to create.

2. Designate Customized Beneficiaries on Your Retirement Accounts 

If you have individual retirement account (IRA), you’ve most likely placed your spouse as the primary beneficiary and child as the contingent beneficiary. Similarly to life insurance proceeds, a minor cannot inherit an IRA in his or her name. It is therefore important to take an additional step and arrange for an adult to manage the money in the event that you and your spouse pass away while your child is under the age of majority. In order to do so, contact your financial institution and ask to establish a trusted relative or friend as a custodian on your IRA accounts.

Your financial institution may require you to complete a beneficiary designation form, and it is a good idea to be as specific as possible in your instructions (e.g. list the custodian’s Social Security number, first, middle and last names, as well as date of birth), to obtain written acknowledgement of your designation from your financial institution, and to keep a copy of the acknowledgement with your will. If you and your spouse die without setting up clear instructions about the custodianship, your IRA will most likely go to probate and will be at the mercy of a judge who will try and interpret what he thought you meant. If your financial institution won’t cooperate, you should move your account elsewhere. (For related reading, see: Designating a Minor as an IRA Beneficiary.)

3. Revisit Your Investment Accounts

Finally, either before or soon after your child is born, it is a great idea to sit down with a financial advisor and evaluate where you stand. Revisit where you currently are and where you would like to be. For instance, have you set up a college savings plan? Do you need to adjust contributions to your 401(k) plan? How about paying for childcare? Have you put enough money aside to buy a house if you’d like to? Discussing these questions is critical to making sure you have a plan to reach your goals.

This is a lot. I know. And if you are feeling overwhelmed, that is completely normal. Taking care of one of these items is a huge accomplishment. Much like preparing for a family or raising a child, it is the incremental progress that matters.

(For more from this author, see: Financial Planning: Preparing for the Unexpected.)

Disclosure: Securities and Advisory Services offered through Commonwealth Financial Network, Member FINRA/SIPC. Clearfront Advisory LLC. 157 Columbus Ave., Suite 436 New York, NY 10023. 646-779-9811.This communication is strictly intended for individual residing in the states of GA, IN, NJ and NY. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.

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