In this episode, Victor explores some basics like: Why is estate planning important anyways? In the second half of the episode, Victor discusses how to select an asset manager, and why it’s important to select one aligned with your investment beliefs.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
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Announcer: Welcome to “Make It Last.” Helping you keep your legal ducks in a row and your nest egg secure, with your host Victor Medina, an estate planning, elder law attorney, and certified financial planner.
Victor Medina: Hello everybody. Welcome back to Make It Last. I’m your host, Victor Medina. I’m so happy you can join us this Saturday morning. I am pleased to be bringing you two topics today that I think are just really super important.
One of them has to do with whether or not estate planning is important. Want to cover that as a base level question, because I actually had a client come in and ask me that question. Have me ask, “Well, hey, should I even be doing this? What would happen if I didn’t do this?”
I thought, “Oh my God, I’ve got to answer this question on the radio show.” Just so that we don’t run into a situation where people are thinking about this, and thinking “Maybe I shouldn’t do estate planning.”
Then I’m going to talk a little bit about hiring an asset manager, because I think that’s a really interesting topic as well. Before I get going with that, a little great personal news to share. I had one of my children, my middle child get into school that he was looking to get into. Now he’s off taking his first travel soccer weekend.
We’re going to be heading off to Maryland and participating in a soccer tournament. Really excited about that, parents getting together having their fun, the kids having their fun. The only thing I’m worried about though, is the weather at Maryland does not look warm at all. This is a spring tournament and the weather says anything but spring.
We’ve gotten together a little sign up list to make sure that we’ve brought enough stuff in there, and I can’t tell you, there is not enough blankets, tents, windbreakers, anything else in there, hand warmers, things like that, because it could be really, really chilling. I am excited to watch my kid play soccer, because I love doing that.
In any event, let’s go right into the topic of estate planning. I’ll tell you something, in order to cover this, what we’re going to have to do, is set up what estate planning is. Then we can make an argument about why it’s important.
Essentially estate planning is the process of determining, typically through legal guidance and documents that get drafted, who is going to receive your stuff, when you pass away. Estate planning also goes into what happens when you become incapacitated, and you’re unable to take care of your own affairs.
Part of the discussion isn’t just what happens when you die, but the term of estate planning, if it’s really being used to cover everything, is about trying to figure out what happens, not only when you pass away, but also if you become incapacitated.
When you start to think about it, that’s a pretty important thing to take care of, there is that whole concept, “It’s time to become adults, it’s time to start adulting.”
It is definitely an important element of adulting because your failure to attend to estate planning, if you don’t have that stuff setup, that can cause all kinds of problems and messes when you’re gone. We’re going to cover probably five or six areas that I think are important in making sure that estate planning is done.
One of them has to do with saving taxes. I use that as a lead because inasmuch as people might understand the soft reasons to do planning, making life easier for people when you’re gone. Sometimes you got to hit them right between the eyes and say, “This is gonna be saving money.”
If you have a proper estate plan put in place you can save on estate and income taxes. You can save money as you make a transfer for one generation to the next. Who’s going to pay the income taxes?
We’ll give you some examples. You’ve heard us in the past talk about proactive income tax planning. That’s the process in which you look at your tax rate today and sometimes turn into the storm. Turn into the income taxes to pay some of those taxes now because you’ll pay them at a lower rate than your beneficiaries will pay them later.
The most obvious way to do that is to take a look at your IRA accounts. Think about moving some extra money out of there and causing some taxes to be owed, paying the taxes because your tax rate is lower than your kids tax rate.
You are smart enough to be listening to this show and realizing that your kids are going to have to pay those income taxes at some point in time if you just leave it behind as an IRA. Why don’t we try to save on some of those taxes?
The other money that you can save with good estate planning is making sure that you avoid costs that are related to estate administration. If you think about the process of what happens when you die, you’ve got to follow whatever the legal process is to transfer whether that’s probate or trust administration.
You essentially have to go through this legal process of moving the stuff from one person, you to your kids, that other person. If you’ve done smart estate planning, you can reduce those costs by thinking ahead about that process or working with somebody that thinks ahead about that process.
Too often what we do is we consider the use of a will as something on a to‑do list. We’ll go in and say, “Well, I want the least expensive up‑front item, whatever that is. If that’s a will, I want to pay for that but I want to pay the least amount for it,” without actually contemplating all of the costs of estate planning, which include that back‑end costs of estate administration.
Often, that can be the most expensive of the costs that come along.
With smart estate planning, we can reduce those expenses. Can’t eliminate them entirely, there’s no way that we’re going to essentially be able to go to zero off of it, but you can get in a situation which the cost of that is greatly reduced so that you’re saving some significant dollars.
That’s pretty straight forward in most of the estate planning that gets done, but you have to be thinking about ahead of time and you have to be working with somebody that thinks about it ahead of time.
Next, in terms of the saving dollars, before we take a break here. It has to do with saving the cost of long‑term care. Nowadays, really good estate planning is done mostly by people who focus in the area of elder law.
You may not be ready to call yourself an elder, and that’s OK. I respect the idea that elder, just some people thinks they’re going to be in their 80s, when really this planning is very beneficial for people in their late 60s, mid 60s, and 70s.
If you say, “Well, that’s not for me, yet,” I want you to think about what it would do to your estate if you were forced to pay somewhere between 6 and 10 thousand dollars a month if you were in assisted living or in a nursing home.
As much as you may want to avoid those circumstances, the truth is you can’t control them. You can’t control whether or not you’re going to get sick and you can’t control whether or not the kind of sick that you’re going to get is going to cause you to need this kind of care ‑‑ this assisted living care, this nursing home care.
If you’re trying to avoid that, if you think it’s important to avoid that kind of expense, then you want to consider estate planning. It becomes important because good estate planning, being done by people who focus on asset protection while you’re in retirement and while you live the rest of your days, that kind of planning can save serious money.
Just think about one year that it can save. If you’re paying $10,000 a month for one year, that’s $120,000 in savings, if you’re able to help plan for that. That has to be done, typically, ahead of time. It has to be done with somebody that is thinking about that kind of planning and helping you think about that kind of planning.
There’s another one that’s right between the eyes, right between the eyes, and it will help you save money if you’re good enough to do that planning ahead of time.
Listen, when we come back, I’m going to cover a few other areas about why estate planning is important. Let me tell you, I’m going to propose that these things, while they’re not the dollar amounts, are actually more important than the dollar amounts. I’m going to tell you what they are when you come back from the break on Make It Last.
Victor: Welcome back to Make It Last, we’ve been talking about why estate planning is important. In the prior segment I gave you all of the dollar things that I think might…
I urge you do to do this planning, I compel you to do the planning if you want to save on taxes, if you want to save on the cost of estate administration, if you want to save on long‑term care costs, these are all reasons why you want to do estate planning. Let me give you the soft reasons, that although they are not about dollars, are probably going to be more important.
We have spent a career in my law firm helping people with estate planning. We have been doing nothing but estate planning as our principal work. I get to talk to a lot of people, we do a few hundred plans a year, I got to talk to them a lot and I talk to all of them myself.
One of things that is a threat throughout all of them is the importance of family, family harmony, and making sure that we don’t create problems in the future by how we leave these assets. The majority of my clients come into a situation really wanting to make sure that the assets that they have spent a lifetime accumulating don’t cause a problem when they’re gone.
One of the benefits of estate planning is avoiding or minimizing family fighting because you can, with good, clear guidance, avoid a lot of the questions that come up that cause fighting between siblings with clear estate planning. If you’re able to put a good plan in place, you’re able to avoid those problems as they talk together.
Another way where this planning can help avoid problems is in avoiding the emergencies that come about when you don’t have a plan together. A perfect example is a comprehensive estate plan is going to have a really robust power of attorney.
It’s not just going to have any form. It’s not going to have one that’s downloaded from the Web. It’s going to have one that is a mack daddy, high‑octane power of attorney, because you want it to work when you need it. You’re going to go ahead and get that.
If you have that power of attorney, one of the principal benefits is going to be avoiding a guardianship when and if you become incapacitated.
Because the difference between having a power of attorney, which lets somebody just step right in and help manage your affairs, and the guardianship is the difference between that really easy process and spending somewhere between $12,000 for a guardianship between you and the lawyer for the loved one, because there are two lawyers that are necessary, at least in New Jersey.
Avoiding that, avoiding three to four months’ worth of headaches to get this stuff done, avoiding fighting with financial institutions about whether or not you’re the person that they can listen to. That is a big headache. As I mentioned in prior shows, that headache exists even between spouses.
Whether or not you care about making sure that this stuff is well set up for your kids if you become incapacitated, most of you married folks really don’t want to saddle your spouses with this problem. The problem comes in because here they are. They’re trying to manage your IRA. They don’t have a good power of attorney because you didn’t do good estate planning.
You did the cheapo estate planning and got out the door. When it comes to manage that stuff, that power of attorney doesn’t work. Here we go back into a guardianship. Here we go back to thousands and thousands of dollars and all of the headache that comes with it.
Lastly, as we think about making sure that we don’t leave problems behind in the way of the inheritance.
Many times, clients will come to me and say, “I think that my daughter is probably OK to manage the money. Really, what I’m concerned about, I’m concerned about what happens if she becomes divorced, or if she’s got some of the inheritance left over and she passes away. I don’t want that money to go to my son‑in‑law. I don’t want it to go outside of the family.”
If you have done no estate planning, you’re going to get the estate rules, the default rules, because they’ve got rules for you, by the way. You’re knocking out estate planning. [laughs] Once again, there is estate plan for you. It’s the state version. It’s the default version.
In that version, your daughter gets the money, just probably the way that you wanted, equal shares amongst the kids. There are no protections on that. If she takes that money and she gets a divorce later, that money might be going to your divorcing son‑in‑law, the ex‑son‑in‑law that you’re so worried about.
If she passes away, likely, she’s had either an “I love you” will, leaving everything to the spouse, or he’s got a right to take it under state rules. In that scenario, your inheritance ends up going to the person that you don’t want it to go to.
What should we do? One of the things we can think about doing is creating an estate plan that, in its documents, creates a castle for the inheritance that you’re leaving behind, because if you have the opportunity to protect it with a castle and it doesn’t cost you anything different, and it doesn’t cost your daughter anything different to help protect it, then why wouldn’t you do that?
Most of my clients are right there. I would say that about 95 percent of the cases…No, I’m making that number up. It’s just so many. I can’t remember the last one that it didn’t use this. In most of the cases, people are using the planning to make sure that the assets that they leave behind are ones that are protected for the next generation, protected against divorces, protected against creditors.
When you put this stuff together, when you think about family harmony, when you think about saving money, when you think about reducing expenses, saving on income taxes as well as saving on long‑term care costs, there are a host of reasons why you need to do estate planning.
While it can be tempting to essentially stick your head in the sand and not get this done and try to deny reality, the truth is you’re playing a little bit of a roulette game. You could come up just great. You could also come up by any number of families that I’ve met where they get caught by not having a plan. The cost of not having a plan can be multiples of what it would cost to set up a plan in the first place.
What I’m urging you to do, if you skated this far without a good estate plan, is to really consider putting a fantastic plan in place. In a couple of episodes ago, we talked about what it will take to find a great planner.
What I’m going to ask you to do is if you’re interested in getting this done, go back to the other episode. Go on to Spotify. Go on to iTunes. Download a prior episode where it says, “How to select a really great estate planning attorney.” Go through the process of picking that person out and working with him to put an estate plan in place.
I am unmoving in my belief that estate planning is essential. It is the one piece of legal work that you can do that will end up leaving you better than how they found you when you get into it. When you get a traffic ticket, you need to work with a lawyer with that. You’re going to be out with some money. When you got a divorce, you got to be divorced. [laughs] It’s not good stuff coming out of that.
When you go through estate planning, and especially proper estate planning, what you’ll find is at the end of that process, you’ll essentially be better than the way that you started. I want that for you. I really do.
Victor: Listen, when we come back from the break, I’m going to talk to you about what goes into hiring an asset manager, because a lot of people have got questions about where their money is. I’ll talk a little bit about our practice and what we do with that. I’m not going to go into specifics about specific asset managers.
We’re going to talk generally about what goes into selecting one, so that you can, in fact, make a great one. Stick with us. We’ll be right back on Make It Last.
Victor: Welcome back to Make It Last. We spent the first part of the show talking about why estate planning is important. Hopefully I made the case. It’s really super‑important to do estate planning.
You want to make sure that you’ve got a great estate plan in place no matter where you are in life, but especially if you’re in a situation where you’ve got minor kids or you’re facing retirement and you now know, “Hey, listen, I’m going to die at some point in time. I might get sick.”
Those are all important times to get estate planning done and I want to make sure that you’re going to do that. Onto a retirement planning, investing in asset managers. There was a point in time in which asset managers were rockstars. What you would do is you would follow an asset manager because you thought that they had just the right mix.
Just the right touch to make you the most amount of money or prevent you from losing money if that was their gig. Number of things happened, which was the amount of information that was able to be known increased exponentially with the idea that everyone had access to it.
Internet comes along, reports, people are paying attention to the numbers in a way that wasn’t the case. What you find is that most of the information that can be known in investing is already known and factored into the price. It’s very difficult to get an edge. It’s very difficult to find just an asset manager that is somehow going to be superior to others.
Let’s be clear, this is a zero‑sum game. There will be asset managers that are going to be inferior. One person does not make money without somebody else losing money. The real question is what are you following? Are you following a person or are you following the process and the belief?
When we think about picking an asset manager, I want to lay out behaviorally what happens. I’m going to use a family member. This is dangerous. This is dangerous when you use a family member as an example. The family member I’m going to use in example is my mother‑in‑law who I love.
I want to make it clear if she’s listening to the show, I love my mother‑in‑law. What my mother‑in‑law did, when it came to investing is that she would look at the reports that were coming out about who was doing great and end up moving her money to let’s say a mutual fund. Mutual fund that was doing great.
She would hop from one fund to the next fund across her investment. Of course, she wasn’t making a lot of money because she was following the trends. What ends up happening is that she leaves somebody that’s on their way down and joined somebody on their way up.
What does that sound like to you? It sounds to me that she is selling low, getting out while you’re on your way down and buying high. Getting in while people are growing. What’s in that the opposite of how we make money?
We don’t buy high and sell low. We go in the other direction. We want to buy low and sell high. The problem with that strategy, of course, is that no one can tell you what is low and what is high.
There’s not a person in the world that can tell you exactly what’s going to be low. If it’s zero, that’s the lowest, but then you’re bankrupt. Figure out what high is, is much, much harder. What you want to think about is not necessarily following a person but following a process or looking at an investment philosophy.
What we ended up doing in my practice is we subscribe to an investment philosophy called the modern portfolio theory, which is a subset of that, but you can do your research on it and understand a little bit about it.
Essentially what it says is all the knowable information about the market is already in there. The price is accurate. There are no deals. There are no deals that you can find. The real question then is if you would like to make money, what can you do?
One of the things you can do is start to tilt or favor your investments in certain classes that have historically and by the math, by the evidence that’s out there, outperformed other classes. Let’s take three of them.
What I’m explaining here is the philosophy of a particular fund advisor that we use in our practice. We use them a lot. What they say is, and this was based on work that was done first in the ’70s again the ’80s.
Nobel Prize work. They say, “Look, if you start to favor or if you tilt your investments towards smaller companies versus larger companies, companies that provide value versus those that provide growth and profitability versus ones that are not as profitable. If you tilt your investments in those directions, you will find dimensions of return that exceed the market.”
If you follow the map on that, you see that that in fact’s the case. Here’s the thing, it doesn’t happen quickly. It doesn’t happen instantaneously. It’s very difficult to look back one, two, three months and prove that this has been the case. You do that with more time.
When we talk about these dimensions outperforming the market, we do so on the basis of it being a long view. A long view. It is not a short‑term approach. If you start focusing on that stuff, if you start focusing on the area, you will outperform the market. At least the math suggests that, but it’s going to take time.
What you really want to do then is if you say, “If I’m in for the long haul, the next thing that I want to do is make sure that the cost of these investments is not high. I don’t want those costs to accumulate year after year after year because that’s going to erode how much I can make.”
You’re going to want to be thinking about funds advisors, asset managers that essentially have lower costs over higher costs. If they’re following that philosophy, you’re going to be with them for some period of time.
It’s not going to be a quick thing. You don’t want to overpay for what is essentially a long‑term philosophy because it will eat into your total returns. When I think about an asset manager, I’m really less concerned with the person. There are some advisors that can name the people.
I can’t tell you any of the people in Austria or Santa Monica that are actually making the trades within the funds. It’s not important to me because the person is not determining the strategy and the result. They’re not going after their belief as to what’s going to work and what’s not going to work.
What they’re doing is they’re following math. They’re following some evidence‑based stuff that says, “When it comes to investing, here’s the things that you’re going to want to do in order to be successful.”
They have certain orders that they’re following in order to get that done and so because I don’t follow the rockstar, I don’t suffer the rockstar’s fate. There’s too many of them. Their stars burn bright, but they also burn out.
If you look at people that are active managers, that are doing stuff on a short‑term basis, it is nearly impossible to find somebody that has consistently outperformed their benchmarks. It just doesn’t happen. You got to bury two things together.
You got to marry your following of the philosophy. Finding somebody whose philosophy you believe. Like in our case, there’s this long‑term based philosophy. This passively‑based investing, in evidence‑based, investing, these dimensions of return. If you’re going to find that, you want to marry it with good behavior.
I know that I’m turning that around on you because you might think to yourself, “Oh jeez, I am having good behavior.” No, most of the time investor behavior is the number one cause of them not making what they should be making. It wasn’t that philosophy was wrong, it was the behavior that was wrong.
We get to the value of an advisor. If you’re able to hand this responsibility over to someone who both is following the philosophy that you agree with or it’s been explained to you and you say, “OK, that’s works.”
You turn it over to them so that they insulate you from bad decisions. In fact, you can end up making much, much more money off of this. You can definitely get everything that you deserve in that area.
The happy end of that story is that with respect to my mother‑in‑law, her account and value has increased significantly now that she’s not futzing around and moving from one fund to the other.
If we are able to do the same thing for the rest of our clients, prevent them from making any mistakes at the end of the day, they’re going to end up better than if they had made those mistakes. We’re going to try and do that. That’s it for today’s show. I want to thank you for joining us.
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Until we come back next week, I want to thank you for joining us. I want to thank you for listening. We have such great loyal listeners and we really appreciate the feedback that you’ve provided and continuing to serve you with this radio show.
We’re looking forward to doing more of that next week. This has been Make It Last, where we help you keep your legal ducks in a row and your financial nest secure. My name is Victor Medina. I will see you next Saturday. Bye‑bye.
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