Asset Location: Why Attorneys Should Bridge the Perceived Investment Gap

Hayley, a widow, is meeting with her attorney to get advice on her estate planning. The attorney suggests that she should fund her revocable trust with her $2.5 million investment account and keep her IRA, other assets, and her home in her individual name. The attorney also recommends that she review her beneficiary designation for her IRA. It is likely that most of her assets will be held in a trust upon her death. Hayley met with multiple investment advisors from different financial institutions, but she didn’t want them to communicate with each other. As a result, each advisor recommended a slightly different investment plan for her, which caused confusion. This happened because the advisors didn’t talk to each other or to Hayley’s lawyer, and Hayley didn’t want her lawyer to talk to her advisors either. This lack of communication led to a disjointed investment plan. As Hayley’s attorney, it’s important for me to care about her investments because it directly impacts her estate plan that I designed for her. If her investments are not managed properly, it could lead to unnecessary fees, lower performance, and a less effective estate plan. By encouraging clients to share their financial information with their investment advisors, we can ensure that the investment strategy aligns with the estate planning goals. This starts with diversifying assets among different categories like stocks, bonds, and real estate based on the client’s needs and risk tolerance. Asset allocation is about deciding how much of your money to put into stocks and how much into fixed-income investments, based on your willingness to take risks. Asset location, on the other hand, is about deciding which type of account to put each investment in, based on its tax characteristics. This can make a big difference in how much money you end up with in the long run. It’s important to understand the tax implications of different types of investments and how they are taxed, in order to make the most of your money. It’s important for investment advisors to understand and explain the different tax implications of various investment options to their clients. They should also look at the specific characteristics of each investment to see how it will be taxed. This includes looking at the income tax and gift, estate, and GST tax implications. Different types of investments, like individual assets or retirement accounts, have different tax implications. It’s important to choose the right investments for each type of account to minimize taxes. Advisors also need to consider the tax efficiency of each investment, meaning how much of its return is affected by taxes. For example, some bonds are more tax efficient than others, depending on the type of account they are in. Hayley has a lot of money invested in different accounts and trusts. As her advisor, it’s important to understand how taxes will affect these investments. Once we know that, we can make a plan to put the investments in the best place for tax benefits. For example, we might put some of the money in accounts that have tax advantages, like municipal bonds. It’s important to talk to all of Hayley’s advisors so they can work together and make the best choices for her. The main asset location challenges in this example are related to income tax considerations and the interrelationship of investments in a trust that is exempt from gift, estate, and GST taxes. Hayley’s high income tax rate means it may not make sense to hold taxable bonds in her trusts, and the traditional IRA investments could have included more growth assets. The income passing out to Hayley during her lifetime could impact the final amount passing to her daughter, Sophie, so a strategy with investments generating long-term capital gain might be better for the trust. When thinking about where to put your assets for tax purposes, it’s important to consider the type of trust you have. One type of trust may not be subject to estate or GST tax, while another type might be. It’s a good idea to look at both trusts together and consider putting more stock investments in the tax-exempt trust and more fixed-income investments in the taxed trust. It’s also important to understand whether the managers are allocating assets before or after taxes, as this can affect the allocation of investments.

When dealing with trusts, trustees have to follow specific rules and laws, so asset allocation decisions might have to be made separately from other assets. It’s easier if the trustees are the same and the beneficiaries understand the overall strategy. The general rule is that certain types of investments should go into different types of accounts. However, there are always exceptions to this rule. To decide where to put your investments, you need to consider things like the economy, taxes, and your own financial goals. A lawyer can help with this process by giving advice on the tax implications of different types of accounts and investments. It’s important for lawyers and financial advisors to work together to help clients make the best decisions for their money. Asset allocation, or how you divide up your investments, is really important for your financial planning. Most of the information about this is written by financial experts, and there’s a lot of research to support it. It’s not just about stocks and bonds – you should also consider things like cash and alternative investments. And be careful about selling stocks at a loss and then buying them back in your retirement account, because there are rules about that. The authors of this article suggest that advisors may want to talk to Sophie to see if a certain investment strategy works for her and her family. Some experts recommend making investment decisions based on after-tax considerations. The article also references specific Florida statutes. The authors work for a wealth management firm and have legal and tax backgrounds. This article was submitted by the Tax Section of the Florida Bar.

Source: https://www.floridabar.org/the-florida-bar-journal/asset-location-why-attorneys-should-bridge-the-perceived-investment-gap/