Tag Archives: John Hartog

Weaknesses And Strengths Of Wealth Management Advisers, Service Models - AZ Business Magazine June 2010

Popular IRAs Have Dark Downsides, Experts Warn

IRAs and annuities are growing in popularity as retirement investment options, according to recent surveys, but three financial experts warn they can have serious disadvantages.

“Last year, four out of 10 U.S. households had IRA accounts – that’s up from 17 percent two decades ago,” says CPA Jim Kohles, chairman of RINA accountancy corporation, citing an ICI Research survey. “But they can be bad for beneficiaries if you have a very large account.”

Investment in annuities, touted as offering a potential guaranteed income stream, alsocontinue to grow with sales up 10 percent in the second quarter of this year.

“Annuities have several dark sides, both during your lifetime and for your beneficiaries,” says wealth management advisor Haitham “Hutch” Ashoo, CEO of Pillar Wealth Management. “My business partner, Chris Snyder, and I wouldn’t recommend investing in them.”

Putting large amounts of money in either annuities or IRAs can have serious tax consequences for your heirs, say Kohles, Ashoo and attorney John Hartog of Hartog & Baer Trust and Estate Law.

“If you want to ensure your beneficiaries get what you’ve saved, you need to take some precautions,” Hartog says.

The three offer these suggestions:

• Take stock of your assets – you could be worth more than you think: If your estate is worth more than $5.25 million (for couples, $10.5 million), your beneficiaries face a 40 percent estate tax and federal and state income taxes, says Kohles, the CPA. “It can substantially deplete the IRA,” he says.

To avoid that, take stock of your assets now – you may have more than you realize when you take into account such variables as inflation and rising property values. Be aware of how close to that $5/$10 million benchmark you are now, and how close you’ll be a few years from now.

“Consider vacation and rental properties, vehicles, potential inheritances,” Kohles says.

Also, take advantage of the lower tax rates you enjoy today, particularly if they’re going to skyrocket after your death. “A lot of people want to pay zero taxes now and that’s not necessarily a good idea,” he says. For instance, if you’re at that upper level, consider converting your traditional IRA to a ROTH IRA and paying the taxes on the money now so your beneficiaries won’t have to later.

• No matter what your estate’s value, avoid investing in annuities. Wealth management adviser Ashoo warns annuities, offered by insurance companies, can cost investors an inordinate amount of money during their lifetime and afterward.

“Insurance companies try to sell customers on the potential for guaranteed income, a death benefit paid to beneficiaries, or a ‘can’t lose’ minimum return, but none of thosecompensates for what you have to give up,” he says.

That includes being locked in to the annuity for five to seven years with hefty penalties for pulling out early; returns that fall far short of market investments on indexed annuities; high management fees for variable annuities; declining returns on fixed-rated annuities in their latter years; and giving up your principle in return for guaranteed income.

“If you own annuities and have a substantial estate, there are smart ways to unwind them to minimize damage,” Ashoo says.

• Consider spending down your tax-deferred IRA early. If you’re in the group with $5 million/$10 million assets, it pays to go against everything you’ve been taught and spend the IRA before other assets, says attorney Hartog.

“It’s a good vehicle for charitable gifts if you’re so inclined. And if you’re 70½ or older, this year you can direct up to $100,000 of your IRA-required minimum distribution to charity and it won’t show up as taxable income,” Hartog says. (That provision is set to expire next year.)

You might also postpone taking Social Security benefits until you’re 70½ and withdraw from your IRA instead. “That willmaximize your Social Security benefit – you’ll get 8 percent more.”

Finally, anyone who has accumulated some wealth will do best coordinating their financial planning with a team of specialists, the three say.

As a CPA, Kohles is focused on minimizing taxes; wealth management adviser Ashoo’s concern is the client’s goals and lifestyle; and lawyer Hartog minimizes estate taxes.

“We get the best results managing tax consequences and maintaining our clients’ lifestyles by working together,” Hartog says.

value of money

Will Your Beneficiaries Beat the Odds?

Two-thirds of baby boomers will inherit a total $7.6 trillion in their lifetimes, according to the Boston College Center for Retirement Research — that’s $1.7 trillion more than China’s 2012 GDP.

But they’ll lose 70 percent of that legacy, and not because of taxes. By the end of their children’s lives — the third generation — nine of 10 family fortunes will be gone.

“The third-generation rule is so true, it’s enshrined in Chinese proverb: ‘Wealth never survives three generations,’ ” says John Hartog of Hartog & Baer Trust and Estate Law, (www.hartogbaer.com). “The American version of that is ‘shirtsleeves to shirtsleeves in three generations.”

There are a number of reasons that happens, and most of them are preventable say Hartog; CPA Jim Kohles, chairman of RINA accountancy corporation, (www.rina.com); and wealth management expert Haitham “Hutch” Ashoo, CEO of Pillar Wealth Management, (www.pillarwm.com).

How can the current generation of matriarchs, patriarchs and their beneficiaries beat the odds? All three financial experts say the solutions involve honest conversations – the ones families often avoid because they can be painful – along with passing along family values and teaching children from a young age how to manage money.

• “Give them some money now and see how they handle it.” Many of the “wealth builders,” the first generation who worked so hard to build the family fortune, teach their children social responsibility; to take care of their health; to drive safely. “But they don’t teach them financial responsibility; they think they’ll get it by osmosis,” says estate lawyer Hartog.

If those children are now middle-aged, it’s probably too late for that. But the first generation can see what their offspring will do with a sudden windfall of millions by giving them a substantial sum now – without telling them why.

“I had a client who gave both children $500,000. After 18 months, one child had blown through the money and the other had turned it into $750, 000,” Hartog says.

Child A will get his inheritance in a restricted-access trust.

• “Be willing to relinquish some control.” Whether it’s preparing one or more of their children to take over the family business, or diverting some pre-inheritance wealth to them, the first generation often errs by retaining too much control, says CPA Kohles.

“We don’t give our successor the freedom to fail,” Kohles says. “If they don’t fail, they don’t learn, so they’re not prepared to step up when the time comes.”

In the family business, future successors need to be able to make some decisions that don’t require the approval of the first generation, Kohles says. With money, especially for 1st-generation couples with more than $10 million (the first $5 million of inheritance from each parent is not subject to the estate tax), parents need to plan for giving away some of their wealth before they die. That not only allows the beneficiaries to avoid a 40 percent estate tax, it helps them learn to manage the money.

• “Give your beneficiaries the opportunity to build wealth, and hold family wealth meetings.” The first generation works and sacrifices to make the family fortune, so often the second generation doesn’t have to and the third generation is even further removed from that experience, says wealth manager Ashoo.

“The best way they’re going to be able to help preserve the wealth is if they understand what goes into creating it and managing it – not only the work, but the values and the risks,” Ashoo says.

The first generation should allocate seed money to the second generation for business, real estate or some other potentially profitable venture, he says.

Holding ongoing family wealth meetings with your advisors is critical to educating beneficiaries, as well as passing along family and wealth values, Ashoo says. It also builds trust between the family and the primary advisors.

Ashoo tells of a recent experience chatting with two deca-millionaires aboard a yacht in the Bahamas.

“They both built major businesses and sold them,” Ashoo says. “At this point, it’s no longer about what their money will do for them — it’s about what the next generations will do with their money.”