Whenever new technology enters the world there are two inevitable emotions: excitement and fear. The thrill of new possibilities tempered by fears of new tech failing to live up to the hype. Take, for example: Robo-advisors. A great example of the complexities surrounding emerging tech, Robo-advisors provide automated digital financial advice based upon algorithms and/or mathematical rules.
When Robo-advisors launched in 2008 they were heralded as the dawn of a new era in financial planning. Some experts even believed this advancement signaled the end of financial planning (and real, human financial planners) as we know it. Not so. Over a decade later Robo-advisors are still around; however, they have failed to take over the financial planning world as predicted and in fact many are shuttering their doors or seriously scaling back on size.
So what happened? Why did Robo-advisors fail to eliminate the role of humans in the financial planning process? At the end of the day, it comes down to human connection. While an algorithm can crunch numbers, make predictions, and even offer investment advice, it cannot form impactful and lasting relationships like a real human. Investment selection and management is a part of what financial planners do – but that is only the tip of the iceberg. Real, effective financial planners are there to prepare you for and coach you through life’s unexpected inevitables. What happens when some life event inevitably occurs or you have a pressing question about your financial plan and when you try to get an answer you reach an automated phone tree that leads nowhere? Unlike a Robo-advisor, a financial planner is a real human available to provide advice and support when you need it. Think of them like a coach for your finances!
True, a human financial planner may cost more than a Robo-advisor. But in return they provide much more value. A study conducted by Vanguard found that working with a financial planner can add about 3% to client returns with 1.50% of that coming from behavioral coaching (that’s half the value coming from coaching alone!). When you start working with a planner you are not simply hiring an investment manager. Instead, you are partnering with someone who will work with you as life evolves to achieve your unique priorities. As you progress along your financial journey you form a trusting relationship with your advisor, so whenever you have questions or concerns you know there is a real human you trust who will answer the phone and provide clarity for you.
Estate planning is an essential step to help protect the wealth that you've spent your life building. Meeting with an estate planner will help to create a comprehensive plan that will allow your assets to effectively pass to your assigned beneficiaries. Creating this initial plan can feel overwhelming, and we are here to help you prepare.
Here are five important questions you can expect to discuss with your estate advisor as you start to plan for your future.
How Would You Like Your Wealth to Pass to Your Heirs or Elsewhere?
The basis of your estate plan is where you want to direct your wealth and how you'd like that to happen. No matter how large or small your estate is, you'll need to decide how it should be distributed among children, grandchildren, other family members or favorite charity organizations. For example, this could mean leaving different parties a percentage of your total assets, or leaving one child your business and another child your vacation home.
It’s important to also think about whether you want your beneficiaries to receive their inheritance all at once or not. If you have a disabled child requiring lifelong care on your list, or someone who needs a little extra help managing their money, you may want a trust or annuity structure in place to pay out the inheritance in increments.
What Can Be Done to Prevent Costs and Conflicts for Your Heirs?
Costs for your beneficiaries are most likely to come up if your estate needs to go through probate, which is the process by which a court distributes your assets. In addition to financial costs, there are other reasons to avoid probate. Probate can be a long and exhausting process – meaning, your heirs will not be able to access your estate right away. If you have dependents who will rely on the money in your estate, this can be an especially serious concern. In addition, probate adds your estate information to the public record, which you may want to avoid. There are several strategies your financial advisor might recommend to avoid probate. These include placing assets in a trust and moving funds into joint accounts with your beneficiaries.
Conflict among heirs is another common concern, especially in families where conflict already exists. While the legal documents included in your estate should help minimize disagreements and make it more difficult for someone to contest your wishes, communication during your lifetime is important as well. Disagreements often surround specific items like jewelry or sentimental pieces rather than your financial assets. Labeling these items, writing a letter of instruction and starting to pass on these things during your lifetime can all help make your intentions clear.
How Can You Reduce Your Tax Burden?
After a lifetime of working to earn your money, you likely want to direct your wealth to your loved ones rather than the government. In 2023, only estates valued at $12.92 million (or $25.84 million for some married couples) or more may be subject to the federal estate tax. If, upon your death, the total value of your estate is less than the applicable exclusion amount, no federal estate taxes will be due.
Depending on the state you live in, your heirs or your estate might also be subject to state estate or inheritance taxes. If taxes are a concern for your estate, there are several ways to reduce your tax burden.
One simple option is to start passing money along during your lifetime. Based on the 2022 gift tax exemption limit, individuals can give up to $16,000 per recipient per year. This lets you give money directly to your children or grandchildren while reducing the value of your estate, which will reduce your tax bill. Other options include a marital trust, which allows one spouse to place assets in trust for the other spouse, and an irrevocable life insurance trust, which can pay for life insurance premiums with tax-deductible funds and then avoid estate taxes later on.
Are You Already Working with Financial Professionals?
If you're already working with an estate attorney, a financial planner or a tax professional, it's important for your estate planner to understand the strategies your existing financial team has recommended. You'll want to make sure that all of these members of your team are working together so you aren't paying for duplicated efforts or conflicting suggestions.
If you aren't already working with a financial team, your estate planner may recommend that you do so depending on the details of your estate plan. If you have complex tax concerns, you might need to talk to a tax expert. Depending on the type of trust that you wish to establish, you may need an estate attorney to set it up.
How Will Changes in Your Life Change Your Estate Plan?
Your estate plan should have the flexibility to adapt to changes in your lifestyle, family structure or life expectancy. Your initial plan will be based on your current circumstances, but you should consider potential future concerns and possible solutions.
Divorce and Remarriage
Divorce and remarriage are common life changes that can affect your estate plan. If you remarry, you may not want your new spouse to manage the inheritance of your children from the first marriage. This can create the need for a new trust to be established. In addition, if you have more children in later marriages, you will again need to update your estate plan.
Life Expectancy and Medical Issues
There are other lifestyle considerations that might change as well. For example, if based on your family history you expect to live into your 90s, you might not want to start giving away assets to avoid estate taxes. And if medical issues arise and your life expectancy changes, you will likely need to adjust your plan.
While you won't need to make any decisions based on hypotheticals, it's a good idea to discuss the possibilities.
How to Get Started?
Your estate plan is a key component of your Life Plan. To create an estate plan that addresses the above questions and any other concerns you may have, you'll need to start by finding the right estate advisor. Talk to the Trilogy Financial team to take control of your finances today while maximizing your future opportunities.
Here’s a tip: Review your spending habits. It's really hard to mitigate or manage financial anxiety if you don't have a clear sense of your spending.
When talking with clients, questions that come up all the time are “Where's my money going? I don't know where all of our dollars go, we’re making a good income, but I don't know where it's going?”. To get cash flow will start answering that question. It will start reducing the anxiety in those particulars because we can't continue this path of “how do I fix this?”. That's what we do as Advisors – we train, and we help people fix and solve those particular problems. I always ask this question, where's my money going? But more importantly, is your money in sync with your financial why? And your financial why is customized, it's, what do you want it to be? And that could be financial independence.
I can tell you in the course of my 30 plus years I’ve sat down with many couples, individuals, and businesses and I've said, “Hey, congratulations, you now have financial independence”. In other words, you don't have to go to work anymore, work is now an option. You can still choose to go to work – you could change jobs, you can do whatever, but you don't need to anymore. You've built up enough that you can replace the income, enjoy the lifestyle that you want to enjoy, spend the time with family, friends, and loved ones that you want to do. And that comes from good planning on the front end and understanding that you can get there much faster if you work with a coach or work with an advisor and understand your cash flow.
It will be liberating once you go through that process, but it does require taking action. Here's some take actions on what you can do. There are the knowns and the unknowns.
In the knowns, we control whether we want to have a plan or not, we control whether we want to do cash flow and budget analysis, we control that reduction. If that's really your number one goal is to get debt-free well, then let's build a plan that makes you debt-free. We control how much is in our emergency fund; so that if we lose a job or income drops, maybe we've got adjustable income or we want to change jobs, we've got this money set aside so we don't have anxiety during that period. We control all those things. We control how much protection we have against risks; you know how much life insurance that we have if we have state documents that are there those are all known things. Now, here's an unknown, you don't what day you will leave this world. Do you have plans in place that make sure that loved ones are protected the way you'd like them protected? Again, you control these areas, these are all things that are in your control.
The one thing I'll say is even though we don't have control over the unknown, we always want to stay informed, especially around new laws and new rules. This is what Advisors do for a living. For instance, if you take money out and the market's down or maybe you took it out and it's taxable- now it bumped your taxes up. It’s important to meet with your Advisor and to have a coach to help interpret these known rules that are probably unknown to most Americans. It's probable these types of things will come up and once you pick a strategy, whatever that strategy is, you can't change it.
But you have to always ask yourself “Maybe this impacts me, and if I don't know about it, I'm not going to do anything prudent to help myself get on to financial independence”. If you do know about it and your Advisor knows about it, they're going to help you make good decisions that will work well for you in those areas. It's important to understand that there are unknowns out there, and you can plan your best for those unknowns, but it's important to accept that you never have full control of the unknown. So. think about what you do have control of, and make sure that you are making the best decisions for yourself, your family and your loved ones.
