jesse-collins-tukk8xRbaeQ-unsplash

Newsworthy

Perspective on industry, economics, money, retirement, and business

Schedule a Strategy SEssion

Frequently Asked Questions.

Financial planning involves evaluating your current financial status and setting short-term and long-term monetary goals, with detailed strategies to achieve those goals. It’s essential because it helps you manage your income, investments, and expenses more effectively, ensuring financial stability and future security.

It’s recommended to review your financial plan at least annually or whenever you experience a significant life event (such as marriage, the birth of a child, or a change in employment). Regular reviews ensure your financial goals stay aligned with your life circumstances.

Key factors to consider include your life goals, risk tolerance, risk capacity, and investment horizon. Balancing these elements can help you determine the right mix of assets (stocks, bonds, real estate, annuities, etc.) that align with your objectives and comfort with risk.

Diversification across different asset classes and geographic regions can help mitigate risk. But that will only take you so far in our modern capital market. Additionally, employing strategies like dollar-cost averaging and maintaining a long-term perspective can reduce the impact of market fluctuations on your portfolio. Diversification should include all asset classes: Stocks, Real Estate, Fixed Income, Annuities, and Life Insurance-to name a few.

Investing in retirement accounts like 401(k)s or IRAs offers various tax benefits, including tax-deferred growth on your investments and potential tax deductions on your contributions, which can significantly enhance your savings over time.

Estate planning involves arranging the management and disposal of your estate during and beyond your lifetime. Everyone can benefit from estate planning, not just the wealthy, as it includes appointing guardians for minors, protecting assets, and ensuring your wishes are carried out.

You can reduce your taxable income through various means such as maximizing deductions (e.g., mortgage interest, charitable contributions), taking advantage of tax credits, and contributing to retirement accounts, which can lower your gross income.

Planning for retirement and achieving low to no income tax is possible with proper use of allocation into taxable, tax deferred, and tax advantaged accounts. 

  1. Tax-deferred accounts are designed to postpone taxes on your investments until they are withdrawn during retirement. These include various retirement and savings plans such as 401(k)s, 403(b)s, 401(a)s, 457 deferred compensation plans, deferred benefit pensions, certain Social Security benefits, IRAs, SEP IRAs, SOLO 401(k)s, Cash Balance Plans, and deferred annuities. Additionally, College 529 plans—when utilized for retirement—and Self-Directed Real Estate IRAs, along with 1031 exchanges or investments in Delaware Statutory Trusts (DSTs) and Qualified Opportunity Zones (QOZs), fall under this category.

  2. Taxable accounts, on the other hand, accumulate interest or gains that are subject to taxation, typically reported via 1099 tax forms. This category encompasses non-IRA real estate investments like rental properties, brokerage accounts, stocks, most bonds, mutual funds, ETFs, REITs, most alternative investments, and all forms of bank accounts including checking, savings, CDs, and money market accounts. It also includes business capital gains and generally any capital gains, which may also cover inheritances or trust funds.

  3. Tax-advantaged accounts are structured to incur taxes initially at the time of deposit, after which no further income tax is levied on them. These accounts include Private Health Savings Accounts, all types of ROTH accounts, 721 Cash Value Life Insurance, Flex Method or Self Banking strategies, and In-State municipal bonds. These vehicles offer strategic benefits for managing long-term tax implications and growing wealth efficiently.

Frequently Asked Questions

Tax and Estate

TAX

Tax-loss harvesting involves selling investments at a loss to offset a capital gains tax liability. This strategy can lower your taxes and reposition your investment portfolio without altering your investment goals.

Tax advisory services provide strategic advice tailored to your individual or business financial circumstances. This can include planning to minimize tax liabilities, advice on tax-efficient structures, and guidance on future tax implications of financial decisions.

Individuals, businesses, and organizations of any size can benefit from tax preparation and advisory services. Whether you are an individual looking to optimize your tax return or a business seeking strategic tax planning, professional services can provide significant benefits.

Tax advisory services can help your business by identifying tax savings opportunities, ensuring compliance with changing tax laws, and providing strategic guidance on financial decisions that have tax implications, thus optimizing your overall tax situation.

A tax preparer is primarily focused on accurately reporting past and current financial activities to comply with tax laws during the filing of returns. A tax advisor provides more comprehensive guidance on how to structure your finances and plan your activities to reduce future tax liabilities and maximize financial outcomes.

Bring all relevant financial documents such as W-2 forms, 1099 forms, investment income statements, deductions, credits, and any other pertinent records related to your finances for the tax year.

You should consult with a tax advisor at least once a year; however, more frequent consultations may be necessary if you experience significant life or business changes, or if there are major updates in tax laws that could affect your financial situation.

Yes, tax advisory services are often tailored to the specific needs of various industries, as different sectors have unique rules and opportunities related to tax. Professionals may specialize in areas such as real estate, non-profits, tech startups, or international businesses to provide the most effective advice.

ESTATE

A will is a document that specifies how your assets should be distributed after your death. A trust, however, allows you to start distributing assets before death, at death, or afterwards. Trusts also offer greater privacy and can help avoid probate.

Estate planning is the process of arranging the management and disposal of your estate during your life and after death. It involves creating legal documents to outline your wishes regarding the distribution of your assets, care of minor children, and your preferences for medical treatment if you become incapacitated.

Estate planning is crucial because it ensures that your assets are distributed according to your wishes, reduces potential legal disputes among heirs, minimizes taxes and other expenses, and provides peace of mind knowing your loved ones are cared for in your absence.

Key documents include a will, trusts, power of attorney, healthcare directives, and beneficiary designations. Each serves different purposes, from directing asset distribution to specifying who will make decisions on your behalf if you are unable to do so.

It’s wise to start estate planning as soon as you have any notable assets or family responsibilities. Life’s unpredictability makes it important to have arrangements in place at any age, ensuring that your affairs are in order, especially if unexpected events occur.

An executor is responsible for managing your estate after your death, so choose someone who is responsible, trustworthy, and capable of handling financial and legal matters. It can be a family member, a friend, or a professional like an attorney.

Without an estate plan, state laws will determine how your assets are distributed, which may not align with your wishes. This can also lead to longer, more costly legal processes for your loved ones.

While you can write your own will, working with an attorney ensures that the document complies with state laws and addresses all potential legal issues. This can prevent your will from being contested and ensures your wishes are clearly understood.

You should review and possibly update your estate plan every three to five years or after major life changes like marriage, divorce, the birth of a child, or significant changes in your financial situation.

No, estate planning is important for anyone who wants to ensure their assets are distributed according to their wishes, regardless of the size of their estate. It’s about managing whatever you own in a way that makes sense for you and your loved ones.

An irrevocable trust, in contrast, cannot be altered or terminated once it has been established, without the consent of the beneficiaries. Once the trustor transfers assets into an irrevocable trust, they legally relinquish control over those assets and the rights to make any changes to the trust. This type of trust is often used for estate tax reduction, asset protection, and as a means to qualify for certain government benefits.

A revocable trust, also known as a living trust, is a type of trust that can be altered or terminated by the trustor (the person who creates the trust) during their lifetime. As long as the trustor is alive and competent, they have the flexibility to make changes to the trust’s terms, modify the beneficiaries, or even dissolve the trust entirely. The assets in a revocable trust pass directly to the beneficiaries upon the trustor’s death, avoiding probate.

Control: With a revocable trust, the trustor maintains control and can make changes as needed; with an irrevocable trust, the trustor gives up all control over the assets and the trust’s terms.

Protection from Creditors: Assets in an irrevocable trust are generally protected from creditors, as they are no longer considered the trustor’s property; whereas assets in a revocable trust are still accessible to creditors during the trustor’s lifetime.

Estate Taxes: Irrevocable trusts can help reduce estate taxes, as the transferred assets are no longer part of the trustor’s estate. In contrast, assets in a revocable trust are still considered part of the estate for tax purposes.

Probate: Both types of trusts can help avoid the probate process, but this is dependent on proper funding and setup.

The choice between a revocable and irrevocable trust depends on your specific financial goals, need for control, and desire for creditor protection. It is advisable to consult with a financial advisor or estate planning attorney who can provide advice based on your individual circumstances and objectives.

Wisdom is not a product of schooling but of the lifelong attempt to acquire it.

Articles & Blog Library

Warren Buffett and His First Rule of Investing

Never Lose Money

Warren Buffett, the Oracle of Omaha, is not just a testament to the power of compound interest but also a beacon of wisdom for investors worldwide. Known for his folksy charm and unparalleled investment prowess, Buffett’s advice is dissected and revered by professionals and novices alike. Central to his philosophy is a rule so simple it’s often overlooked for its profundity: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”

The Philosophy Behind the Rule

Buffett’s first rule of investing, “Never lose money,” is not to be taken literally, as even the most astute investors incur losses on paper. However, the essence of this rule is risk aversion and the emphasis on making thoroughly calculated investment decisions that have a high probability of success. Buffett encourages investors to adopt a mindset that prioritizes capital preservation over potential high returns that come with proportionally high risks.

Application of the Rule: The Margin of Safety

A key concept that helps apply Buffett’s first rule is the “margin of safety” — a principle borrowed from Benjamin Graham, Buffett’s mentor. The margin of safety involves investing at a price sufficiently below the intrinsic value of a stock to allow room for error in the analysis. For Buffett, this means buying undervalued companies that boast stable financials, strong earnings power, and potential for continued growth — qualities that should help prevent capital loss over the long term.

Examples from Buffett’s Career

Throughout his career, Buffett has applied his first rule by investing in companies with familiar business models, straightforward revenue streams, and strong brand loyalty. His long-term holdings in companies like Coca-Cola and GEICO reflect his strategy of investing in businesses where the chance of any loss is minimized by their enduring market value and consistent performance.

Criticism and Real-World Application

Critics might argue that Buffett’s rule is overly cautious and could dissuade investors from making potentially lucrative bets. Indeed, for the average investor, mimicking Buffett’s success is not straightforward. Most lack the access to information, capital, and opportunities that Buffett has. However, the underlying principle of avoiding loss is universally applicable, encouraging investors to focus on long-term financial health rather than short-term gains.

For most, applying Buffett’s rule means doing diligent research, understanding the fundamentals of the investments, and maintaining a disciplined approach to investing. It also means being aware of one’s risk tolerance and financial goals, as these should guide investment decisions just as much as any piece of advice, even if it comes from Warren Buffett.

The Timeless Relevance of Buffett’s First Rule

In today’s volatile market, Buffett’s first rule of investing is as relevant as ever. It serves as a reminder that preserving capital is as important, if not more so, than growing it. For both new and seasoned investors, Buffett’s approach underscores the importance of making informed, prudent decisions that secure financial well-being over high-risk, speculative bets.

Whether you are managing a small personal portfolio or a larger pool of investments, adhering to the principle of not losing money can guide you through the complexities of the market. Remember, the goal is not to avoid loss at all costs, but to minimize the risk of permanent loss, ensuring that investments are sound, and the future is secured.

In essence, Warren Buffett’s first rule isn’t just about investing—it’s about smart investing with a focus on sustainable, long-term wealth creation.

Buffett advocates for investing in businesses that you understand thoroughly. By sticking to familiar industries and companies, you reduce the risk of surprises and are more likely to make informed decisions.

Buffett is known for his buy-and-hold strategy, often holding stocks for decades. For the average investor, this suggests prioritizing long-term growth and stability over quick profits, which can reduce transaction costs and the impact of short-term market volatility.

Look for stocks or assets that are undervalued relative to their intrinsic value. This involves analyzing financial statements to find companies with strong fundamentals—like good earnings, low debt, and solid management—that are priced below their true worth.

While Buffett’s portfolio is concentrated compared to typical diversification advice, he owns stocks across different sectors. For everyday investors, maintaining a balanced portfolio that spreads risk without diluting potential returns is key.

Avoid the temptation to follow market trends or react emotionally to market fluctuations. Buffett’s success is largely due to his disciplined approach to investing, focusing on long-term performance metrics rather than short-term market movements.

Moneyball

Applying Data-Driven Decision Making to Financial Planning and Retirement Success

In the early 2000s, the Oakland Athletics revolutionized baseball by using a statistical, data-driven approach known as Moneyball to assemble a competitive team despite their financial constraints. This strategy, popularized by Michael Lewis’s book “Moneyball” and the subsequent film, focuses on leveraging overlooked or undervalued players based on their on-base percentages and other metrics. The core principle of Moneyball — maximizing resources to achieve the best possible outcome — can be equally effective when applied to financial planning and retirement success. Here’s how adopting a Moneyball approach can transform your financial strategy.

Focus on Undervalued Assets

Just as the Oakland A’s focused on undervalued players to build a competitive team, smart investors can look for investment opportunities that others might overlook. In financial terms, this could mean investing in asset classes, funds, or stocks that are not currently in vogue but offer solid fundamentals and potential for growth. By doing thorough market analysis and using historical data, investors can find these “hidden gems” that may provide higher returns for lower costs.

Use Data to Inform Decisions

Moneyball is fundamentally about making decisions based on data rather than intuition or traditional methods. In personal finance, this translates to a reliance on thorough financial analysis rather than following gut feelings or trends. Tools like Monte Carlo simulations in retirement planning or detailed cash flow analysis can provide a more accurate picture of financial health and investment risk, allowing for better-informed decisions.

Emphasize Efficiency Over Size

The Oakland A’s didn’t have the financial muscle of the big-market teams, so they had to find efficiency to compete. For individuals, this means optimizing your financial resources to get the most out of your investments without necessarily having the largest amount of capital. Efficient financial planning involves managing expenses, minimizing unnecessary fees, optimizing tax strategies, and ensuring that each dollar is effectively contributing to achieving your financial goals.

Adapt and Evolve

Baseball, like financial markets, is constantly evolving. Teams that adopted Moneyball had to continue refining their strategies as other teams began to adopt similar methodologies. Similarly, effective financial planning requires continuous monitoring and adaptation to changes in financial circumstances, market conditions, and life goals. Regularly reviewing and adjusting your financial plan ensures that it remains robust and responsive to external changes.

Measure and Track Performance

Metrics were crucial to the Moneyball approach, enabling teams to track the performance of their strategies and make adjustments as needed. For retirement planning, this means setting specific financial goals and regularly reviewing investment performance against these benchmarks. By measuring progress, you can identify areas that need adjustment, whether it’s reallocating assets, changing savings rates, or reevaluating retirement timelines.

Conclusion

The Moneyball strategy teaches us that success isn’t just about having the most resources but using available resources in the smartest possible way. By applying these principles to financial planning and retirement, individuals can maximize their financial potential and achieve their long-term goals effectively. Just as in baseball, in finance, those who best understand and adapt to the dynamics of their environment are most likely to succeed. Embrace the Moneyball philosophy in your financial strategy, and watch as it changes the game of your financial future.

Focus on Undervalued Assets: Invest in overlooked opportunities with solid fundamentals, akin to how the Oakland A’s recruited undervalued players.

Use Data to Inform Decisions: Base financial decisions on robust analysis and historical data rather than intuition or trends, similar to the data-driven approach used in Moneyball.

Emphasize Efficiency Over Size: Optimize financial resources to maximize returns without necessarily having the largest capital, mirroring the A’s strategy of achieving competitive success with limited budgets.

Adapt and Evolve: Continuously refine your financial strategies in response to changing market conditions and personal circumstances, ensuring your planning remains effective.

Measure and Track Performance: Set clear financial goals, regularly review investment performance, and adjust strategies as necessary to stay on track towards achieving retirement objectives.

These points illustrate how adopting a Moneyball approach can lead to smarter, more efficient financial planning and retirement success.

Value Efficiency: Look for cost-effective ways to manage your finances. This could mean choosing low-cost index funds, minimizing fees, and avoiding high-cost financial products that don’t offer proportional benefits.

Embrace Data-Driven Decisions: Use available tools and resources to make informed decisions. Budgeting apps, retirement calculators, and financial planning software can provide valuable insights and help track progress toward financial goals.

Stay Flexible and Adaptable: The financial landscape and personal life circumstances can change unexpectedly. Regularly review and adjust your financial plan to stay aligned with your current needs and future goals.

Invest in Learning: Just as teams in Moneyball prioritized players with a deep understanding of the game, invest time in learning about personal finance, market trends, and investment strategies. Knowledge is a powerful tool for making better financial decisions.

Set Clear Goals and Monitor Progress: Define what financial success looks like for you, whether it’s saving for retirement, paying off debt, or funding education. Regularly assess your progress and adjust your strategies to ensure you’re on track to meet your goals.

Strategic Tax Planning to Pay Zero Capital Gains Taxes

Combining Delaware Statutory Trusts, Qualified Opportunity Zones, and UpREITs for Lasting Income

For investors seeking to optimize their tax strategies while securing lasting income, Delaware Statutory Trusts (DSTs), Qualified Opportunity Zones (QOZs), and Umbrella Partnership Real Estate Investment Trusts (UpREITs) offer compelling benefits. These vehicles not only facilitate tax efficiency but also provide opportunities for diversification and income generation. Understanding the synergistic potential of these tools can significantly enhance an investor’s portfolio.

Delaware Statutory Trusts (DSTs)

A Delaware Statutory Trust (DST) is an attractive investment vehicle for those looking to defer capital gains taxes through a 1031 exchange. This legal entity allows for flexible operations and is often used in real estate to hold multiple properties.

Tax Advantages of DSTs:

Capital Gains Tax Deferral: By leveraging a 1031 exchange within a DST, investors can defer paying capital gains taxes on the sale of properties by reinvesting the proceeds into other “like-kind” properties within the trust.

Pass-Through Taxation: DSTs benefit from pass-through taxation, where income and deductions flow directly to investors, thus avoiding the burden of double taxation.

Critical Timing for DSTs:

It’s crucial for investors to establish a DST before realizing any capital gains from the sale of assets to qualify for a 1031 exchange. This proactive approach ensures eligibility for tax deferral.

Qualified Opportunity Zones (QOZs)

Created to stimulate economic growth in designated distressed areas, QOZs offer tax incentives for investors reinvesting capital gains into Qualified Opportunity Funds (QOFs).

Tax Advantages of QOZs:

Deferral and Reduction of Capital Gains: Taxes on prior gains reinvested in a QOF can be deferred and reduced (10% if held for 5 years, 15% if held for 7 years).

Exemption from New Gains: After a 10-year holding period, investors can benefit from a tax exemption on new gains accrued from the QOF investment.

UpREITs and 721 Exchanges

An UpREIT operates by using a partnership structure to contribute properties in exchange for operating partnership units, which can later be converted into REIT shares. This mechanism, known as a 721 exchange, provides an alternative to a direct 1031 exchange and can be particularly useful for deferring capital gains taxes while maintaining liquidity.

Value of UpREITs in Conjunction with DSTs:

Diversification and Income Generation: UpREITs allow investors to diversify their holdings across various properties within a REIT’s portfolio. This not only spreads risk but also enhances the potential for consistent, long-term income.

Flexibility and Growth Potential: Investors in UpREITs benefit from professional management and the potential for capital appreciation, which can lead to a significant growth in asset value and dividend payouts.

Conclusion

By integrating DSTs, QOZs, and UpREITs into their investment strategies, savvy investors can create a robust framework for managing capital gains taxes and generating sustainable income. These vehicles offer a blend of tax efficiency, income potential, and capital appreciation, making them a smart choice for those looking to enhance the overall performance of their investment portfolios. As with any sophisticated investment strategy, consulting with financial and tax professionals is crucial to navigate the complexities of these investments and align them with personal financial goals.

  1. Delaware Statutory Trusts (DSTs):
    • Allow for deferral of capital gains taxes through 1031 exchanges.
    • Offer pass-through taxation, reducing the tax burden on investors.
    • Must be established before realizing capital gains to qualify for tax benefits.
  2. Qualified Opportunity Zones (QOZs):
    • Provide potential for deferral and reduction of capital gains taxes.
    • Investments held for 10 years are eligible for tax exemption on new gains.
    • Aim to stimulate economic growth in designated distressed areas.
  3. Umbrella Partnership Real Estate Investment Trusts (UpREITs):
    • Facilitate tax-efficient real estate investments through 721 exchanges.
    • Allow investors to convert partnership units into REIT shares, potentially deferring capital gains.
    • Offer diversification and income through dividends from a managed portfolio of properties.
  4. Strategic Integration:
    • Combining DSTs, QOZs, and UpREITs can optimize tax savings and increase return on investment.
    • Investors should align these tools with their overall financial goals and risk tolerance.
    • Regular consultation with financial advisors is recommended to navigate complexities and maintain effective investment strategies.

Tax Efficiency: Using DSTs, QOZs, and UpREITs can significantly defer, reduce, or even eliminate capital gains taxes. DSTs allow for deferral through 1031 exchanges, QOZs offer deferral plus reductions over time, and UpREITs provide a mechanism to defer gains through 721 exchanges.

Income Generation: Both DSTs and UpREITs offer opportunities for generating steady, long-term income. DSTs do this through real estate investments, while UpREITs allow investors to receive income in the form of dividends from a diversified portfolio of properties managed by real estate professionals.

Risk Diversification: Investing in a mix of DSTs, QOZs, and UpREITs allows investors to spread their capital across different geographic areas, asset types, and market sectors, reducing the risk associated with individual investments.

Professional Management: UpREITs and DSTs are typically managed by experienced real estate professionals, relieving individual investors from the day-to-day responsibilities and complexities of property management.

Strategic Timing and Planning: It’s crucial to establish DSTs prior to the realization of capital gains to qualify for a 1031 exchange. Similarly, understanding the timing requirements for investments in QOZs (to benefit from maximum tax reductions) and utilizing the flexibility of UpREITs can optimize financial outcomes.