This is the final article in our series based on the three layers of the financial planning pyramid.
In the first phase, “protection” you employ strategies to make sure you are prepared for emergencies and unexpected events such as a job loss or premature death. This is the foundation of your financial plan and, if executed correctly, you will be able to adjust your financial planning strategies to incorporate these minor or significant deviations from the plan. The second phase, “accumulation,” covers saving for big purchases such as a house and accumulating wealth for specific goals such as financial independence. We are now at the third and final stage, “distribution.”
It is as important to manage your accumulated wealth in step three as it is to accumulate the assets in step two. But as you move up the pyramid, your financial life and the decisions that have to be made are usually more complex. We recommend professional help from the outset both from a financial professional and an estate attorney.
The distribution phase encompasses basic estate planning to make sure your assets are distributed according to your wishes and in an orderly manner. This is important whether you have accumulated a large estate or not. It is particularly relevant in the LGBT community.
If you die without a will or a properly executed will, your estate will be distributed according to your state’s law and those state laws may very well not take your wishes into account. Your intended beneficiaries may get nothing. Also, many states will not recognize same-sex unions and planning strategies that may work for opposite-sex couples on the federal level will not be effective for same-sex couples.
Married same-sex couples can transfer assets to each other as a gift or in death tax free and many states have the same or similar estate tax exemptions. In addition, the current estate tax law allows married opposite-sex couples to transfer their unused portion of the estate tax exemption (up to $5 million each) to each other, thereby being able to pass more on to their children or other beneficiaries’ free from federal and state estate taxes.
Same-sex couples are not afforded the same protections. As a result, the value of your assets may be eroded by estate and inheritance taxes and the intended recipients may not easily get their bequests. We recommend you consult with an estate attorney to ensure your wills and accompanying documents are prepared correctly so that you can know your loved ones will be taken care of or the charities of your choice will receive their intended donations.
This is also the stage when you have to make decisions about living off your assets, preserving the assets to try to make sure they last for your lifetime and also how to effectively leave a legacy, if desired. This can be highly complex and usually involves multiple inter-dependent decisions. This may mean adjusting your asset allocation strategies and the introduction of new investment vehicles in seeking to preserve and live off the assets.
Income generating investments may also be considered at this stage as well as cash needs. This is also the time to consider protection strategies such as long-term care insurance so make sure your assets are not eroded by the cost of caring for yourself or a loved one who has a chronic medical need.
There may be a tendency to put off these decisions as they may seem far off in the future, yet planning ahead of time as part of the overall financial planning process will lay the framework for future decision making. Of course, as time goes on these goals and strategies will have to be revisited to make sure they are still relevant both personally and in terms of the ever-changing estate tax laws.
This material is for informational purposes only and is not intended to act as specific advice. Please talk to a financial professional prior to investing. Benefit guarantees for insurance are subject to the claims paying ability of the insurer. No strategy ensures a profit or protects against loss.