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Why it’s a bad idea to transfer control of all your assets to your kids in your lifetime


By Daniel Harris, Thursday April 14, 2016


I want to tell you the story of a recent case of an estate plan gone bad.  I think of it as an example of what not to do.  There was nothing wrong with the legal maneuvers, but the people who devised it didn’t think about human nature and they structured it in a way so that one financially irresponsible child was able to mess up a whole family’s estate plan.


Who are the actors in this drama?


The father was Robert Perdue, a successful investor and attorney and his housewife Barbara.  They had five children, four who seemed responsible and one who seemed not so responsible based on the fact that she was in debt to her parents even in middle age.


In their late 80’s in the year 2000, Robert and his wife Barbara had a net worth of $28 million, $24 million of which was in publicly traded securities.  They owned a roughly $3 million house and about $1 million in a commercial building.  They had not done any advanced estate planning at this point.


What did they choose to do?


Under the advice of a more junior lawyer in Robert’s firm, they set up a Qualified Personal Residence Trust (a maneuver where you transfer your property to a trust controlled by your children and pay rent to them) and a Family LLC where they provided all or almost all of the LLC assets, but only retained a 10% ownership interest in the LLC and transferred 90% of the LLC to their 5 children.


Why did the attorneys recommend the family set up an LLC and transfer ownership to the children?


The attorney gave 5 reasons for his recommendations (and I’ve put my comments next to their reasons)

1)  They told them this structure would save them on estate taxes (it did insofar as it allowed the mother to transfer discounted annual gifts)

2)  Limitation of Liability of an LLC (the LLC owned $22 million in stock and hardly any other assets – stocks have no real liability risk but it makes sense for the real estate to be in an LLC)

3)  Pass through income taxation

4)  Minimal Formalities (this is true compared to other structure that take advantage of discounting)

5)  LLC’s are the ideal entity to own real estate (the LLC only owned $1 million in real estate and the rest was in stocks).


What happened and why didn’t they save on estate taxes nor were they able to close an estate until 14 years after the father’s death


They made the cardinal mistake of estate planning and transferred control of their property to their children before they passed away.  You’ll see why this is a bad idea. 


Everything was good for one year, until the LLC was set up and the assets were transferred.  Then, Robert unexpectedly died the next year.  Because the transfer was done within 3 years of Robert’s death all of the money was pulled back into Robert’s Gross Estate and subject to estate tax.  The tax bill was to be $9,863,571. 


Robert’s wife Barbara had transferred almost all of her assets to their children $22 million out of the $28 million that they once had and so she could not personally pay the estate tax bill.  Moreover, the way the lawyers set up the operating agreement of the LLC, all five kids had to agree on any special distributions including those to pay the estate taxes – which was a major tactical mistake in the structure of the business.


The one kid who owed the parents money for her beach house (the promissory note put into the trust) wanted a bigger distributions from the family LLC and refused to approve a dividend to pay the estate taxes unless the other four siblings let her treat the family LLC as her personal piggy bank.  The siblings didn’t agree and, as a result, this completely liquid asset base was insufficient to pay estate taxes and Robert’s estate went into debt with the government.


In all the estate, which had $22 million in liquid marketable securities, was in debt to the U.S. government for 85% of the time between the father’s death in 2001 and the mother’s death in 2007. 


What is the right way to structure an estate?


Smart estate plans may transfer minority interests in assets but should never transfer control to the children before the last surviving parent has passed away. 


I think this family got really poor advice, not because the maneuvers were technically wrong (they weren’t) but because the attorneys ignored common sense and family dynamics when setting up the estate plan.  While your estate plan needs to be legally compliant its just as critical that your estate plan passes the common sense test which this one did not (a child in debt to her parents at middle age may not be that good at money and shouldn’t have the ability to veto a legitimate action on behalf of a family LLC).


What could they have done differently when they set this up in 2000


In 2000 when the trust was first set up the estate tax exemption was $1,350,000 for a couple and the maximum estate tax rate was 55%.  If they do nothing, $13,342,500 will pass down to the children free of estate tax.  So that is the worst case scenario.


If they form a family LLC where the parents are in control and the kids are minority owners they can pass down $100,000 to their children in 2000, $100,000 in 2001, $55,000 in 2002, $55,000 in 2003, $55,000 in 2004, $55,000 in 2005, $60,000 in 2006 and $60,000 in 2007.  With discounts for lack on control they can actually pass down 30% more assets – so cumulatively they’ve passed another $702,000 to their children so that total rises to $14,044,500.


Finally, there were opportunities to do Grantor Retained Annuity Trusts in 2000, 2001, and 2002.  This may have moved another $4,800,000 to the children (about 20% of the estate) free of all estate and gift taxes.


So now the children will have gotten $18,844,500 in assets out of the $28,000,000 estate.  The parents would have had to temporarily give up control of some of the assets for 2-3 years to do a Grantor Retained Annuity Trust, but otherwise they would have retained total control of the assets.  A Grantor Retained Annuity Trust puts assets into a trust for 2 years and pays the parents 110% of the principal back over two years.  Any appreciation above 10% goes to the children, estate and gift tax free.


On the date of Barbara’s death in 2007, she would have died with an estate of $11,249,000, more than enough to live on, and would have been able to pass 2/3 of her estate to her children, all of which can be done without permanently giving up control of the assets.


Most estate planning just involves common sense and the mistake the lawyer made in this case is that he didn’t think about how an irresponsible daughter could mess up the transfers for everyone else.  A legal maneuver won’t protect you if you aren’t really thinking about the human element of estate planning.  Because estate planning can go awry in all sorts of surprising ways, my advice is to keep it simple. 


Estate attorneys are invaluable in terms of the legal maneuvers but sometimes even they have to be kindly reminded when they are making a mistake of not accounting for common sense in their recommendations.  I think the attorney in this case really let the family down because the red flags were there in advance.


In case you are interested in the case, here it is:




First Quarter Update


By Daniel Harris, RIA, Wednesday April 13, 2016


Market Update


The big five markets continued to be mixed, with the best performance in international emerging market stocks, followed by US stocks, US Bonds, International Developed market stocks and Chinese A Shares did the worst of all major asset classes.  It’s a sign that while emerging markets are recovering – it isn’t an across the board recovery.


Best to worst performing major asset classes in 1Q 2016


1)  International Emerging Market Stocks: +5.37%

2)  US Stocks: +1.29%

3)  US Short Term Treasury Bonds: +0.84%

4)  International Developed Market Stocks: -3.74%

5)  Chinese A Share Stocks: -10.12%


Economic Update


The economy is doing very well and the leading economic indicators are highly favorable suggesting that we’ll have a good next six months on the ground.  If you look closely you can tell that the economy is favoring workers over owners right now – corporate profits are falling while wages are going up faster than inflation.


GDP – We have growth but it is slowing growth


GDP: GDP is growing at about 1.4% per year, which is down 30% from the previous quarter.  The primary causes of our declining GDP growth rate are:

1) A decrease in state and local government spending

2) A downturn in exports

3) Decreased spending by households


The Labor Market – It is improving and wages are going up faster than inflation


The Labor Market: The labor force participation rate is up 0.6% since September of 2015 – which shows positive momentum in this market.  Employee wages are up 2.2% in the past year and are growing faster than the rate of inflation.  There appears to be strong demand for labor in this market


Inflation – It is about 1/3 of it’s historical average

Inflation: Inflation is tame with a mere 1% increase in the consumer price index in the past year. 


Which Industries are hot (they have pricing power) and which industries are cold (no pricing power).


Notice some changes in your budget since last year?  Here is where costs are going up and where they aren’t.



1)  Medical Care Services: up 3.9%

2)  Homes and Rental Expenses: up 3.3%

3)  Private Services: up 3.1%



1)  Fuel and Heating Oil Prices: down 32.1%

2)  Energy Commodities Pricing: down 20.9%

3)  Gasoline prices: down 20.7%


Washington, Legal and Tax Court Updates


Congress has been extremely quite this year with basically no meaningful tax or investment related legislation so far in 2016.  Given that it is an election year you hear lots of crazy ideas being talked about by the politicians, but this pandering rarely becomes law.  My expectation is for lots of gridlock through the rest of 2016 and who knows what will happen after the election!




What Systems are most productive for a very mature person (Ages 77 and up)

By Daniel Harris, RIA, Tuesday April 12, 2016


This is the 4th part of a four part series on comprehensive lifetime financial planning.  This article deals with those who are 77 and up.


Let’s start with the most productive systems for this age group and go down to the least productive.


1)  Legal Advice  


Legal advice is the most important thing you can buy at this stage.  At this point, there is more predictability about what the law will be when an estate plan goes into effect. 


If you are above the estate tax limits ($5,450,000 as an individual or $10,900,000 as a married couple) you should talk to a lawyer about Grantor Retained Annuity Trusts, Family LLC’s or Limited Partnerships, Charitable Lead Trusts or other instruments to avoid paying estate tax.  Where possible, I think you should maintain control of these instruments, despite the tax consequences of doing so.  The basic rules for limited partnerships or family LLC’s are that you can pass down more than $14,000 worth of assets per year by discounting assets due to the recipients lack of control and lack of marketability (shares in a LLC or interests in a family limited partnership).  The stated value will be $14,000, but due to discounting you can pass down assets that can be sold for more than $14,000.


Estate attorneys come in all forms.  Some are teachers and some are back slapping fraternity boys.  Everyone is a little different in what they want and what they want to pay.  We can match you with an estate attorney that we think matches your personality and your needs.  Even if you aren’t a client, don’t hesitate to contact us when looking for an estate lawyer.


2)  Tax Planning


At this point you can do serious estate planning – and you can use discounting and GRAT’s to move assets down while not leaving a tip for Uncle Sam.  The odds of running out of money are lower at this stage as you have fewer years to worry about and so you can feel more comfortable doing the more advanced maneuvers, in my view.


3) Investments


Every dollar invested may generate up to $0.77 in profits with good knowledge and investment advice.  The three things that matter at this stage are 1) maintaining an aggressive enough stance so that you don’t run out of money, 2) investing money you will need in the next ten years in a low volatility way, and 3) managing withdrawals in a tax efficient and sustainable way.  It may seem counterintuitive to have some growth oriented investments in the portfolio of a 77 year old, but the reason to do it is to keep up with inflation and protect you against outliving your money.


As you can see, multiple goals have to be managed simultaneously – which makes this a lot more complicated than just a young person saving for retirement. 


Although investing is less productive for growth as you get older, the hazards of getting it wrong go up because without an income from work if you make inaccurate projections about the productivity of your money you may be left with a lot less or even run out of money.  No one wants to die poor, so I recommend talking to us before you enter the withdrawal phase of your life to make sure your projections are reasonable.


4)  Charitable Planning


  Charitable Planning is important for those who want to do it, but it is also risky if you aren’t conservative in your approach.  From what I’ve seen, the average family gives away 2% of their income to charity each year.  Sometimes people choose to give more at death or give away their money early using Charitable Remainder Trusts and Charitable Lead Trusts.


  A gift to charity or a charitable trust is irreversible so you’ll want to be somewhat conservative in your giving during your lifetime.  It’s easy to give away money to charity at death and doing so reduces the risk that you will die poor, because planned gifts to charities at death can be revoked during your lifetime. 


  A popular tool is a charitable lead trust or charitable remainder trust, but I think there is actually a better way to give to charity.  My advice is to set up a donor advised fund at a brokerage house and fund it with one year’s worth of charitable donations at a time.  I believe that you can set up a donor advised fund as a beneficiary on your transfer on death designations, (say you give 2% of your brokerage accounts to your favorite charity through it).  Alternatively, you can list charities directly as beneficiaries of your accounts.


   The very unfair thing about the tax code is that during your lifetime you can not write off charitable contributions if they exceed 30% of your income for appreciated asset gifts and 50% of your income for cash (often after tax) gifts.  By contrast, at death you get a 100% deduction against the estate tax by giving a gift to a qualified charity.  So you save more in taxes if you wait until death to give to charities.


What about splitting my assets between my children and a charity?


Some families like the Walton’s have used Charitable Lead Trusts as a way to give their grandchildren money while avoiding the estate tax.  This is currently technically legal, but the lead trusts have a long lifetime and its always possible that the law can change.  While the IRS cannot pass a retroactive tax, they most certainly can change the tax on the remainder interest in a lead trust at any time.  Lead trusts have the money in limbo for at least 10 years and sometimes up to 30 years.  The lead trust takes advantage of the fact Applicable Federal Rate on mid and long term obligations is less than 3% due to our low interest rates and so anything you earn above 3% doesn’t go to the charity, it goes to your grandkids tax free.  Of course you have to use up your Generation Skipping Tax exemption to fund these trusts. 


Another common trust in the Charitable Remainder Trust.  Here your kids or grandkids get an annuity and the trust gets the remainder.  Charitable Lead and Remainder Trusts may get less of a tax deduction than giving assets at death because your tax write off for charitable giving is taxed in your lifetime but not at death.  Moreover, it’s better to just give your kids one lump sum and the charity another lump sum at death to meet both of your goals, minimize your taxes and reduce your risk of running out of money in your lifetime.


5)  Insurance


Insurance is sometimes used to change the character of an asset or to pay estate taxes.  You should be able to move assets down to the next generation through GRAT’s, Family Limited Partnerships and LLC’s with the help of a lawyer and an accountant. 


Insurance allows you to avoid the estate tax because death benefits are not taxable from an income tax or estate tax point of view.  However, with insurance you generally pay more in premiums than you receive back in death benefits and the asset is only not taxed because it’s a return of your premium. 


I’m not a fan of life insurance or annuities in your old age.  I think it almost never makes sense if you run the numbers.  Remember the IRS doesn’t usually allow to make profits without paying taxes – the primary reason why I think life insurance benefits come through tax free – is that they usually reflect an economic loss rather than a gain.  The IRS is usually very fair about not taxing you when you paid more in premiums than you get back in a death benefit.


This article touched on some legal issues and accounting issues.  Talk to your lawyer or accountant for a legal or tax opinion on these issues before taking any action.





The Lifetime Financial Planning Roadmap – the six areas of financial planning that matter the most for an older person or a family


By Daniel Harris, Sunday April 3, 2016


This article is part 3 of a 4 part series on comprehensive financial planning throughout your life.  These opinions are my own.


What systems are most productive for an older person (59-76)


1)  Legal Advice – Legal advice starts to become supremely valuable at this age.  The reason is you can use trusts to move things out of your estate and you are old enough that it makes sense to start looking at the proper legal instruments to carry out your estate planning goals.  The laws change all the time, which makes it very risky to do intensive estate planning when you are young when the laws have lots of time to change, but by your mid 70’s you can start to consider estate planning especially in recessions to get under the estate tax limit if you want to do so.


2)  Education Planning – if you want to help your grandkids with school, you can set up an education funding plan with the right structures in your name with your grandkid as the beneficiary.  This can allow you to pass down assets for something that is meaningful to you and save $3 or $4 in taxes per every dollar invested. 


3) Productive Investments – every dollar invested has the potential to produce an additional $1.67 in profits (a 160% return) when you use good advice. 


What is most important at this stage is to manage your withdrawals.  So many people mess this stage up and it requires a lot of experience and seeing this done successfully as well as really accurate calculations.  It’s so technical that I don’t think any advisor but a financial advisor can do this correctly.  It requires immense understanding of pricing, volatility, withdrawal rates relative to the environment, inflation expectations and lots of other technical factors to make it work.  At this stage it isn’t about dying rich – it’s about not running out of money.


4)  Accounting and tax planning – tax planning has far fewer tricks once you are no longer working.  It is very hard to get out of capital gains taxes.  Accounting has value in terms of structuring liquidity events, doing valuations for GRAT’s and other instruments – but it is important to recognize the difference between a tax deferral (may have no economic value, a negative economic value or a positive economic value) and tax avoidance which always has positive economic value.  Tax avoidance is always great but there are fewer things you can do once you are retired.


5)  Charitable Planning – This is when most people get serious about charity if that is something they want to do.  The tax code lets you write off 50% of your income for cash contributions and 30% of your income for appreciated asset contributions.  Some people consider CRUT’s or Charitable Lead Trusts at this phase, but you first just consider setting up a Donor Advised Fund and simply naming it as a partial beneficiary of your transfer on death designations.  Giving too much to charity too early has put families like the Rockefellers and many others in precarious economic positions, so I’d advise being conservative in your charitable giving at this age, and you can use the basic structures to give more at your death if that is what you want to do.  I think it is okay to give up to the income tax deduction in charitable gifts each year, and the remainder at your death.  Doing so maximizes your tax deductions under the IRS rules.


6)  Insurance - Insurance has mostly no value for a nonworking person.  By this age, having to stop work due to illness or injury shouldn’t have a big impact on your finances.  Some people use insurance to recharacterize assets, but you usually pay the insurance company more in premiums than you get back in benefits, so you might be better off just setting up a sinking fund to pay estate taxes – that should keep more money in the family.


So what is the take away for an older person?


In your mid to late 70’s, your going to want to look at the tax component of your estate plan for the first time.  Tax laws change all the time, so it generally doesn’t make sense to do tax based estate planning when you are young.  But as you get older it starts to make sense.  There are a world of options at your disposal and we’re happy to give you a referral to smart and creative estate attorneys.


This is also a good time to look at college funding for your grandchildren if that is something you want to do.  There are some tax avoiding vehicles that make this cheaper.  Investments continue to have a lower rate of return because they have less time to compound, but you’ll need to nail the proper withdrawal rates and investment mix on your retirement assets.  Investing generally is hard, I would never do this stage without a professional or extreme expert advice – the drawdown phase of investing is the hardest part and if you do it wrong you can run out of money (or run low on it) like lots of other people.  Accounting is a little less valuable at this stage, because as a retired person your arsenal of tax planning tricks are far fewer, and you’re a little too young to do the advanced estate tax planning work at this age, in my view. 


Charity is the biggest risk at this phase.  Lot’s of people go broke (or get much broker) by giving too much to charity early on.  Even if you are charitably inclined, its important to be conservative in your giving during this stage so you don’t run out of money.  Worse off, the IRS discourages giving by capping charitable deduction write offs to 30-50% of your income.  My advice is that if you want to give, give up to annual charitable deduction amount in your lifetime, and give a bigger (fully tax deductible) chunk at death, if that is what you want to do.





Comprehensive Financial Planning for middle aged folks (ages 40-58) and the relative value of the four areas of financial planning (tax planning, productive investments, legal advice and insurance) at this stage of life


By Daniel Harris, RIA, Saturday April 2, 2016


This is the second part of a four part article about the arc of comprehensive financial planning throughout your life and factors warrant your attention at each stage


What systems are most productive for a middle age person (40-58)?


1)  Tax Planning for business owners – You may be able reap up to $9 in taxes saved for every $1 in tax planning fees.  By middle age, tax planning is more important than saving and investing for a business owner – so this is where your first dollar of money or your first hour of effort should be spent.  If you are considering an exit  one day, this is the time to consider your business structure in order to make it tax advantaged to exit.


2)  Investment Productivity and Savings Rates – Your savings rate continues to be very important at this stage, but investing as productively as possible is even more important.  Every dollar invested productively can be worth about $5 of extra profit to an investor in their late 40’s.  It costs about $0.01 per dollar invested for good investment advice.  The lower rate of return is due to less years of compounding in front of them but given that you likely have another 30-40 years left, there is still plenty of time to grow your savings if you invest correctly.


3)  Tax Planning for Individuals -- Nonbusiness owners can reap up to $5 of taxes saved per dollar spent in tax planning fees, in my view.  So tax planning remains a productive area – using all the same tricks that work for a younger person but just keeping up the vigilance in avoiding taxes where it makes sense from an investment point of view.  Since investments are generally more productive than tax planning for employees it is important to do what makes sense from an investing point of view, and then try to do it as tax efficiently as possible.


4)  Legal Advice – If you hit 50 and you’ve never been divorced it’s likely that you aren’t going to get divorced, in my view.  This opens up a window for good legal instruments like the marital bypass trust for those who want it.  There is not a direct monetary benefit to it, but a lot of people feel better knowing that their children will get the remainder of their estate (something you cannot guarantee without using a trust).  Trusts are not a standard legal procedure since the law generally discourages remainder interests or having a say over property after you die.  However, they are permissible but you need a lawyer to do this.  I encourage you not to be cheap and use a nonlawyer provider, form book or trust mill, if you are doing a nonstandard procedure like a bypass trust – so make sure an actual lawyer who can testify about your intentions creates it or at least signs off on it. 


Your lawyer may try to talk you into a professional fiduciary – don’t take the bait and if they really push for what I believe is basically a self dealing tactic, consider finding a different laywer or at the minimum have their legal advice reviewed by an independent party (your accountant or financial advisor).


I have one exception to this rule.  If your family is just at war with each other and the beneficiaries hate each other haven’t talked to each other for 30 years – you may have no other choice than to hire a corporate or professional fiduciary (but a corporate fiduciary is generally better in my view and I can help you find one).  I’m only okay with corporate or professional fiduciaries when there is no alternative and literally no other responsible person on earth who can serve as trustee (including the beneficiaries themselves).  I believe that professional fiduciaries are pushed on a lot of people with a thorough misrepresentation of the facts, according to my analysis, and it leads me to believe that a good portion of the time when the lawyer is pushing it they are acting in their own self interests to earn more legal fees from the professional fiduciary they are recommending and not acting in the interest of their client who is actually going to be paying the bills.  Once you’ve appointed a fiduciary to act on your behalf they can make their own decisions of who to hire and what to pay them – including the decision to hire your own lawyer and pay legal rates for what is basically administrative work.


If the lawyer gives you the spiel about how trusts are so hard to administer and it’s so easy to breach your fiduciary duty and there is so much heat on you – know that in my view: 1) the lawyer is likely lying to you, (see the article from the Georgetown Law Journal below for proof) and 2) the lawyer is probably self dealing, in my view.  It’s an objective fact that litigation over breach of fiduciary duty is extremely rare (18 cases total in 9,000 deaths in Alameda County according to my analysis [99.8% of deaths did not have a breach of fiduciary duty claim as I understand it]).  It is so rare that it rarely came up when the topic was recently reviewed by Professor David Horton at UC Davis School of Law in the Georgetown University Law Journal article on California probate that examined all the probate court cases in a California county for a period of time.  Here is the article by Professor Horton on the topic – it is worth a read:  You won’t have any fear of lawsuits after looking at the facts, in my opinion.


Second, professional fiduciaries are likely some of the biggest buyers of your lawyer’s services and I assume they are not very rate sensitive.  It’s likely that the fiduciary will buy more legal services from your lawyer than you will and as a general rule you should never take legal advice from anyone who is more loyal to your adversary than they are to you.  There are too many good, honest, estate attorneys in San Diego – you don’t have to settle for one who puts their own interest before yours.  Worse still, once appointed, a professional fiduciary is extremely difficult to remove if you disagree with their billing practices and I believe that you have to pay their legal fees to defend the Professional Fiduciary’s own behavior (see the San Jose Mercury article below).


Can you imagine that?  It’s as if a client wanted to fire me, and I said no, and you had to prove in court why you should be able to fire me, and when it is all said and done not only do you pay your lawyer for going to court but you pay my lawyer fees too.  How unfair is that?  This is why I always recommend distributing assets at death where possible, and never, ever, hiring a professional fiduciary unless there is no other responsible person on earth to serve in that role.   In a bypass trust your spouse is the trustee so even though you distribute assets at the second death, you never have to hire a professional fiduciary. 


If you have a professional fiduciary in your line of executors or trustees on your estate, I think you should change your trustees on your trust.  At the very least, you should read the following article by the San Jose Mercury News on a situation where a professional fiduciary and a probate lawyer ran up $370,000 in fees in just two years on a beneficiary’s account with bills and charges many would consider to be excessive, unwarranted, unfair and abusive.  It was so bad, the state legislature had to require even more accountings from these groups since many in the public viewed their behavior as grossly unethical (but not illegal).


You may think the law will protect you – it didn’t protect others and I doubt it will protect you.  Turning over your estate to a professional fiduciary in my opinion is a license to get robbed (legally).  I don’t like taking such a hard stance against any group, but I feel that you probably don’t know much about the fiduciary process and haven’t looked at the evidence – I have.  After reviewing, I completely understand why the people of California have been stripping estate attorneys of their power over the years by allowing you to more things outside of probate and without using lawyers – I was really bothered that the excessive behavior happened under the supervision of a publicly elected probate judge, with assets of people who died and couldn’t do anything to reverse the process.  


Because lawyers recommend fiduciaries and the fiduciaries turn around and hire those same lawyers for legal services – it is a super chummy type of relationship and I think it is usually the legal customer and their family that often gets screwed in these deals.  I can’t encourage you enough to read the San Jose Mercury article on this topic – you won’t look at your lawyer or the professional fiduciary they recommend the same after you’ve gotten informed, in my view.


We all want to trust our lawyers and think they are looking out for us.  I’d say 70% of them are and can work without supervision.  20% are kind of self dealing in my view and they need to be supervised by outside independent advisors (like your lawyer or accountant).  10% of them will rob you blind if you let them, in my opinion. 


Most of the time your lawyer, your financial advisor, and your accountant are going to be highly aligned on what to do and have common interests in looking to increase the growth of your money, reduce your risk of losing money in a lawsuit, and reduce how much you have to pay to the government.  But not everyone in these fields is a beacon of honesty and if you’ve been pitched on a professional fiduciary because handling estates is so hard (it isn’t), then the other advice you got from that person likely benefits them more than it benefits you in my estimation, and I’d be happy to review with you their legal recommendations and tell you the truth about the odds of a problem and what your options are (I’m a member of the bar too and I have no incentive to tell you anything but the truth since I don’t sell legal services and I always farm out legal work to other lawyers).


5)  Insurance – Life insurance and disability insurance become less valuable at this stage as your own savings should allow you to mostly self-insure.  Depending on your net worth, you may want to drop your term or disability insurance at this stage if you are a good saver or productive investor and its getting expensive to buy the insurance.  You’ll want to keep your work related insurance the full length of your career.   According to my analysis, whole life policies and annuities have badly negative returns for people in these groups when compared to alternative options.


So what is the take away for middle aged people?


If you are a business owner make sure to focus energy on your business tax planning and investments.  At the end of this age group, you may be considering a liquidity event but you need to set up the right tax structure to do it (to avoid double taxation) and it may take 5 years to change the structure of your business and get the full tax benefits.  If you don’t have one, we can recommend a tax planner for you.  Tax planning, a good savings rate and productive investments continue to be the highest returning areas for your effort and money at this stage, in our view, with legal advice starting to be more important at the end of this age group (marital bypass trusts) and insurance becoming less and less important because as you get more well off you can self insure.


For estate planning, the marital bypass trust, if that is what you want to do, should go right through without review from outside parties.  However, other legal instruments that don’t distribute assets at death should largely be avoided, and professional or corporate trustees are a good way to make your estate plan cost 4-5% a year in fees, which will destroy your corpus over time, in my view.  When you set up one of these perpetual trusts to slowly distribute the assets you are essentially adding your lawyer, your financial advisor or corporate trustee, and your fiduciary to your trust along with the children or charities you want to include.  Since accounting, advisory, trustee and fiduciary fees eat up almost all the income of a trust each year, there will be substantially less for your true intended beneficiaries.  Therefore, at this stage, my general recommendation is to not to have trusts that live on long past your death unless it is a marital bypass trust (which lives on just as long as your spouse does).




Comprehensive Financial Planning for younger people (ages 22-40) and the relative value of the six areas of smart planning (investments, taxes, education planning, estate planning, legal advice and insurance) for someone your age


By Daniel Harris, RIA, Friday April 1, 2016


Finances are kind of like the human body, things that are best for one organ system are often bad for the others – so you have to make your decisions thinking of the entire system.  It matters a great deal in terms of how secure your family is going to be and how effective you are going to be at meeting your goals to learn how to get the most out of one system without compromising the others.


As a general rule, I feel that most people don’t understand the potential of these different systems.  People vastly underestimate the value of a good savings rate, productive investments and tax planning and vastly overestimate the value of some other services. 


Part of the reason for this make is that the value of these services varies over your own lifetime.  While tax planning and highly productive investing are pretty consistently important, legal services start out not being that valuable but become the most valuable service as you get older.  Insurance, despite it’s negative returns is immensely important in your first two decades in the workforce, is sometimes a factor in middle age and almost completely irrelevant in old age. 


Finally, the idea of charitable giving starts to really kick in for most people at late middle age.  The typical family gives away about 2% of the discretionary income to charity – but most of this happens in the later years of life when they feel more financially secure. 


Just as it is critical to save when you are young, it’s important not to overspend or over give in your early years of retirement.  You can always give more later, but if you give away too much now, you can never get it back.


To help you understand the systems, I’ve laid out a road map of what I think is smart financial planning throughout through out your life until this multipart article.  Every one is a little different in their goals and personal time line but it’ll give you a rough idea of what to focus on.


 I’d recommend putting your money and/or your time behind the areas that are most productive.  I’d recommend doing enough to get by in the other areas but not overly focusing on them because I think the return isn’t there.  The rates of return are my projections based off what I’ve observed across thousands of clients or are my own opinions based on my research and analyses of the available products.


What systems are most productive for a younger person (Ages 22-40)


1) Savings Rate & Productive Investing – Most people know the value of saving – but they often don’t take advantage of good savings by combining it with good investing.  A normal saver saves around 5-6% of their income.  Unless you have a really high income, you’ll want to save at 2 to 3 times this rate – and most millionaires find a way to save 20% of their after tax income.  If you make 3 times as much as the average person, you can afford to save 5-6% of it and be fine in most cases.  But the combination of your earnings and your savings rate needs to be above average to reach financial security.


What most people don’t realize is how productive investments can be and how much they are missing out.  According to BlackRock and Dalbar, the average investor earns around a 2.5% annual return on their investments.  This means that they only earn about 0.25% after you account for inflation.  You can do much better, in my view, if you focus on their productive parts of the investment market.


When done right, every dollar you put in to good investments can generate up to $16 of investment profit with the help of strong knowledge or advice.  Most people don’t reap the benefits though because they don’t actually know how to invest (it’s actually pretty hard to do well).  Investment advice costs about $0.01 of per dollar invested, allowing the remainder of the profits to flow to you.  You can see that good investment advice is the most profitable area for young people to invest their time and money in.


2)  Tax Planning – every dollar you put in to tax reduction can generate up to $9 of saved taxes for a business owner or $6 of saved taxes for an individual according to my analysis.  Tax advice generally costs about $1 of these dollars, allowing the rest of the saving to flow to you.


If you need a tax planner or accountant, we are happy to refer you to someone who we think would be a good fit for you.


3)  College Education Funding – every dollar you put in the right education funding vehicles at birth can generate up to $4 of tax savings by the time your kids go to school.  It generally costs about $0.01 of these dollars to use the vehicle, allowing the rest of the tax savings to flow to you and your children.


We constantly set up these structures for our clients and it only takes about 5 minutes of your time to set up the proper education funding structure in our experience.


4)  Estate Planning – The basics of estate planning are close to free and are only slightly more difficult to carry out than getting a driver’s license or registering to vote.  Most people don’t know that the government or quasi government type entities (like the State Bar Association) provide most of these basic documents for free so long as your wishes are standard (i.e. if you die you want things to go first to your spouse, and if your spouse predeceases you want your assets split evenly amongst all your children).  The court system is part of the government, and you can be reasonably assured, in my opinion, the government will accept its own documents as legally valid so long as you follow their instructions when filling them out.  In this way, estate planning is about as complicated as registering to vote, in my view.


For young couples the primary estate planning concepts are probate avoidance through transfer on death deeds on their home, beneficiary designations on all financial accounts, a durable power of attorney, a pour over will, a health care proxy and an advanced medical directive. 


California Probate law draws a huge distinction between people who die with over $150k of probateable assets in their name and those under that level.  Anything that you leave proper transfer instructions for like real estate through a transfer on death deed, and beneficiary designations on your 401(k), IRA’s, brokerage accounts and bank accounts does not count towards this $150k threshold and is exempted from this estate.  So whatever you have left over, it could be your cars, your clothes, your jewelry, if that is worth less than $150k – you can follow a simplified (i.e. super cheap) probate procedure.  My research indicates that close to 93% of families fall under the simplified probate process and you can easily do this for your family as well. 


My understanding of the pricing in San Diego County, is that if you are under the $150k probateable asset threshold, you can transfer any other property by an affidavit (a written statement under oath saying that you are entitled to it), which I think costs like $40 per piece of property in San Diego.  If you exceed the $150k probateable asset limit, the typical case costs around $11,000 in attorney’s fees and $2,000 in other fees.  So it’s worth your time to fill out these simple forms. 


If you want a lawyer to look over the simple forms, I know a lawyer who will look at them for $250 an hour, which is a lot cheaper than the $2k to $3k that you will pay for a living trust.  The forms are so simple that I’d be shocked if it took more than 1 hour of their time to review your work (the only thing I recommend reviewing is the transfer on death deed which is like 50 words so it shouldn’t take more than 30 minutes for an attorney to review it).


5)  Legal Advice – The estate planning topic I discussed above, is for common estate plan preferences and beneficiaries (your spouse gets everything first, and if they have already passed your children are the contingent beneficiaries and they split the asset evenly amongst themselves) and other situations where your family gets along with each other.  The following types of situations require a lawyer, right away, in my view:


1)  You have a blended family with children from different marriages (you should seriously consider a marital bypass trust which ensures your kids get the remainder of your separate property and community property).  This costs about $2,000 to $3,500


2)  Your family doesn’t get along and members of your family aren’t talking to each other


3)  You plan to disinherit someone in the natural line of succession (your spouse or your kids)


4)  Your assets are illiquid and can’t be easily separated (multiple family members own a portion of an illiquid family business and there is no buy-sell agreement in place)


Less than 1% of estate and trust cases are litigated from my research, which is far lower than the general rate of civil litigation in the U.S.  Generally, almost no one gets sued in an estate and trust case but these four situations listed above are the types of situations where lawsuits are more prevalent and the standardized estate planning options won’t work in those cases. 


If you look at the probate calendar of almost any court in America you’ll usually see two probate cases every fifteen minutes, indicating that the work is highly routine.  San Diego has only two courtrooms dedicated to probate in the entire county and they spend most their time overseeing accountings and appointments for conservatorships and guardianships – there is extremely little litigation in these areas compared to normal civil law (which has sixteen courtrooms and are frequently holding trials).


6)  Insurance – Every dollar you invest in pure insurance (disability, term, or malpractice insurance) should generate loses of 3-10% on your money.  That’s life – insurance companies need to make a profit.  Every dollar you invest in insurance/investment hybrid products (annuities, variable annuities, whole life insurance) could generate loses of 40-90% in my opinion relative to other options.  Even though it creates negative returns, pooling your risk of an early death, a disability, or a medical malpractice claim) is a smart thing to do at this stage of your life as you likely have dependents to support.  Insurance has low economic value in terms of producing gains, but it is the best instrument to reduce catastrophic losses.  When you are a family with young kids, if you lose your job, income, or ability to provide, your family could be destitute.  For a tiny amount of money, you can eliminate that risk and I think it is the first thing you should do even before you invest for growth.


So what is the take away for younger people (Age 22-40)?


I think you are going to want to focus on investments, then tax minimization, then education funding, then the free standardized options for estate planning if they work for you, or a special lawyer constructed trusts if they don’t work for your situation and finally insurance.    


Despite it having low economic returns as an investment, I would recommend buying your insurance first (term, disability, malpractice if relevant) since it is the only thing that can reduce a catastrophic risk.  You won’t have to focus much on this, once you’ve set it up right you are done for life in terms of buying insurance.  Only after making sure that you are properly insured, I would recommend spending most of your time focusing on investments and tax planning since this is where the money is.  If you’d like a recommendation for an insurance company, I’m happy to put you in touch with people who I think are the better insurance companies and agents to work with.  Nothing against insurance companies, but the agents get paid more to sell products that are very profitable for the insurance company and bad for you.  They don’t get paid much to sell the good products – so they will almost always pitch permanent life insurance and variable annuities, and often only begrudgingly sell you term and disability insurance.  Insurance is really complicated (especially disability) and really it’s a legal document, and so we help our clients go with the best firms and fill out the documents correctly, if they want our that.  Insurance information is still kind of secretive, but because we recommend products and don’t compete directly for insurance with insurance agents, they are pretty open with us about their products and their pricing.


I often get asked by younger people if they should hire an accountant.  The answer depends on how detail oriented you are and what you are trying to do.  If you run a business, you should talk to an accountant each year to at least make sure you are up on tax strategy, which usually more than pays for itself.  If you are detail oriented or an employee, you may be fine as a DIY tax planner with some help from us, if that is what you prefer.  Most accountants strongly prefer to work with business owners since they have more options to work with and are willing to pay more since tax planning benefits business owners more than individuals.  If you are more of a big picture person and details aren’t your favorite thing to deal with, we can refer you to an accountant in your price range or a tax planner who can help you run a tight ship for a tax point of view.


Legal advice also depends on your situation.  If you are in a high risk profession or have a family that doesn’t get along well, then you probably need legal advice from the start.  Legal advice doesn’t just deal with assets, it also deals with guardianship of your children and custody of their assets if something happened to you.  The standard forms take care of this – but if you can’t be open with and gain the acceptance of your family members about what you want to do, you may want to have a lawyer draw up your documents since they are more likely to be contested.  Linda and I just told all of our family what our plans were for our kids should we both die and we laid out those plans in roughly identical wills.  We saw each others will and know of our beneficiary designations and are unified on who we want to have guardianship and custody of our children.  We have different executors on our estate (she chose her family and I chose mine) but we are unified on guardianship and custody of our children.  We’ve also been open with our families about what we want to happen to us if we are in a vegetative state and that we give our medical power or attorney to each other in case we can’t make our own medical decisions.


Since everyone knows our intentions and we have the standardized government and quasi government issued documents that completely match one another on guardianship and custody, I feel like our wishes will be carried out in the event of our deaths.


There are also some asset protection shelters you can use, but I’m pretty skeptical of them.  I usually encourage the simple solution unless for some reason it won’t work.  The simple solution against a catastrophic type risk, is to pool your risk with others through the purchase of insurance, as this is the simplest protection against drawing the short straw in life. 


While the best line of defense for riskier situations is insurance, in my view, lawyers can sometimes, but not always, structure things in a way that can protect you too, as long as you don’t take it too far.  Insurance almost always pays, but you take a risk with a legal structure that it won’t actually work because you don’t know what the law will be at the time you need to put it into effect.


If you are in a normal risk profession (you don’t manufacture asbestos and you aren’t a doctor), you can usually skip the living trust when you are young, in my view, but you’ll want to look again at using their services when you are older. 


There are what I call millionaire next door lawyers – they cater to people who make smart decisions and they charge less – usually around $250 or so per hour (most estate lawyers are in the $375 to $425 range and will help you even if you do things that are pretty high risk).  The millionaire next door type lawyer will review your transfer on death deed on your property, serve as a personal representative in an estate case, and generally fill in as you need them for legal advice without asking you to buy the full $2k to $3k trust right away.  They know that by treating you right up front, you are more likely to mention them to your friends, as well as be their potential lifelong client for your estate planning needs that come up later in life.  Implicit in this agreement is that you won’t be a pain in the butt client and will be a nice person (which I’m sure you are).


You might wonder why shouldn’t I just get it over with and buy a living trust up front?  The answer is that the primary benefit of a living trust is that it ensures that your kids will inherit your portion of your assets (your spouse will have an income or life interest in the assets) and they won’t go to someone else’s kids if your spouse remarries.  I made Linda promise me that if I die and she remarries that she’ll get a bypass trust before that date to protect our children.  I know Linda loves our kid and I feel I can trust her to act in his best interest (she’s fierce in standing up for our kid – you should have seen the death glare she gave me when I suggested that we let him cry it out at two months old) so I feel confident she will protect him from others as well.


But if you do your trust too early – you can have negative tax and legal consequences.  Also the trusts can become close to worthless if you get divorced.  Often if you aren’t divorced by 50, you aren’t going to get divorced.  That makes your 50’s a great time to consider a marital bypass trust for the first time.  You have a much higher chance of getting divorced between 30 and 50 than you do of dying between 30 and 50.  As a result, I think advanced estate planning in your 20’s is too early unless you are in a high risk family situation, in which case I think you should work with a lawyer and use these instruments right away.


This is a long post – but most people don’t know this stuff and are being introduced to some of it for the first time.  The subsequent articles on this topic are much shorter.  As always, they are my opinions only, you are welcome to form your own opinions and do your own research on the topic.  But the thing I hope to get across is to take care of your insurance first and after that focus on your savings, investments, tax planning and education planning at this age as they are the vehicles that are the most productive for a young worker.  As you get older, other things will matter more, but in your youth you really need to save well, spend the time or pay for the knowledge to invest productively, take advantage of legal tax avoidance, and fund education in the right tax avoidance structures.



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