***Three Perils That Can Destroy Your Investment Estate

The desire to protect an estate grows exponentially as the value of the estate increases. If you have little to protect, there is little concern. However, if you have a very large estate, you may actually be paranoid about protecting your estate and your privacy. In that regard, I have identified 35 distinct perils that can destroy an estate – and we’ll discuss here just a few of the most common.

There are basically three major categories of risk: Investment Risk; Tax Risk; and Litigation Risk. Most, but not all of the 35 Perils that can destroy an estate will fall into one of these three categories. For example, inflation risk is one of our biggest conce
s, and it falls into the Investment Risk category. Over time, we will discuss them all. Right now, we will touch on the three categories from a 38.000 ft. level.

Investing has unique risk element. First, let’s define investing as that process of placing some of your financial wealth into particular vehicles that have the potential to earn higher rates of return than are generally provided by safe money vehicles. Safe money vehicles include treasury bills, savings accounts, bank CD’s and money market accounts, which are not considered to be “investments”. They are just a safe harbor for your money.

An analogy might be that your money is in a harbor, perhaps on board of a ship, but the ship never leaves port. There is little risk exposure just sitting in the harbor, nor is there much return on your money. To make more return, you need to put your money in a ship that is going to leave the harbor, and enter into commerce.

By leaving a safe harbor to the open sea, your money is exposed to many risks. These include, for a ship, bad weather, which can cause delays and changes of course. Or even total disaster by sinking – then all is lost. Your ship could collide with another ship or an iceberg. It could be sunk by submerged rocks or even hi-jacked by pirates. The lesson is you should put your money in a ship that can deal with these dangers.

Considering that, choosing the right investments is extremely important, and it is your responsibility to perform your own “due diligence”. The biggest mistakes people make is performing insufficient due diligence. Even if you pay someone a fee to perform “due diligence” on your behalf, you still have final responsibility. You should never invest in something that you do not fully understand. Amazing as it may seem, you can find all the “due diligence” questions you need to ask on the Internet.

Woody Allen once defined a stock broker as someone who invests your money for you until it is all gone. So the second major peril is finding an advisor who puts your interests ahead his/her own. Some advisors are very caring, whether their income comes from commissions or fees. However, make sure you know how your advisor is compensated. Determine if your advisor gets paid for selling investment products as opposed to charging you a fee for managing your investments. You need to know to whom your advisor is ultimately accountable: To you or to his/her firm. This will clearly define the advisor’s role and what you should clearly expect from the advisor.

Taxes are a peril we all face. Some taxes we expect and there are other taxes that come as a surprise. You must learn how your investment will be taxed and how much the taxes will be. For example, some investors will purchase variable annuities with the benefit of not having to pay any taxes until you decide to withdraw your money. While this may work for some people, it could be a disadvantage for others. If you invest in the same mutual fund families but outside of a variable annuity, you might pay lower taxes at the long term capital gain rate.

If you have hired a manager for your stock accounts, make sure you understand if the manager is going to trade the account without regard to taxes. Some managers specialize in retirement plan management, where it doesn’t much matter if there are multiple short term trades, or there is no advantage in harvesting losses that can offset gains. If that is the manager’s style, seek another that is more tax sensitive.

Finally, if you are employing “Modern Portfolio Theory”, seek some advice on how to hedge your equity position if there is a major market decline. I am a fan of Modern Portfolio Theory, but I also recognize that in the 2008 market decline, all stocks and equity funds went down. In the past two years, some very good hedging techniques have surfaced. Check with your advisor to explore these techniques.