Birmingham, Alabama-based financial guru Jeff Roberts, who was recently named one of the top private wealth advisors in the nation by Barron’s®, came on Yellowhammer Radio to lay out the facts so people can decide for themselves.
The full conversation with Mr. Roberts can be heard on the Yellowhammer Radio podcast or in the video above, and a lightly edited transcript of his interview with Yellowhammer’s Scott Beason can be read below.
Subscribe to the Yellowhammer Radio Podcast on iTunes. Learn more about Jeff Roberts’ private wealth advisory practice at JeffRobertsAndAssociates.com.
Jeff:
Today since we didn’t have a particular subject that we wanted to cover related to anything going on in the world I wanted to revert back to one of the things we’ve done in the past where I just go over and share some ideas based on mistakes or problems that I see with clients that are coming in and talking to us in the office. When we’re working with directly with people things that we see commonly done incorrectly. I thought we might talk about some estate planning topics that we see as maybe a learning opportunity.
Scott:
Absolutely, that’s one of the things that it seems that a lot of people that aren’t really sure about it and I’ve learned by just having these conversations with you over the last couple of months that there a number of things that are out there that people can do and I’m learning that there are as many opportunities that I can learn from you and your staff as there are things that I have done wrong in the past. What are some of the mistakes that people are making?
Jeff:
The biggest thing that we want to start with when we think about estate planning is just making sure that people have put some thought into it. We do this with new clients. We make sure they have put thought to their heirs and are they actually ready and equipped to receive any type of inheritance. You really have to think through that and be critical when you’re thinking about people that you’re leaving money to. It’s the concept of leaving and passing money or assets equally to their children is what most people do. If you think about it, if you have two kids most people think, ‘Oh well, when we’re gone husband and wife we want to leave everything split between our two kids.” And there is nothing wrong with that. I want to make sure that everyone hears me say that there is not issue. What we want to make sure is, are we sure those kids are equipped to receive it. Let’s go to an extreme examples for just a minute. Let’s say you have a child, and I’ve seen this, that was literally addicted to drugs. He had addiction issues. You’ve seen and heard these scenarios where there’s a child and they’re literally spending everything they have on some sort of drug that they’re addicted to. They can’t hold a job because of it. They’re always in need and scrounging for money. We’ve even seen scenarios where the kids have stolen from the parents. Stolen valuables that they then turn around and pawn in order to get their hands on more drugs. So the idea is, in that situation if you passed away and had a million dollars would you want half of that to go to a child that is in that situation in life? The answer would be, of course not. We want to challenge people by saying a less extreme. We see this all the time with people in their 20’s, 30’s, could be 40’s that do nothing but spend everything they have. They’re not planning properly for their future. They get new money and just accumulate more things. Stuff is more important to them than anything else. In fact, they have debt. They have more debt than they have assets. We see it commonly with people that come into the office or kids of people that we work with. So what’s the difference between giving a half million dollar inheritance to a kid that’s a drug addict verses somebody that just blows and spends money? In the end I don’t know if there is much of a difference. I have a lot of clients who are Christian and they think differently about money in that they believe that God owns the dollars and their purpose is to steward those dollars during their lifetime. It’s a serious concept that they’re leaving this asset that I’m responsible for to somebody that doesn’t share a similar type of value. That’s where we try and spend time helping clients ask the question, ‘Have I spent the time coaching and equipping my heirs to receive this type of inheritance?” And it’s a very powerful conversation and family planning opportunity.
Scott:
What kind of things do you do? Say you have someone who comes in, like, I was thinking about it for my kids. My first reaction would be, “Okay, I’m going to split it evenly between all the children.” I never thought about whether or not they were all prepared. Are there certain things that you suggest to people sometimes? If one of the children is more responsible, you put them in trust, what kind of things like that?
Jeff:
All good questions and as you can imagine it’s a thorough conversation where we can spend an hour or two just working with clients on this topic alone. But in your situation where you might have kids young enough, set the standard and the example to the kids early on. “Kids look, anything I have that’s left over down the road goes to you. It could be today if I’m in a tragic accident or down the road when I’m 100 years of age and I’ll leave you everything I’ve got. I want to make sure you understand that the decisions that you make in life with the dollars that you earn or I give you, the things that you demonstrate, the decisions that you make and the way that you demonstrate responsibility financially will determine how I decide to leave my assets to you, your brothers or sisters. Because if you’re irresponsible I’m not leaving you the dollars that I was responsible with.” So setting that tone early on to teach them financial responsibility from a bigger picture. You can go about doing that essentially by just having the right type of will in place and beneficiary designation. Which is the second point that I was going to make today. We see with people that most do not even have a will which we encourage everyone to work with their lawyer and get a will. A will is instructions for probate in it’s simplest terms. We also encourage people to use beneficiary designations on any assets that they possibly can.
Scott:
What does that mean?
Jeff:
A beneficiary designation is no more than an estate planning arrangement that you could have attached to a particular asset. For example, if you have a 401k plan or an IRA or a life insurance policy, you could name a beneficiary on that particular product so that the product goes directly to that beneficiary. Just like if you have life insurance and you want the life insurance proceeds to go to your wife, you name a beneficiary. You can have an IRA or a 401k plan and when you sign up for that it will have a little box you can check and you can name the beneficiary. The interesting part about that most people forget is understand the beneficiary arrangements supersede the will. So let’s say that I have a will that leaves everything that I have to my favorite radio host, Scott.
Scott:
And I’m sure you would probably do that.
Jeff:
That’s right, that’s what my will says but my beneficiary arrangement on my retirement account names my brother. Well, if I die the beneficiary arrangements supersedes the will. Now of course I always tell people when you’re talking about these types of estate planning concepts we always recommend people speak with their lawyer or attorney. An estate planning attorney can address these sorts of things but understanding the beneficiary arrangement that it supersedes the will but it passes probate and just goes directly to the person once basic paperwork and estate planning is done there it’s an easy thing. Here’s another thought, though. Follow me, when you buy a car you don’t have a little box that you can check that names the beneficiary on your car just like you don’t have a little box that you can check when you buy your house that says you leave your house to a particular person as well. So those types of assets don’t have a beneficiary designation inherent to them so they often times go to the will which then has to be probated and the will instructs where those assets go. An important concept and sometimes we advise people to have a certain type of trust that you can put a house or a car in so that it basically adds a beneficiary designation to that type of property and it passes straight as well. Another option that we see from an estate planning standpoint that’s important to consider is the ownership of highly appreciated property. Follow me, better make up a stock for example. Let’s say ABC stock, that’s just a random name I’m making up. Let’s say you bout ABC stock with $10,000 and over time it had grown to be $100,000. You know if you sell that stock at $100,000 you got $90,000 worth of gain inside there that you’re going to have to pay taxes on that. Well anytime in your life that you sell it you’re going to pay those taxes if you sell that highly appreciated asset. We advise clients, particularly at this time of year if they’re looking at making charitable contributions by the end of the year which often times people are doing don’t give cash. Instead gift highly appreciated property like a stock that you can pass onto a charity, they can sell it and when they sell that particular asset they don’t have to pay capital gains as a non-profit. So you can gift away highly appreciated assets, take the cash that you would’ve used and use that to buy more of the asset that you just gave away. So your’e gifting away tax basis over time which is very important.
Scott:
That’s the kind of thing, Jeff, that I just don’t believe what I call “normal folks” think about. It’s things like that you help people with. To me that is your value, is that you make us aware of things that I would not have thought of or basically not even known that I could’ve done.
Jeff:
It’s important because these types of planning concepts we see. And one of the reasons that I wanted to talk about them today is because we see people doing this wrong all the time. Another example is where somebody has, let’s say you have that stock in your name and you know that you’re going to pass away because you have some terminal illness and you don’t have a beneficiary on that stock and you want it to go straight to your wife so you gift the shares to your wife and say, “Honey, I’m going to put this in your name so this becomes yours and we don’t have to mess with probate and all that kind of stuff. So if I dies it’s just yours.” By gifting that stock to her you just gave her your cost basis. So she sells it she now has to pay taxes on the $90,000. Where if you just put a beneficiary designation on it, let her receive it directly as a beneficiary she gets a step up in basis to the value of the stock on the date of your death. She could sell it immediately the next day and potentially not have any taxes.
Scott:
That is just a minor thing.
Jeff:
Minor thing that could be huge. I had a situation with my own grandmother and grandfather years and years ago right before I was getting into the business where they were working with an advisor that convinced them to take all the money that was in my grandfather’s name individually move it over into my grandmother’s name to avoid probate. Well they were highly appreciated stocks so she took over the cost basis and ended up having to pay taxes on those which she could have avoided. They’re deceased now, that was years and years ago but it was an interesting learning and planning opportunity. These are important issues to address with your CPA on the tax related issues. Your lawyer on the estate planning issues and we believe the quarterback is the financial advisor that knowledgable about these subjects to make sure that you’re covering all of those bases. Especially the ones and the very beginning where you’re understanding if your children are equipped and ready because if they’re not then you’d be better off gifting the money to a charity. My gosh go give it to St. Jude or some other organization that’s going to do really rally good with the dollars to help people verses somebody that’s going to spend it all.
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