Where Do Millionaires Turn for Good Advice?
Q: I am planning on a great deal of money--six digits per month for several years--starting to come my way later this year. I have never had this much money before, and I know I will need help figuring out how to make the best use of it for the long term. How do I find a good and reliable financial planner? --G.G.
A: Would that we all had your problem!
You are wise to realize that you need expert help before the money starts rolling in. You will not only need help with tax planning and investment strategies but you also should seek advice on planning your estate. Even if you are young, you should make appropriate provisions, if only to ensure that Uncle Sam does not get more than his due if something should happen to you.
Your first move should be to assemble a team of advisers who can provide you tax, investment and estate planning counsel. Some professionals offer all three services; others package their services through a group practice that includes an attorney, accountant and registered financial planner. Before selecting anyone to advise you, get references--the more the better. Ask your friends, relatives or co-workers for the names of competent advisers. Then interview the professionals carefully before making your selection.
You should find out how these professionals plan to charge you. Will it be a flat fee based on the amount of time your account requires? Will they want some sort of percentage of the money they are managing? Will they charge you commissions as they invest your funds? Obviously, anyone who advises you to buy investments that pay him a commission has a bias toward those investments that shouldn’t be ignored.
By now, you no doubt have a sense that your newfound wealth may cause you more than a few headaches. But if you are careful and thorough in selecting competent advisers and attentive to the new demands that your income has given you, you should realize the long-term financial security that such an annual income should provide.
Making Withdrawals From an IRA Account
Q: I am wondering about how I must make my mandatory withdrawal from my individual retirement account. My account includes stocks, bonds, mutual funds and cash. May I make a withdrawal of stocks or other assets, or must the distribution be made in cash only? I am concerned because if one has a stock he wants to hold, a cash-only distribution could require a sale and repurchase that would only benefit the stockbrokers. --C.D.
A: Relax. The government does not care how you take the distribution, only that you withdraw the correct amount from your tax-sheltered account and pay taxes on it. You may decide the form in which your distribution is made.
So even if your IRA contained only stock that you didn’t want to sell, you would only have to withdraw the correct number of shares from the IRA account, transfer them to a non-sheltered account, and, of course, pay taxes on the withdrawal. You would not be required to sell the shares to complete the distribution.
Life Insurance and the Value of an Estate
Q: Should the value of straight life insurance policies and/or the value of annuity life insurance policies be included in the value of an estate for estate tax purposes? --W.S.
A: Yes, assuming either that the policies are payable to the estate of the deceased or that the deceased had control over the policy. Some explanation follows.
If the policies are payable to the deceased’s estate, then the proceeds are considered part of his estate. That is pretty straightforward. However, even if the proceeds are payable to another individual, if the deceased has what is known in the legal profession as “incidents of ownership” over the policies, then the proceeds must be included in the estate as well. What are incidents of ownership? Retaining the ability to change beneficiaries or borrow against the policies would be two examples.
Check with a trusted financial adviser such as a tax attorney or accountant to be absolutely sure whether proceeds from your policies would be included in your estate. In many cases, individuals of high net worth are taking out insurance policies to cover the taxes on their estates. The last thing they want is to have the insurance proceeds included in that estate.
NOTE: A recent column about switching annuity holdings into mutual funds without losing the investment’s tax-deferred status confused many readers, and so we offer a further clarification from Torrance financial planner Thomas Gau.
According to Gau, investors with annuities as part of their individual retirement accounts, Keogh or other retirement plans can simply roll the proceeds over into a self-directed IRA that can be invested in one or more mutual funds at their own discretion. This issue is clear and straightforward.
However, the switch becomes more involved when the annuities are not connected to a retirement plan. In these cases, investors can switch out of their annuities and into a mutual fund only through a 1035 exchange--and only if the mutual fund investment is made through what is known as a “variable annuity.” Investors cannot simply pull out of their annuity and put the proceeds directly into an ordinary mutual fund. They must buy a variable annuity, which is invested in one or more mutual funds. The 1035 exchange procedure allows the investor to retain the tax-deferred status of his proceeds.
In either event, investors should be aware that they could face a surrender penalty for early withdrawal of their annuity proceeds.
