On this week’s episode, we’re exploring the concept of family office services — and to help us do that, we welcome Partner and Private Wealth Manager Brenna Saunders from Creative Planning’s ultra-affluent team. We also explore the growing importance of impact investing and how families are aligning their wealth strategies with values that create positive social and environmental change — an area of increased importance as you accumulate wealth.
Episode Notes
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John Hagensen: Welcome to the Rethink Your Money podcast, presented by Creative Planning. I’m your host, John Hagensen. On today’s show, I’ll be welcoming partner and fellow wealth manager, Brenna Saunders. She works with some of the highest net worth families here at our firm. I’ll also explore the growing importance of impact investing and how to align your financial strategies with your value so that you can have a positive ripple effect on those whom you touch. Now, join me as I help you Rethink Your Money.
A family office, a term that sounds exclusive, it sounds elite, and maybe a little confusing, but to help you understand what it really means, let’s begin with a little history. The first modern family office was created by none other than John D. Rockefeller in 1882. At the time, Rockefeller was the richest man in the world with a fortune of 1.4 billion. That’s a lot of money today, and that was really a lot of money back then. His family office was designed to manage, preserve, and pass on his enormous wealth. And for decades following, family offices were almost exclusively for the ultra wealthy.
Deloitte even noted in a recent article that many believe you need at least 100 million in assets to justify the cost of hiring an entire team of professionals to handle your financial affairs. So if you don’t have $100 million, you might be thinking to yourself, “Well, John, why do I care? Why are you leading the show with this? What does this have to do with me?” Well, because that’s how it used to be. Today, the threshold for benefiting from a family office or having access to a family office model is much lower, because it’s not just about the amount of wealth that you have, it’s about the complexity of your financial life and the value of integration.
If you have financial priorities that can be aided by this coordinated, integrated approach that once was only available to the ultra affluent, well then keep on listening, because here’s really what I think you should be thinking about in terms of, when would be the time to consider utilizing a family office dynamic? Maybe you have a family business and you’d like to separate family finances from that business. How about the number of family lines and generations that are being served? Maybe you plan on passing something down to your kids or your grandkids. Maybe you’d like that strategy coordinated.
What is your family’s overall wealth? What are the types of services that you need? You need help with tax, you need help with your legal, with estate planning, business planning? How’s the chemistry in alignment within your family? Is there financial harmony? Do you anticipate that there could be some tension or disagreements once you’re gone, or maybe even right now while you’re alive? What’s your desire to delegate and outsource vs. running point? What’s the complexity of your family holdings, the importance of legacy and maintaining certain levels of control until certain ages of your beneficiaries?
And while these are just a few of the factors, and there are many more, I think the key here is for you to understand the question of whether you could benefit from a family office dynamic. And by the way, it doesn’t need to be with us here at Creative Planning, but a more coordinated, integrated approach is not, “Do I have enough money? Do I have $100 million? No. Well, then I should just have investment management with a traditional advisor or broker, because I don’t have enough money.” No, that’s not the question, but rather, are some of these integrated factors priorities? Are they important to you? Do you think you could benefit from them?
For example, maybe you don’t need bookkeeping services, and business services, and evaluation, and coordination on a liquidity event, because you’re not a business owner. Okay, but wouldn’t it be nice if your CPA actually talk to your financial advisor? If your financial advisor who’s designing your retirement strategy also understood your risk management needs, or that your estate planning attorney, and your CPA, and your financial advisor have had discussions, like a three-way discussion, with your financial plan at the center of those discussions, has that ever happened for you? Is that taking place? Because you’ve worked way too hard over the course of your lifetime to squirrel away what you have and you have big dreams, I’m sure, and big goals for what you’d like to achieve with that money. Do you have a team around you, as Rockefeller did back in the late 1800s, as the billionaire does today? Because you better believe they have access to that type of team, but they’re going to be fine regardless.
Let me break down for you why a comprehensive approach matters. Number one, simplicity. Picture this: you’re the quarterback of your financial life, but instead of executing plays, you’re stuck coordinating between your financial advisor, and your CPA, and your attorney, and your insurance agent. It’s exhausting. It literally is like a game of telephone. You’re trying to relay information. If it’s somewhat complex information, it’s not that you’re not smart enough, but it’s not what you do every single day, and what you relay from a one-hour visit may not be entirely accurate. It just might not be. And it’s a big pain. A family office approach takes that burden off of your plate. You get Mahomes or Josh Allen, that’s now your quarterback, not you scrambling around, trying to run away from Nick Bosa while he’s sacking you, someone who’s at the top of their game doing this on a regular basis.
Secondly, you increase financial efficiency. So simplicity, that might not actually make you more money, it just may save you time. And obviously, time is money, but a family office dynamic should also help reduce your taxes, because you’re more efficient in where your assets are held, because you’re looking at the tax implications of your investments, not just the investments themselves. That’s just one example. I recall when I started out as a young financial advisor, more of a traditional broker at a broker dealer, I looked at investments. Unfortunately, that’s how a lot of financial advisors operate in America right now. Of the 300,000 financial advisors, how many of them are reviewing their clients’ tax returns on a regular basis? How many of them are meeting with their clients’ attorneys to go over the estate plan?
Imagine you’ve worked hard to build a diversified investment portfolio, but when tax season rolls around, and I see this all the time, your CPA tells you, “Hey, you owed a lot of taxes here and I kind of dug in. You’re not efficiently invested. This is costing you thousands of dollars extra in taxes, because you’ve got ordinary income, fling it onto your tax return that you’re simply reinvesting. Why is that not held in your retirement account?” I mean, shoot, I’ve seen municipal bonds held in retirement accounts.
“Wait, what? A tax-free bond inside of a retirement account? That makes no sense.” A similar taxable bond will pay higher interest and you don’t have to pay tax because it’s in a retirement account. But if you’re just looking at bonds and not considering the tax implication, that actually can happen. A family office ensures that your financial professionals are collaborating so that you’re making the most of every opportunity, from your investments, to your tax strategies, to your estate planning. So when looking at the value of a family office, you increase simplicity, which, let’s face it, that’s the entire reason you have money in the first place, is to make your life better.
Part of making your life better is, free up your time, and free up your mental space, and your stress. It also improves financial efficiency and finally, it allows you more customization. Let’s say you’re a business owner planning for retirement and wondering about succession strategies. Or maybe you’re a family juggling multi-generational wealth and you have different priorities and different values amongst family members. Or you have a special needs family member, or other unique situations, or maybe you have certain values where you want to invest and build a plan that aligns with those. A family office approach ensures the solutions are tailored to your unique needs and your unique goals. It’s not a one size fits all. As Peter Drucker once said, efficiency is doing things right, effectiveness is doing the right things. A family office does both.
So here’s the bottom line. You don’t need $100 million to benefit from a family office approach, and you don’t need $100 million anymore to have access to a family office approach. It’s not about the size of your wealth, it’s about the complexity of your financial life and the value of having a team that works together. But if you are stuck in the old model, where your advisor doesn’t review your tax return, they don’t communicate with your other professionals, you’re driving around town, talking to each individual person who is offering strategies that have massive overlap with the other professional, I would pick my head up if I were you and ask myself, “Why am I doing this in 2024 when other options are available to me?”
Today I have a very special guest, Brenna Saunders. Brenna is recognized by Barron’s as a top 100 women advisor from 2019 through 2024. She’s also been named one of the top 100 independent wealth advisors in America, also by Barron’s, from 2018 through 2024, seven straight years. She was also ranked as the number one advisor in Kansas, both of the last two years by top advisor rankings by state. Brenna works with some of the highest net worth clients here at Creative Planning, helping them navigate the complexities of wealth, taxes, and estate planning. She graduated summa cum laude from Rockhurst University, where she earned her MBA as well. She is a certified financial planner just like myself. Brenna, welcome to the show.
Brenna Saunders: Thank you.
John: I’m looking forward to hearing your perspective and you have a very unique one, as I just mentioned in the intro. What’s the most surprising thing you’ve learned from working with high net worth families over the years?
Brenna: I didn’t start working with high net worth clients. Peter asked me to join that team after I’d been with Creative about 18 months.
John: Okay.
Brenna: And I remember the concern I voiced to him was, “Here I am working with the millionaire nextdoor, I feel like I’m really making an impact. Am I going to have that same feeling with the high net worth clients?” Because they already have everything they need versus somebody who-
John: Interesting, yeah.
Brenna: And I have found that the work is just as fulfilling, if not more so, because the decisions that the high net worth clients are making do have a really big impact. It has been more fulfilling than I expected and just as impactful for the clients too.
John :So the ultra-affluent client doesn’t have every single aspect of their entire life perfect as maybe the perception sometimes is. What are some common financial challenges that they do face?
Brenna: I really break it into two main categories. One, how can they responsibly transfer wealth, most often to the next generation or for many generations beyond that? And they would like to avoid taxes while they’re doing that. So managing taxes while still transferring assets in the most efficient way possible.
John: That makes sense. You mentioned it earlier, nobody likes paying more than legally required, especially people with a lot of money, because that tax bill gets really high because of the graduated tax rate environment. If you make twice as much money, it’s not like your tax bill goes up twice. In some cases, you go, “Wait, my tax bill’s up four times the amount. How is that possible?” Well, because a lot more of that was taxed at a lot higher bracket. This is to the extreme with the ultra affluent in terms of all the tax complexity they have. How do you help your clients not get crushed by taxes and feel a sense of confidence that they’re doing everything they can to minimize their taxes?
Brenna: Definitely investments play into that. For somebody who already has a high salary, they’re paying ordinary income taxes on that. We don’t want to add onto that with the portfolio. So we have strategies that are extremely tax efficient, including some which are designed to maximize. It sounds awful, but it really does make sense, but designed to maximize tax loss harvesting throughout the year. In any calendar year, that’s very common that there’s a dip of at least 13 or 14%. That’s the average downturn in a calendar year. We want to be sellers when those dips are happening, and then use technology to take even further advantage of those dips. So making sure the portfolio is running as tax efficient as possible, not adding onto the tax situation that they already have with their earned income, and then looking for ways that they can help offset some of the taxes on the income we don’t control.
We can’t control their salary, what they’re paying on that, but there are strategies that we can implement using charitable giving, making sure that they’re not accelerating any taxes in a year where they’re already paying more than they need to. And so just being really cognizant of, “Here’s what we have control over, here’s what we don’t. How can we take something that we don’t have control over and help offset it?” So it’s coordination, again, of all of the different components there.
John: Yeah, it’s a really good point. And to be clear, when that correction of 14% on average occurs and you sell, we’re buying something similar. I know you know this, but I’m just clarifying for the listener. If you’re not getting out at the bottom, because I could see a listener going, “Wait, why would you want to sell when things are down?” You sell and then you buy something similar to stay invested, stay in the market, but booking those losses, putting them through onto your return so that you can offset what you hope, down the road, are going to be some gains. Sometimes people will say, “What if I don’t have enough gains to offset it?”
Don’t worry. Yeah, you can only use 3,000 a year, but the rest of them don’t go away. So at some point, certainly with clients like yours, they sell a business for a lot of money, or a building, or have some other event down the road. That could be four years down the road, but you booked a bunch of losses for three or four years previously that are now incredibly useful to minimizing taxes. All right, Brenna, what’s one thing ultra affluent families often overlook when it comes to their estate plans?
Brenna: So you’d be surprised at how many of the ultra affluent clients come to us with no estate plan.
John: Really?
Brenna: Yeah. So it’s kind of a scary topic to think about.
John: Do you think that’s one of the reasons, Brenna, is not that they don’t realize they need it, they’re almost intimidated.
Brenna: Yes.
John: “I don’t want to set it up wrong. I don’t want to do something that would mess up my kids, or grandkids, or disincentivize them from working hard. Or I don’t want to think about my death.” Whatever’s going through their mind, it’s a more complex, layered thing than, “Oh, I just didn’t get around to it.”
Brenna: Right. Of course, yes. There’s a paralysis that comes with the weight of those decisions that they’re making.
John: That’s interesting. So where do you generally start with someone?
Brenna: I ask the clients to start with what their goals are. Sometimes the client feels a responsibility to figure out how to get to the goals. We don’t need them to do that.
John: Got you.
Brenna: We just need to understand, where do you ultimately want to end up? And then we will tell you the best way to get there. And if we get stuck on something, we can talk about it in another session. Our attorneys at Creative Planning are great at walking clients through just the step-by-step decisions. If somebody really gets stuck, what I will advise them to do is, maybe we just get this down on paper, we’ll diagram it for you, show you exactly what your estate plan is going to look like with these decisions that you’ve made. And what I find is, three months after that, it’s going to be much easier to say, “I absolutely hate this part of this and we need to change the document. Or I’m actually happy with where things ended up.” Sometimes we just need to get something down on paper, some decisions made, because once you see them and how they’re all working together, then that sometimes provides enough clarity to find the components that aren’t quite sitting well with the client.
John: That’s really insightful, because I do think it’s common that people will say, “I just don’t know if I want to trust. I don’t know exactly the split of how much I want to go to my foundation and how much I want to go to this irrevocable life insurance trust. I don’t even know if I want an irrevocable life insurance trust. I need to study eyelets more.” And to your point, let’s forget the mechanisms. What are you trying to do with this wealth? How much do you want to, in general, give to charity and your kids? Where do you want this going? Then we’ll dive in a little more on what conduits are best going to accomplish that. Let’s not worry about that. That’s a really good tip.
And then the other thing that I heard you say, which I don’t want the listener to miss, is get something down, because even if it’s 80% of what you think you possibly want and you’re not sure, that’s still way better than not having an estate plan. Certainly with ultra affluent families, you have an $80 million net worth, you’re not 100% sure, so you have nothing. How do you handle it when different generations within a family want totally different things when it comes to their money?
Brenna: That’s interesting, and you can certainly set yourself up to have some conflicts there. Is it a big problem if parents want something different than kids? It can be if the parents are concerned that their values are not passing down to the kids and they want the kids to maintain those values. So if it’s a parent to child situation, then it becomes about, “Well, how are we getting assets to the kids? Are you putting them in charge of their own assets? Is there somebody else that would be better served to be their trustee? When do you want them to have control over decisions? Can we structure this in a way where they have multiple shots at getting their decisions right?” Meaning maybe they don’t get full control over everything right away, we tier it over a period of time.
So there are ways that we can help. And it gets back to that main concern, “How can I pass on wealth without, to put it bluntly, screwing up my kids?”
John: Right.
Brenna: That is a big concern clients have. And then if we’re talking about between siblings, we’re very careful about making sure that we don’t ever put one sibling in charge of another sibling’s trust or something like that.
John: Yeah, really good tip.
Brenna: Just because that’s how you ruin relationships, and kids are going to be different. Maybe kids need different types of trust. If one kid’s going to have more control over their trust than another, that’s a conversation that happens before it’s set in stone, meaning the parents have passed away, because it will be much easier to take if they’re prepared for that, versus it’s a surprise at a point of time in their life where they’re grieving the loss of their parents and things of that nature.
John: I love the Ron Blue quote that says, “Love your children equally by treating them uniquely.” I think it’s important to have good communication when you’re going to skip a generation. So you’re going to do something for grandkids, I think it’s so important that you talk with your children, those grandkids’ parents, and say, “Are you okay with us doing this?”
I’m curious from your perspective, Brenna. How often are multiple generations in meetings with you? And I know it differs from family to family, but how often do you see that?
Brenna: I would say we’re very cautious about parents sharing with children their overall net worth and the overall assets. To me, there’s a difference between putting numbers behind the plan, versus just informing them what the plan is, meaning it would be very common for our clients to leave assets to children in trust, not to punish them, but for asset protection and things of that nature. You can tell your kids, “Hey, I’m not giving you these assets outright for these reasons,” but you don’t have to tell them the dollars behind it. I think the dynamics with children really change substantially. If I know I’m getting $30 million at some point in the future, what motivation do I have to make a life for myself?
John: “Why am I picking up that part-time job at Wendy’s?”
Brenna: Exactly.
John: Like everybody did in high school. Our colleague, Jessica Culpepper, I had her on as a guest a while back, and she said basically the same thing. We discourage giving actual numbers. We’re talking about your clientele are some of the largest clients at our firm, but this is true even if your kid’s going to inherit $300,000. When they’re 17, that may as well be $300 million and it could take away their motivation. And let’s face it, that journey is where we learn some grit, and we develop, and we’re able to accomplish. So in a lot of ways, by showing them that, you’re not making their life easier, you’re robbing them from the potential that they may be able to go out and earn, and the fulfillment that comes with that.
Brenna: Right. I think at the end of the day, if you look at people who are the happiest, they have a purpose in life, and if you tell your children in a roundabout way by sharing that dollar amount that they don’t have to have a purpose in life, it’s hard to see them getting to a point where they’re really excelling. And that can mean a lot of different things for people, but finding your purpose, whatever that ends up being, is so important that we would never want to put somebody in a position that they’ve discouraged that.
John: I want to talk about private investments, which I know, as you go up the net worth scale, they become generally more likely to be a part of someone’s investment portfolio, whether it’s real estate, or private equity, or private credit. How do you help clients take advantage of that? And how do you think about private investments fitting into the overall equation?
Brenna: If we look at the number of public companies compared to private companies, the split between those has significantly shifted.
John: Sure.
Brenna: There’s many, many more private companies than there are publicly traded companies, and that trend is really expected to continue. Also, as time goes on, it becomes easier to invest in private companies. The hurdles that we used to have in terms of having to have really high net worths, and income, and things like that, those are becoming easier to overcome. And so, for our clients, we want to offer private investments to anybody that can qualify, and we’re making those qualification numbers as low as they can be.
The reason that that’s critical is, we do think the expected returns of private investment will exceed that of the public equivalent if you are working with the elite private firms. For our company, we’re working with the top firms in each industry, we negotiate the lowest fees, and so we find it to be very critical, if clients are open to it. It’s always up to the client. But adding those types of investments to a portfolio increases the expected return, but lowers the volatility, but you have to be careful about what companies you’re working with and making sure that the fees are as low as they can be.
John: Two smart people can arrive at different conclusions with private investments, because you’re going to have a little less liquidity, and a little less transparency, and maybe a little bit higher fees. But again, past performance, no guarantee of future results, all things being equal, something that’s less liquid should create slightly better returns or no capital would ever be diverted there because you’d say, “Well, I’m not expecting to do better. Why would I put my money there?” Right?
Brenna: Of course.
John: But the opposite of the public investment market, where this is a total fat head, long tail, in the sense that most private companies, you’re going to have all the negatives and not outperform.
Brenna: Exactly.
John: But to your point, the very top quintile tend to outperform and they tend to outperform by a lot, if you’re able to identify those. And again, there’s a higher correlation of those than, certainly, with public mutual funds and money managers, which is basically throwing darts. This has been fantastic. I can certainly see why you’ve been recognized as one of the top advisors in the country. Thanks for joining me on Rethink Your Money.
Brenna: Thank you.
John: The more you save, the richer you’ll get. Now, of course, at a core level, this is true. And it’s a critical first step, don’t get me wrong, but it’s not the full equation. If you spend more than you earn and there’s nothing to save, and you have high interest consumer debt, and you’re making large car payments, of course you won’t be set up as well for retirement. You won’t be able to be as generous. You’ll probably have more stress and anxiety. But let’s suppose you save from 25 to age 55, $1,000 a month, but you keep it in a checking and savings account and you earn 1% per year. Now, I know, you’re thinking to yourself, “Who would do that? That’s idiotic.” I meet people regularly, prospective clients who are not comfortable with investing. They lost a little money in the stock market way back when, or they were told by someone that’s gambling, “I like to keep my money safe.” So they earn 1% per year.
They’d end up, after 30 years, with $421,000. So it’s not terrible. They almost have a half a million bucks, but they saved 1,000 a month for three decades and don’t even have half a million dollars. Now, let’s compare that to someone saving even less. So instead of $1,000 a month, you decide that you’re going to save 750 per month. And you do this starting at age 25 for the same 30-year period, but you earn 8% per year. You’d end up not with 421,000, but a whopping $1.1 million. It’s sort of like you’re kayaking across a lake with the 1% savings account example, where you’re not comfortable investing, or you’re kayaking down a river with the current pushing you. So the lesson is that saving money is crucial, it’s imperative, or you have nothing to invest. But if you stop there, you’re missing the all important next step.
Investing properly, and growing your wealth, and compounding that wealth is vital, that around $700,000 separation continues to widen if you extrapolate out my example over another decade, to 65 years old, or to 85 years old. The Delta becomes staggering between the two. As we know, that’s how exponential and compound growth works. So why work harder than you need to, as the saying goes, “Work smarter, not harder.” Benjamin Franklin once said, “An investment in knowledge pays the best interest.” So become knowledgeable about how to invest, get comfortable with investing, understand what your investment philosophy is. Have proper expectations of the stock market, of real estate investments, the pros, the cons, expected returns, how often it’ll be down.
And will it work out perfectly to your expectations? Of course not. But you’ll have confidence and comfort in the fact that you have convictions around the strategy. So it’s not just the more you save, the richer you’ll get, it’s the more you save combined with the compound growth of that savings that will truly increase your wealth.
Speaking of investments, let’s transition over to one of the oldest cliches in the investment world. Buy low and sell high. Sounds like the golden rule of investing, doesn’t it? Who doesn’t want to buy low and sell high? Here’s the problem. If it were that easy, everyone would be outperforming the market, sipping Mai Tais in Hawaii on the beach, because they’d be so rich. The truth is, trying to time the market and consistently buy low and consistently sell high is truly like trying to win the lottery. It’s unpredictable and incredibly difficult. I’d argue it might even be worse odds that you’re going to pull it off, certainly over a long period of time. Let’s face it, if you think you can perfectly time the market, or the firm that you’ve hired, the money manager that you’ve enlisted, is going to do so for you, it’s suggesting that you’re going to identify something that millions of other smart people do not know and therefore is not priced in.
It’d be like sitting down at a poker table with the best in the world, yet instead of only having a handful there, you have millions. And thinking that you’re going to win consistently, time after time after time. And here’s a fun stat for you. The stock market has been at all time highs about half the time over the last 40 years. Not at an exact all time high, but near an all time high. So if you’re sitting around waiting for the market to dip so that you can jump in at the perfect time, you could be waiting a really long time and the market can run away from you. That’s why the risk of being out of the market is greater than the risk of being in, because more often than not, the market increases in value. It’s like when you measure your kid’s height on the pantry wall like we have in our home. Yeah, they get taller. They’re growing. You’re not shocked when your third-grader’s taller than when they were in first grade.
The same is true with the stock market. Why does it surprise us? It doesn’t surprise us that a Chipotle burrito bowl is going to cost more in 10 years. Or the same house two decades from now in your town will cost more. We understand this with every other aspect except the market. When we try to time it, it’s like trying to catch a falling knife. Good luck. Think about Apple. Today, one of the biggest companies in the world, but even Apple, if you were trying to pull this market timing, buy low, sell high, get in and out strategy off with one of the most successful companies ever, it’d be really hard, because it wasn’t a straight line up since the ’80s when it listed. Apple’s dropped over 50% in value multiple times, and if you tried to sell every time it dipped, you would’ve missed out on huge long-term gains, and when would you be able to figure out the right time to get back in?
And the other major challenge with that, is you don’t know that Apple’s going to be Apple. It’s far more likely that it ends up as Washington Mutual, or Enron, or AOL. Or one of the other hundreds of companies that we don’t know the name to, because they went broke. But here’s the positive news. There is a way to buy low and sell high, systematically, consistently, and predictably. And thankfully, it doesn’t require you or someone else to be right, playing a game that they almost certainly will lose.
What am I referencing? Rebalancing. Strategically rebalancing your portfolio that is well diversified, meaning you have different investments that are non-correlated or low correlation, with dissimilar price movement to one another, allows you when one of your asset categories is overweight, to sell a little bit of that and use those strong dollars that you sold at a premium to probably your friend who’s going to make poor returns, chasing the hot new investment like most Americans do, and purchase the asset categories that are underweighted, meaning they performed worse, they’re down in value. And in the end, you’ve reconstituted your portfolio to the right allocation for your time horizons, your goals, your risk, and you did so by selling high and buying low without ever needing to be right.
I receive a lot of questions about trust, and it’s interesting. People seem to have a strong opinion one way or another. Some prospective clients come in and they say, “John, I do not need a trust. I just want a will.”
And I ask them, “Why?” And I receive a lot of different answers. But I think, in general, it’s due to misconceptions, pieces of common wisdom related to trusts that just aren’t true. One of which is that trusts are only for tax avoidance. I don’t have a big tax problem, so I don’t think I need a trust. But while it’s true that trusts can play a role in estate tax strategies, particularly for ultra wealthy families, it’s really not their primary purpose for most people. In reality, let me highlight five common benefits of trusts that don’t have anything to do with taxes. Now, before I do, let me back up and say, yes, if your net worth is over the estate tax thresholds, which is over $26 million for a married couple right now, you can funnel money into irrevocable trusts, get it out of your estate at today’s value, you lose control, you lose access, and then all the compound growth of that account moving forward is outside of your estate and you’ve used up some of your exemption.
So again, that can be a viable strategy and a common one for higher net worth families who aren’t giving significant amounts of their net worth to charity. Or they have an illiquid asset, like a family farm, or an illiquid business where they expect their heirs to need to pay estate taxes without liquidating the business, or the farm, or the piece of land. And that’s where even life insurance may be used inside of that irrevocable trust for the benefit of avoiding or paying taxes. But when I look at five of the most common reasons why trusts are used, the first is that it’s used to avoid probate. Probate can be a lengthy and expensive process, and a trust allows you to pass assets directly to your heirs without having to go through the court system. When’s the last time you dealt with the DMV?
Second benefit of a trust is that, because it avoids the courts, it provides privacy. So unlike a will, which becomes public, a trust keeps your financial matters private even after your death. This is why, by the way, you sometimes know all the details of a celebrity’s estate, like how much money they had, where everything is going. They didn’t do proper trust planning. Everything went through the courts, which is public record.
Number three, customizing an inheritance. You can specify how and when your beneficiaries receive their inheritance. For example, it’s common that you may want to delay distributions until a child reaches a certain age, or a set of conditions such as completing college.
Number four, protecting assets from creditors or divorce. 50% of marriages end in divorce. The vast majority of Americans are in debt. A sad reality on both fronts, and there’s nothing less in line with the givers, usually the parents’ wishes, than to have their child’s ex-spouse getting half of what they worked hard to accumulate. So the benefits of a trust: avoiding probate, providing privacy, customizing inheritance, protecting assets from creditors or divorce.
And finally, number five, supporting a loved one with special needs. A special needs trust ensures that a beneficiary with disabilities can receive financial support without jeopardizing their eligibility for government benefits. Now, I think too often people hear the word trust and it’s all about tax avoidance for billionaires. Not usually. That’s like assuming sunscreen is only for people who live in Hawaii. Hawaii is pretty nice, and sunscreen, Reef Safe especially, is a must.
Time for this week’s one simple task, which is to check your FSA. Not HSA, FSA plan rules. If you have a flexible spending account, now is the time of the year. You have less than one month to understand your timelines. Many FSAs have a use it or lose it policy. Any unused funds in your account at the end of the year may be forfeited. That’s not the holiday gift that you’re looking for, that’s for sure. You don’t want to put money in and then lose it because you didn’t spend the money. Depending upon your plan, here’s some key things to review.
Number one, your FSA balance expiry. Straight up, when does this expire? Many plans require you to spend it by the 31st or the funds are gone, as I mentioned, but some plans offer a grace period of up to two and a half months. That’s certainly not guaranteed, so check your plan’s specific rules. You also have carryover options. Some plans allow you, for a little over $600, to carry forward if they’re unused toward the next year, but not all plans allow for that. Make sure you submit claims before the deadline. Even if you have time to use the funds, make sure you know the deadline for submitting claims for the reimbursement.
And then, finally, spend strategically. Schedule medical checkups, buy prescription glasses, stock up on eligible over the counter supplies. Make the most of what’s left in your account. Remember, FSAs are incredibly flexible on what you can purchase. So the bottom line is, take a few minutes, execute this one simple task, and review your FSA. It could save you hundreds of dollars and help you head into the new year feeling just a little bit more organized. To view that and all of this year’s previous one simple tasks, you can do so on the radio page of our website at creativeplanning.com/radio.
Well, we’ve made it to listener questions and I have a few great ones teed up for today as Britt, one of my producers, is here to read those for us. Hey, Britt, who do we have up first?
Britt Von Roden: Up first we have Ryan out of Florida, who shared that he’s anticipating a pretty substantial bonus from his employer this month, and he wants to know if you have any tips or things he should consider doing with this money.
John: Well, first off, Ryan, congratulations. Nice to get a year-end bonus. Not everybody gets that, especially a big one. First off, maximize your retirement contributions. So if you haven’t hit contribution limits for your 401(k), or your HSA, or your IRA, or your Roth IRA, whatever it might be, use part of the bonus to max them out. That would be a great way to reduce your taxable income on the deferred side, not obviously with the Roth but the others, while saving for the future. Don’t forget, also, about that mega backdoor Roth. So if you’ve already maxed out everything, do you have an opportunity within your plan to throw in 10, 20, 30,000 more into the non-deductible side of your retirement plan, that you then immediately can convert? Now, that won’t help you save taxes today, but it will effectively take money that would’ve otherwise been, after tax, in a capital gain environment and moved it to a Roth.
This is where that integration of tax and investments come into play when looking at your broad financial plan. Let’s say your bonus pushes you into the 32% bracket. Could you gift some money, if you’re charitably inclined, say $50,000, and that might bring your taxable income down to 370 grand and now you’re in the 24% bracket? So are you just sneaking into a bracket that’s a jump that you’d like to avoid? That may dictate the amount you give to a 501(c)(3) to maximize the tax benefit while in a higher bracket. And then invest wisely for the long-term. Really determine, from a financial planning standpoint, what the time horizon is on this bonus. If these are monies you don’t need for 30 years, invest it in a way that’s consistent with that. Shoot for growth, be well diversified, rebalance, harvest losses, and accept volatility. If you need it six months from now, obviously invest it in a manner that’s consistent with your ultimate goals for this bonus.
Appreciate that question. Britt, let’s go to the next question.
Britt: Yep. Our next question is actually from a live listener today, Lisa from San Diego, who referenced your segment from earlier on impact investing. Her question for you, John, is how does Creative Planning help accomplish this for their clients?
John: Great question, Lisa. Here at Creative Planning, because we operate as a family office, we can completely customize your plan to align with your values, and we think that’s really important. So this may mean with your legacy planning, we have an institutional team that helps form and manage things like a family foundation. But beyond that, specific to your investments, which was your question, we can include and or exclude whatever industries or specific stocks you’d like. And there’s a lot of discussion around impact investing, or ESG investing, or biblical investing. There’s a lot of these different buzzwords out there. Let’s stick with ESG, which focuses on environmental, social, and governance investing, with the idea being some only want to invest in companies that are conscious of those aspects, that are running a business consistent with those types of things.
And I’ve heard some pundits argue that it might be a smart way to invest, because those companies may do better in the future, because they’re not resisting cultural trends and they’re focused on things that may, theoretically having a diverse board, make the company run better. Not sure I agree, not sure I disagree either. I don’t have a strong opinion one way or another, but if we take that idea of ESG investing or investing consistent with your values, you may decide, “I don’t want to invest in tobacco companies,” or, “I don’t want to invest in gun companies,” or, “I don’t want to invest in companies that earn money from pornography.”
Or maybe you have a strong stance on privacy and you don’t want to invest in companies that you feel like restrict your privacy, or your free speech, or whatever it might be. You can screen against all of those. We do that for clients here at Creative Planning. We can fully customize down to the individual holding what you have or you don’t have. I talked a lot about things that people want to avoid, but it might be the cup half full approach, where it’s not what you want to exclude, but rather the types of companies you do want to invest in, like, “Hey, I think these companies are making a huge positive impact on the world. I want to support them. I want to put my capital behind those companies.” And you go heavy on those.
Whatever your desire is, we can, again, completely customize the entire portfolio for your wishes. And of course, we’ll offer our guidance and opinion along the way if you ask for it, in terms of how much that customization may dilute the overall efficiency of the portfolio, or costs, or tax efficiency. Let me just lay out the case for you on why you’d exclude companies, per your values, or include great companies only, versus someone who also does care about the world and has convictions and values, but decides to just buy index funds and not take a more customized approach. So for that person, who’s just in the indexes, they would argue these are secondary shares. Does the Ford dealership up the street care what you do with your 8-year-old Ford? Do they care if you sell it for 28,500 or 28,200? Does it directly affect the Ford dealership up the street? No, it’s a secondary transaction. You’re not buying a new vehicle from Ford directly.
When you are buying or selling shares on the secondary market, you’re trading with someone else. So one of the arguments is, you’re not really helping or hurting the company all that much by what you choose to do, by not buying a share of a certain company. What does that do to the company? Nothing. That person might also say, “Hey, you often engage every day with companies you don’t believe in. You’re probably wearing Nikes. Where are those produced? Who’s producing those?” I’m not picking on Nike, but just as an example. I’ve had people say, “I don’t want to own Apple stock. I don’t like what they stand for.” They literally send that for me, talking into their AirPods or from their iPhone, right?
So I think that can be tricky and a slippery slope, because is it practical to try to screen 2,500 different potential stock holdings in your portfolio, understanding everything that the board of directors believes in and what their leadership stands for from a moral standpoint, how all of their benefits for those in their factories are being treated? That’s a really hard thing. I’m not saying it’s not important, but that can be really impractical and I think some people think, “I don’t know if I have the bandwidth, and I don’t know if I could really feel confident that I was making a good decision on what to keep and what not to keep.”
So that person would just say, “I’m going to build the lowest cost, most efficient portfolio. I’m not going to go out of my way to buy companies that I don’t like, but I’m going to buy the broad indexes, I’m going to broadly diversify. I’m going to be tax efficient. I’m going to take all of the hypothetical efficient profits that I earn from having a great portfolio, and I’ll give more to my church, or to private companies, or people that are in need, or organizations that truly are leveraging my capital. And when I give them 50 grand, it makes a huge impact whether I give that money or don’t give that money.”
So I think that would be one type of person who does care about things, they’re not apathetic, but they say, “I’m just going to invest that way and then give my outside capital.” The counter to that, for the person who says, “I want to take an impact investing approach, I want to be real specific, and customize in exactly what I’m owning and feel good about that,” is the person who says, “Yeah, I get everything above, but I don’t want to own shares and benefit from the profits earned from pornography. I don’t feel good about earning money and being an owner. You’re a shareholder of companies that are earning profits off of things I don’t believe in.” Online gambling, alcohol sales, whatever it is.
Two smart people can arrive at very different conclusions, and I think the important thing for you to understand, Lisa, is that when you’re working with a firm like us here at Creative Planning, we’ll walk you through these pros and cons, listen to your desires and your goals and what your concerns are, and help you build a portfolio at whatever customization you desire, and that fits your convictions, and that you feel good about.
Well, thank you for those questions today. If you have questions you’d like me to answer, you can submit those by emailing [email protected].
Well, true wealth isn’t measured solely by material possessions. I think we all understand that at this point. There are people with a lot of money who are miserable. There are people with almost nothing who are filled with joy. And that generally comes down to the intangible and priceless things in life. So if you want to know how rich you are, you probably thought I was going to share with you a study of exactly how much income or net worth you needed within this country or this state to be in the top 10% or the top 1%, and that would define that you’re rich. No. I’m going to share with you six much more important, much more valuable aspects of life in determining whether or not you’re rich.
Number one, your relationships and connection. Family and friends. The bonds that you share with loved ones, the time spent nurturing those relationships, cannot be bought with money. Money can augment those things. Maybe you’re able to travel together or you have a little more freedom to spend time together, because you are financially independent. But deep, meaningful connections are a form of wealth that no amount of money can replace. The trust and respect earned over time in these relationships, personal, professional, are invaluable as well. These qualities take years to build and will never be purchased.
Number two, health and wellbeing. Physical and mental health. Emotional health. Yeah, money can help provide access to healthcare, but it can’t buy the vitality of a strong body or a peaceful, healthy mind. Health is often considered the true wealth. And when it comes to peace of mind, true contentment, emotional wellbeing, and a sense of inner peace come from living authentically. Understanding what you value, what your moral plumb line is, what your basis for life is. Those don’t come from material wealth, but time.
Time with loved ones. No amount of money can buy more time with the people that you care about, or give you more time on this earth. A very poor 20-year-old is likely not wanting to change places today with Warren Buffett. Why? He’s one of the richest people ever to walk the earth. Because he’s in his 90s. And that shows you right there, time is more important than money.
Next, happiness and fulfillment. Inner joy. While money can contribute to your comfort, happiness and joy ultimately comes from within. From how you choose to live your life, pursue your passions, and find your purpose.
Next, experiences and memories. Travel and adventure. Yes, money can fund travel, but it can’t buy the memories or the deep connections made during those experiences. True wealth can be found in the experiences you live, and the stories that you create, and the wisdom gained from overcoming challenges and learning new skills, simply living with integrity and purpose. It’s a form of wealth that you cannot buy.
So the invaluable things that make you rich, that are not directly correlated to money, are relationships and connection, health and wellbeing, time, happiness and fulfillment, experiences and memories, and finally, legacy. What is your impact on others? What is the positive mark that you leave on the world? And I’m not talking about money, I’m talking kindness, mentorship, being there for others. That becomes part of your legacy. Money cannot buy love, it can’t buy respect, it can’t buy admiration from others, but you garner that because of the way you lived your life. The values and principles you pass down to your future generations can shape their lives in ways far beyond what money can provide.
I hope this serves as a reminder to reflect on what truly matters in life and look at how often the most valuable things have nothing to do with money. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.
Disclaimer:
The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm. Creative Planning, along with its affiliate, United Capital Financial Advisors, currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. John John Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment, tax, or legal advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal to any historical performance levels. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.
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