Asset allocation, tax planning, and estate planning are three main elements that affect overall financial planning. In this post we’ll cover all three in brief, so you can make sure that your financial plan is complete and that you’re ready for your work-optional future!
ByMike Rogers, AIF®, Founder and President of360 Financial
Mike Rogers is a fiduciary financial advisor with over 30 years of experience in the financial services industry as an investment advisor and financial planner. He founded 360 Financial in 1995 and holds series 7 and 63 security registrations with LPL Financial.
Financial planning is important at every age. But as you get older, it becomes more important that you protect your assets and think about your work-optional future.
Please note that this overview isn’t a substitute for getting solid financial advice from a fiduciary financial advisor. The more complex your situation and the more assets you’ve built, the more critical these three elements will be.
Asset Allocation
Asset allocation involves diversifying investments across various asset classes such as stocks, bonds, and real estate to optimize the balance between risk and return. For anyone with significant investable assets, tailored asset allocation is key. Remember that while maximizing growth potential may be important to you, managing risk is just as important.
Depending on when you plan to retire or start living a work-optional lifestyle, your asset allocation will need to be more or less conservative.
Your financial goals and your age inform your risk tolerance which informs your asset allocation.
A fiduciary financial advisor must act in your best interest at all times and will create a diversified portfolio that is designed to help you pursue your goals.
Tax Planning
Understanding and strategically planning for tax time is crucial, especially if you have a high-net-worth. Effective tax planning can significantly impact investment growth and wealth preservation by minimizing tax liabilities.
The more you make, the more tax you potentially end up paying.
However, there are strategies which can be used to ensure that you don’t overpay your taxes. For many people taxes are their biggest annual expense; so it pays to be smart with your tax planning.
Below are just some of the tax planning strategies that can be used to ensure you don’t overpay your taxes while still staying compliant with the IRS.
Please note that tax planning can be complicated and it’s important to speak with your accountant or CPA as well as your financial financial advisor to create a tax strategy that works for your situation.
Investment in Tax-Efficient Assets
In the U.S., investing in municipal bonds is a popular tax-efficient strategy.
The interest from these bonds is often exempt from federal income taxes, and if the bonds are issued by the state in which the taxpayer lives, they can also be exempt from state and local taxes.
Utilizing Retirement Accounts
Contributing to retirement accounts like 401(k)s and IRAs, can lower your taxable income.
For 2023, the contribution limit for a 401(k) is $20,500 or $27,000 for those aged 50 or over. For IRAs, the contribution limit is $6,000 or $7,000 for those 50 or over.
Contributions to a traditional IRA may be tax-deductible depending on income levels and participation in employer-sponsored plans. Roth IRA contributions are made with after-tax dollars but allow for tax-free growth and withdrawals. Your investment will likely grow over time, and when you take money out, you don’t pay tax on the growth.
401(k) retirement planning is a critical part of tax planning and financial planning for most Americans.
Charitable Giving
Charitable contributions can often be deducted on U.S. tax returns.
As long as your charitable contributions are made to qualified organizations and itemized on the taxpayer’s return, you should be able to get a tax deduction.
Donating appreciated assets like stocks can be particularly beneficial, as this allows you to avoid paying capital gains taxes on the appreciation while still getting a deduction for the full market value of the asset.
In simpler terms:
If you have stocks or similar investments that have increased in value since you bought them, you can donate them to charity.
This is a smart move because:
You don’t have to pay taxes on the profit you made from the stocks going up in value.
You can still reduce your taxes by the full value of the stocks at the time you give them away.
So, you can save on taxes and help a charity at the same time!
Estate Planning and Trusts
Using trusts and other estate planning tools can help manage estate taxes.
Trusts can be used to transfer wealth while minimizing estate and gift taxes. The current estate tax exemption in the U.S. is quite high, but it’s still important for high net worth individuals to plan for potential future changes in the law.
The federal estate tax exemption for 2024 in the U.S. will be $13.61 million, increased from $12.92 million in 2023. The good news for those with a high net worth is that only the portion of an estate’s value that exceeds these amounts is subject to estate tax.
The estate tax exemption adjusts every year to account for inflation. While the exemption amount significantly increased due to the Tax Cuts and Jobs Act (TCJA), this increase will expire after 2025 unless new laws are passed.
Tax Loss Harvesting
Tax loss harvesting involves selling investments at a loss to offset capital gains in other parts of the portfolio.
In the U.S., taxpayers can use capital losses to offset capital gains and up to $3,000 of ordinary income per year, with additional losses carried forward to future years.
Having a food financial advisor and wealth management team who is there to help with your tax planning and asset allocation is critical. Tax loss harvesting is probably not something most DIY investors are going to do. But when you have a team to help you, it’s something you can do to minimize your taxes.
Investing in Opportunity Zones
Investing in designated Opportunity Zones can defer and potentially reduce capital gains taxes.
A Designated Opportunity Zone in the United States is a community or area that has been officially recognized as economically distressed. These zones were created as part of the Tax Cuts and Jobs Act of 2017 to encourage investment and economic growth in these areas.
Gains invested in Opportunity Zones funds can be deferred, and if the investment is held for at least 10 years, any appreciation on the Opportunity Zone investment can be tax-free.
There are several tax advantages for investing in an Opportunity Zone:
Deferral of Capital Gains: Investors can defer taxes on any prior gains invested in an Opportunity Fund until the earlier of the date on which the investment is sold or exchanged, or December 31, 2026.
Reduction of Capital Gains: If the investment in the Opportunity Fund is held for longer than 5 years, there’s a 10% exclusion of the deferred gain. If held for more than 7 years, the exclusion rises to 15%.
Exemption of New Gains: If an investor holds the investment in the Opportunity Fund for at least 10 years, they are eligible for an increase in basis of the investment to its fair market value on the date that the investment is sold or exchanged, effectively making any post-investment gains tax-free.
Please note that this article is not a substitute for speaking to a tax advisor or CPA.
Utilizing Family Limited Partnerships (FLPs)
FLPs can be used to manage family assets while providing some tax benefits.
They allow for the transfer of assets like a family business or real estate to family members at reduced tax rates.
Each of these strategies has specific rules and considerations, and it’s crucial for individuals to consult with a CPA or other tax professional to understand how these strategies might work for their unique circ*mstances and to ensure compliance with U.S. tax laws.
Estate planning ensures that your loved ones are taking care of while also preventing excess taxation.
Estate Planning
Estate planning is the process of arranging the management and disposal of a your estate, ensuring wealth is transferred according to your wishes and with tax efficiency. It’s essential for preserving assets and securing a financial legacy for your family and loved ones.
These are the main elements of estate planning that everyone should consider:
Will and Testament: Outlines how assets should be distributed after death.
Trusts: Legal arrangements for managing assets, often used for tax benefits and controlling asset distribution.
Beneficiary Designations: Specifies who will receive benefits from accounts like life insurance, IRAs, and 401(k)s.
Power of Attorney: Appoints someone to manage financial and legal affairs if incapacitated.
Healthcare Directives: Specifies preferences for medical care and appoints someone to make healthcare decisions if unable to do so.
Guardianship Designations: Specifies guardians for minor children or dependents.
Property Ownership: Determines how property is titled and how it will pass upon death.
Business Succession Planning: For business owners, plans for the transfer or sale of the business.
Tax Planning: Strategies to minimize estate and inheritance taxes.
Funeral Arrangements: Pre-planning for funeral expenses and preferences.
Digital Asset Management: Plans for digital accounts and assets after death.
Make sure you’re working with a fiduciary financial advisor because they are legally obligated to ensure you have the best asset allocation for your exact situation and risk tolerance profile.
Common Questions about Financial Planning
What are three key factors that influence financial planning?
The three key factors that influence financial planning are asset allocation, tax planning, and estate planning. These factors are critical in optimizing investment growth, minimizing tax liabilities, and ensuring wealth is managed and transferred efficiently according to the individual’s wishes.
How do income, expenses, and financial goals impact financial planning?
Income, expenses, and financial goals impact financial planning. If you look at these three areas, you can determine how you should allocate your resources, build up your savings, and meet your long-term goals. Your income sets the foundation for budgeting. Meanwhile expenses dictate spending patterns. But watch out if you’re overspending on thing that don’t matter to you while underspending on that which you most value.
Most importantly, your goals drive the overall strategy and allocation of financial resources.
What steps can I take to achieve better financial stability?
You can create a detailed budget, set clear and achievable financial goals, and regularly review and adjust your financial plans to align income, expenses, and financial goals. Make sure you’re not overspending. But also ensure that you’re saving and investing enough to achieve your short-term, medium-term, and long-term goals.
If you have kids, it would be wise to start putting away money for their college tuition when they’re young so you can take advantage of compound interest. If you start saving for their education, when they’re born, you could have 18 to 20 years to build up their education nest egg.
Setting goals and living below your means while investing prudently are important steps in effectively managing your finances. If you’re already earning well and have a nest egg of $500,000 or more, it may be wise to seek the guidance of a fiduciary financial advisor and wealth management team.
Preventing catastrophic once-in-a-lifetime money mistakes is just part of what your financial advisor will do. All it takes is one overly optimistic bet for your entire nest egg to disappear. In addition, your financial advisor will guide you towards the right tax planning and estate planning decisions so you don’t end up gifting the government more tax dollars than necessary.
When you’ve worked hard and made sacrifices, you shouldn’t have to worry about your financial future.
Connect with a Fiduciary Financial Advisor
If you need a wealth management team to help you pursue your big-picture goals, we recommend scheduling a call with a financial advisor at 360 Financial. 360 Financial is one of Minnesota’s best independent wealth management firms with over 30 years experience. We work with clients in Minnesota and across the U.S. If you’d like to work with a team that always puts your best interests first and is committed to helping you create a lasting legacy, please get in touch.
About the Author
Mike Rogers
Mike Rogers is the founder and president of Minnesota-based financial advisory firm 360 Financial. As the founder, Mike’s priority is that 360 Financial always serves the clients with empathy, integrity, and honesty. This customized, client-centric approach allows the firm to help clients decipher between the things they can control and what truly matters. In other words, Mike understands that money is not the end-all-be-all; instead, it’s the “how” that fuels the “why” to the question:“What’s important to you?”
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This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation does not ensure a profit or protect against loss
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 Ł may result in a 10% IRS penalty tax in addition to current income tax.
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