Ask Liz Weston

Get smart with your money

Financial Advisors

Q&A: How to Choose a Trusted Financial Advisor for Long-Term Care Insurance and Asset Protection

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Dear Liz: My 68-year-old husband has Alzheimer’s disease. I thought we were responsible, having a nice nest egg of over $2 million, a house that is paid off and no debts. However, I am now terrified that it will all be depleted because of long-term care costs. Per your advice, I consulted a fee-only financial planner to get his opinion about long-term-care insurance for myself (my husband no longer qualifies). Turns out he will be the one to get the policy for me, should I decide to go forward. I feel uncomfortable that the financial advisor has an obvious stake with this long-term-care policy and therefore might be biased with his advice.

Answer: Understandably. If the advisor would earn a commission from this policy, as your question implies, then he is not a fee-only financial planner. Fee-only planners receive payment only from their clients, not from commissions or other arrangements that could bias their advice.

Long-term-care insurance is expensive, and you’d be smart to take any policy you were considering buying to a fee-only planner committed to putting your best interests first. Most advisors don’t have to uphold this type of fiduciary standard.

You can get referrals to fee-only planners from the Garrett Planning Network, which represents advisors who charge by the hour; the XY Planning Network and the Alliance of Comprehensive Planners, which represents those who charge retainers; and the National Assn. of Personal Financial Advisors, which includes planners who charge a percentage of the assets they manage.

Also consider talking to an elder law attorney, who can advise you about possible ways to protect your assets from depletion. You can get referrals from the National Academy of Elder Law Attorneys.

Q&A: These major financial decisions shouldn’t be DIY projects. Talk to an expert!

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Dear Liz: I anticipate being dead soon (cancer). I have established an irrevocable trust for my 8-year-old child, with my 47-year-old wife as the trustee. With respect to taxes and other issues and naming beneficiaries, what is the optimal strategy regarding my child for life insurance and traditional and Roth IRAs? My wife will get the 401(k).

Answer: The best person to answer those questions is the estate planning attorney you (presumably) used to create the irrevocable trust. Estate planning should not be a do-it-yourself activity, particularly when minor children are involved. The wrong plan could give too much too soon to your child, or tie up the money too long. You also don’t want to unreasonably stint your wife in your efforts to preserve money for your child. Also, the optimal strategies for tax purposes may not be the best for your family’s situation.

For example, the best way to minimize taxes may be to leave all the retirement money to your wife. Spouses who inherit retirement funds have the option of treating the accounts as their own. That means your wife wouldn’t have to begin required minimum distributions from the 401(k) or the traditional IRA until she’s 75. (The current RMD age is 73, but it rises to 75 for people born in 1960 and later.) She would not have to take distributions from a Roth IRA she inherits from you.

Non-spouse heirs generally have to drain retirement accounts within 10 years. Minors who inherit retirement funds don’t have to take the first distribution until they turn 21, but then the accounts must be emptied within 10 years.

Life insurance proceeds typically aren’t taxable, or payable to a minor child. But you can create a trust to receive and dole out the proceeds to your child. Your estate planning attorney can help you set this up.

Q&A: Beware the insurance salesperson in financial planner’s clothing

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Dear Liz: Do you have any general advice for choosing a tax preparer? My financial advisor has recommended switching my 403(b) contributions over to Roth 403(b) with the same investment plan. I am worried that this could put us at risk for a higher tax bracket currently.

Answer: Ideally, a financial advisor wouldn’t recommend switching to a Roth option without knowing a fair amount about your current and future tax situations. Otherwise, the advisor wouldn’t be qualified to determine whether giving up the current tax break is likely to pay off later.

Unfortunately, not all financial advisors are truly qualified to give the advice they do. Some, particularly those advising people about 403(b) investments, are insurance salespeople rather than fiduciary financial planners.

You can get referrals to tax pros from the National Assn. of Enrolled Agents and your state’s chapter of certified public accountants. (The American Institute of CPAs has compiled a list of those at its website.) Both enrolled agents and CPAs are fiduciaries who promise to put your best interests first.

For broader financial advice, consider getting referrals from one of the organizations representing fee-only fiduciary planners such as the Garrett Planning Network, the XY Planning Network, the National Assn. of Personal Financial Advisors and the Alliance of Comprehensive Planners.

Also, teachers should consider spending some time on the nonprofit 403bwise website, which grades school districts’ retirement plans and seeks to educate teachers about the costs of trusting the wrong people.

An aging father chafes at a daughter’s request for financial safeguards

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Dear Liz: I am 88. My wife who is 81 has Alzheimer’s but not so bad that we cannot do most things together as before. My younger daughter, an attorney, wants me to sign an agreement that will make it a little more problematic for me to access my substantial financial accounts. She thinks somehow I will get tricked into giving the money to some scam artist. I like the idea of being protected but do not care to have her being able to decide if I can spend my own money as I see fit. She says the document can be deleted by me at any time, but I still feel put upon.

Answer: Take this document to your estate planning attorney for a review. The attorney can help you assess whether this is the best approach or if there are other ways to keep you safe.

If you don’t have an attorney, get one. Estate planning is not a do-it-yourself endeavor when you’re both in your 80s and one of you has dementia.

You’re understandably in a “live for today” mode. You’re focusing, for example, on what you and your wife can still do, rather than on the cognition she’s lost or the losses yet to come. Your daughter’s focus on the future may feel like an imposition, but the reality is that you won’t become less vulnerable to fraud, scams and plain bad decisions as time passes.

Q&A: Minimizing your taxes is fine — to a point

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Dear Liz: In reading your columns, one can get the impression that reducing tax liability is the primary objective for many financial advisors. I disagree with this. Paying a fair share of taxes is a responsibility to society and the less fortunate, especially for wealthy people. Why are so many financial “professionals” so obsessed with paying less in taxes?

Answer: Tax planning is an essential part of comprehensive financial planning. No one is under an obligation to pay the maximum tax possible. Those who specialize in tax avoidance love to quote a judge named Learned Hand, who wrote in 1934: “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

Where advisors — and taxpayers — get into trouble is when they prioritize tax avoidance over all other concerns. That’s how you get advisors doing tax loss harvesting on a financial account to reduce capital gains for an older couple in the 0% capital gains bracket (an example of this behavior from a recent column).

Q&A: What to do when your financial advisor isn’t doing right by you

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Dear Liz: My husband and I are in our 80s, living in a retirement community. Our investment account is valued at $550,000. This has to see us through till we die. We have no pension, no other assets. Social Security provides $2,760 a month and we are in the lowest tax bracket. Our financial advisor is using tax loss harvesting “to save us from capital gains tax.” We are both uncomfortable with this. Taking a loss on purpose doesn’t feel like a secure path and should be for people with a long-term future. Should we ask him to stop using this method of trading?

Answer: Tax loss harvesting involves selling investments that have gone down in value to offset some or all of the gains from investments that have gained in value. The point is to reduce capital gains taxes. Since you’re in the lowest tax bracket, however, your federal tax rate on long-term capital gains is effectively zero. It’s hard to imagine how your advisor would justify tax loss harvesting, given your situation.

Go ahead and ask them. The answer should give you some insight into how much your advisor knows, or cares, about your individual circumstances. Obviously, you should halt the tax loss harvesting if there’s no good reason to do it, but you might also want to start looking for a new advisor.

Keep in mind that most financial advisors don’t have to put your best interests first. They can recommend investments or pursue strategies that make them money, regardless of whether the recommendations are the best fit for your financial situation.

If you want an advisor committed to putting you first, you’ll need to seek out one who is willing to be held to a fiduciary standard. Such advisors include certified financial planners, certified public accountants (including those who are personal financial specialists) and accredited financial counselors. A fiduciary would have taken the time to understand your financial situation and then crafted a strategy to best fit your circumstances.