Learning Center   The following are common mistakes that we see individuals and non-profit organizations make.  After reading this page, please click here if you would like to access our free guides on these topics.   Underestimating The Costs Of Identity Theft Identity theft is a multi-billion dollar growth industry. To reclaim one’s identity after being victimized, direct and indirect costs can run into the thousands of dollars. The means employed by identity thieves are becoming more sophisticated each year. Protecting one’s identity must go beyond the usual solicitation opt-out at the three major credit reporting agencies.  Our free Privacy Protection Toolkit will help you do this.   Inadequate Succession Planning For Your Business   It's time to retire.  What are you going to do with your business?  Your plan that your kids would take over the business hasn't panned out.  Who will take over the business?  Your employees?  Or, will you sell to a third party?  Whether its employees or a third party, can they afford to buy you out?  Can they obtain financing?  What will the terms of the deal be?  Is it all cash or part cash/part earn-out?  By the way, how is your business organized?  If your business is organized as a corporation, is it an "S" corporation or a "C" corporation?  Regardless of your age, you want to build your succession plan into the business.  And, the best time to start doing that is now. Investment Mistakes Overestimating Your Tolerance For Risk Studies conducted by the American College in Pennsylvania and the University of New South Wales in Australia have found that individuals typically take greater financial risks than they think they are willing to take.  This research suggests that individuals tend to be over-confident in their financial decisions.  A typical moderate-risk tolerance investor might be over-exposed to equities by as much as 10 to 20 percent of his or her portfolio's assets.  Underestimating The Significance Of Risk When we talk about investment risk, what exactly does that mean? In the end, investment risk might be best defined as obtaining some result other than what someone either needed or expected. But, given two portfolios with the same average rate of return, does risk really matter? The answer is yes. Even though, the two portfolios have the same average rate of return, the portfolio with greater risk ends up with less money. Underestimating How Long Your Investments Must Last When asked what he wanted to have on his tombstone, comedian Will Rogers said “100 years between the dates”. Such a thing might not be too far off. A recent program on the Discovery Science television channel discussed advances in the medical sciences. It seems that these advances are occurring at an accelerating pace. One genetics researcher at the Massachusetts Institute of Technology commented that most maladies associated with aging can be traced to five genes. He suggested that within 20 years, scientists will be able to exercise significant influence over these five genes and average life expectancy might extend to well over 100 years. Failing To Diversify Concentrated Positions When your grandfather died in 1970, he left you $2,500 of stock in XYZ. With the stock came a note which said, “XYZ was always good to me. Never sell it. Reinvest the dividends. It’ll be good to you, as well.” You listened to your grandfather’s advice and today it is worth over $500,000. The problem is that XYZ represents 80 percent of your liquid investments. The story above has been told over and over again. Often, a concentrated position in one stock or a few stocks is a symptom of a number of problems. Failing To Provide Sufficient Cash Flow During Down And Flat Markets When considering their diet, some people say that a calorie is a calorie regardless of whether it comes from protein, carbohydrate, or fat. A nutritionist will tell you differently. Total return is the sum of interest (in the case of bonds), dividends (in the case of stocks), and appreciation/depreciation in value. Some investors and investment managers will say that total return is total return regardless of whether it comes from interest, dividends, or appreciation. They go on to say that given stocks have a larger average annual rate of total return than other asset classes over the long run, it only makes sense to gravitate towards an all-stock portfolio. From early 1997 to early 2009, the Standard & Poor’s Composite 500 Stock Index saw no appreciation. For a retiree, non-profit organization, or any other investor who is dependent on cash flow coming from their portfolio, this is not acceptable. Overestimating The Long-Term Average Annual Rate Of Total Return From Stocks Many market researchers and investors base their plans on a database used by Morningstar. According to this database, from December 31, 1925 to December 31, 2000, domestic large-capitalized stocks experienced an annualized rate of total return of roughly 10.8 percent. However, a longer-term data base used by Credit Suisse First Boston indicates that this total return is only 9.1 percent. This is nearly one and three-quarters percent per year lower than the figure many market researchers and investors use.   Avoiding International Securities At the end of World War II, the United States accounted for roughly 66 percent of the world’s economic production. By the early 1990s, it accounted for about 50 percent. Today, it accounts for approximately 40 percent. It is clear that as emerging economies raise their respective standards of living to the level of developed economies, their economic growth rates must necessarily be higher than those of the developed economies. Has this higher economic growth rate presented investment opportunities?   Avoiding Alternative Asset Classes The alternative asset classes include real estate, private equity, natural resources, and absolute return strategies. From December 31, 1989 to December 31, 2005, the benchmarks for these asset classes had risk-adjusted returns superior to that of the Standard & Poor’s Composite 500 Stock Index. In spite of this, many investors have avoided these asset classes.   Failing To Rebalance One’s Portfolio For Fear Of Taxes Most individuals will try to avoid taxes if possible. In a rising equity market, selling stock will result in a capital gain and consequently incur an income tax liability. Understandably, this might lead an investor to simply not sell in order to avoid the tax liability. Some investors might be inclined to postpone stock sales until death, when they would receive a “step-up” in income tax basis. This can lead to unintended consequences. Without rebalancing a portfolio to the asset allocation that is appropriate to the investor’s risk tolerance, a portfolio naturally becomes more risky.   Not Being Realistic About Realizing Capital Gains What level of realized capital gains might an investor reasonably expect? It is important to note that this is a different question than: what level of realized capital gains are an investor willing to accept? To keep a portfolio’s actual asset allocation and risk exposure relatively close to an investor’s “target” asset allocation and risk tolerance, rebalancing is necessary. While the income tax implications will vary widely from investor to investor in the early years of a rebalancing program, after seven to ten years, expected realized gains become reasonably consistent.   Failing To Tax-Wise Allocate Among Taxable and Tax-Deferred Accounts The traditional wisdom has been to allocate growth assets in one’s retirement account to take advantage of the tax-deferral aspect of retirement accounts. While a tax overlay to asset allocation is dependent on each investor’s specific circumstances, the traditional wisdom is wrong. The concept of tax-wise allocation can be extended to different types of trusts – such as a survivor trust, a by-pass trust, an exempt marital trust, and a non-exempt marital trust. Here, too, the traditional wisdom of allocating among these trusts might no longer be valid.   Estate Planning Mistakes Assuming That You Must Have A Trust There is a saying among many craftsmen such as carpenters and plumbers: the right tool for the right job.  A trust is simply an estate planning tool.  Before you conclude that you need a trust, you must decide what it is that you're trying to accomplish.  If your objectives are simply to avoid the lengthy, expensive, and public probate process, there are many other estate planning tools that allow you to do this.  Talk with your estate planning attorney about non-probate/non-trust means to transfer your estate.  If your objectives go beyond just avoiding probate, a trust might well be in the cards.  But, only a full discussion with your estate planning attorney can help you decide. Inadequate Planning For Your Durable Power Of Attorney For Health Care So, you've named your spouse or domestic partner as having a durable power of attorney for health care decisions.  You've been in an auto accident and the doctor needs direction.  Unfortunately, your spouse or domestic partner was in the same auto accident.  Now what?  You need to consider having more than one person named as having a durable power of attorney for health care decisions.  And, each of the individuals you name as having a durable power of attorney for health care decisions must have a copy of the document.  Now, consider that you're on vacation.  When was the last time that you brought on vacation a copy of your durable power of attorney for health care decisions?  Bring one.  And, if you're not traveling with any of the individuals you've named, you might want to consider creating a temporary power to include a trusted person with whom you are traveling. Assuming That Your Estate Plan Is On Cruise Control Once You Have One In 1996, the California legislature completely rewrote the California Probate Code.  While such an occurrence is rare in any jurisdiction, annual changes to State laws regarding estate issues is quite common.  Also, Federal laws and regulations associated with estate tax are in continuous flux.  Between 2009 and 2011, substantial changes in the estate tax system are anticipated.  These alone dictate a review with your estate planning attorney every three years. Assuming That Your Trust Is On Cruise Control Once You Have One Prior to 2005, married couples who created trusts typically created a particular type of trust sometimes called an "A/B" trust.  One of the objectives of such a trust is to preserve the estate tax exclusion of the first spouse to die.  To that end, once the first spouse died, the couple's combined estate would be mechanically split 50/50 into two separate trusts.  This approach worked well when the estate tax exclusion was lower than it is today.  But, under today's higher estate tax exclusion, it provides the surviving spouse with less flexibility.  Instead, individuals should consider a "disclaimer" trust. Assuming That Your Trust Is On Cruise Control When Your Spouse Dies Once your spouse dies, your trust is NOT on cruise control.  There are many matters that must be handled once the first spouse dies.  First, the successor trustee must determine which assets are held in trust and whether any assets intended to be held in trust were accidently left out.  Second, the successor trustee must value the assets held in trust as of the date of the first spouse's death.  Third, the law of many States generally require the successor trustee to provide certain notifications to all trust beneficiaries -- both current and future beneficiaries.  And, the list goes on.  Indeed, there can be dozens of actions that must be taken. Assuming That A Family Member Should Be Your Successor Trustee "After all, how difficult could it be to administer a trust?  And, how much time can it possibly take?"  It depends on the trust and the family circumstances.  Are you worried about family dynamics and disputes among beneficiaries?  If asset protection is provided for in the trust, who are the "adverse" trustees that will deny creditors?  If a marital sub-trust is involved, is the family member fully aware of tax elections on which the estate plan was based?  If marital or by-pass sub-trusts are involved, does the family member understand the difference between net income distributions and unitrust distributions?  In the end, family members often don't have the business acumen, the tax acumen, the time, or the desire to be a successor trustee.  You should have a serious conversation with your estate planning attorney when considering who you want to name as your successor trustee. Having A Generation-Skipping Trust But Failing To Maximize Its Duration A generation-skipping trust allows one to provide for successive generations without the assets being estate taxed at each generation.  Most States have a law called the Rule Against Perpetuities.  Colloquially, the rule states that a trust must distribute its assets to someone at some point.  While the Rule Against Perpetuities is complex at best, in practicality, it limits the duration of a trust to about 100 years or so.  Some States, however, have eliminated their respective Rule Against Perpetuities and allow trusts to continue without limit.  You should consider allowing a trustee to "remove the situs" of your trust to a State without a Rule Against Perpetuities.  Talk with your estate planning attorney about the ramifications. Locking Your Family Into Your State's Income Tax System and Court System You've established a generation-skipping trust to benefit your family through the years.  You and your spouse have both died.  Your kids have decided to move to another State . . . a State that does not have income taxes.  Unless you make provisions to allow your kids to "remove the situs" of your trust, your trust might be locked into paying income tax in your home State for the duration of the trust.  Moreover, not including that same provision, your kids will likely need to petition a Court in your home State (rather than their home State) for guidance regarding your trust or relief from a particular provision.  Talk with your estate planning attorney about the ramifications.   After reading this page, please click here if you would like access to our free guides on these topics.