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Your Checklist for Success: Fortifying Your Kingdom—How to Protect Your Assets, Build Your Legacy, and Insure Against the Unknown
Invincibility lies in the defense.
—SUN TZU, The Art of War
Congratulations on taking this journey with us. I hope you feel more prepared, informed, and fully equipped to achieve financial freedom after reading this book. As you know now, Unshakeable isn’t just the title—it’s a way of living that can permeate every aspect of your life. Ultimately, it means freedom and peace of mind.
Yet the truth is, none of us has absolute control over the future. There are a variety of unknowns that could emerge to prevent you from enjoying the very wealth you have worked so hard to build.
• What if you are no longer able to work due to an unexpected illness or disability?
• What if you get slapped with a lawsuit, putting all your hard-earned money in jeopardy?
• What happens to your money if you’re confronted with the harsh realities of divorce?
• What happens to your wealth and legacy when you inevitably pass away?
Remember how we said that losers react and leaders anticipate? Anticipation can be the ultimate power. And these final pages are all about anticipation—both of things that you know will happen and things that you pray will not. I know, I know, it’s not the most fun thing to sit down and plan for unlikely events or one’s eventual passing. However, there will be tremendous relief and peace of mind once you buckle down and bulletproof your wealth. There’s nothing like the unshakeable feeling of knowing that you and those you love will never have to worry about any external events disturbing the quality of your lives.
Remember Ray Dalio’s mantra to expect surprises? This section allows you to do just that. For the same reasons that you diversify your portfolio, the items in this checklist allow you to prepare for all those unknowns that could be lurking around the corner. Plus, you’ll discover even more ways to save on taxes!
Think of true wealth management as the building of your personal financial kingdom. At the center is your portfolio, but you must fortify all the areas in and around the kingdom to protect your treasure from being destroyed or eroded by unnecessary taxes, costly lawsuits, or government intervention. And ultimately you want your heirs to get exactly what you wish upon your death, or to be able to leave a legacy of impact and philanthropy to causes of your choice.
We’ll keep this section as short as possible. This is not even really a chapter. It’s designed to be a guide or checklist. In fact, there are four distinct checklists for you to utilize with your attorney and financial advisor: one for health, one for wealth, one for insurance, and one for charitable giving.
Dearly beloved / We are gathered here today to get through this thing called life
—PRINCE, “Let’s Go Crazy”
In 2016, millions of fans around the world mourned the unexpected loss of the icon we came to know as Prince—one of my favorite artists. According to the New York Times, Prince died at 57 years young without a will. He didn’t set up an estate plan or take any necessary steps to protect his estimated $300 million estate. Now instead of his assets going to his family, they’ll be tied up in court for years, and the government is guaranteed more than $120 million, or 40% of his estate—all because he failed to put together a plan.
While purple may not be your favorite color and you might not win seven Grammys, the lesson is clear. Whether we realize it or not, if we fail to plan, we are planning to fail.
Now, to walk you through these checklists and to make sure you can avoid these missteps that have harmed so many in the past, I’m going to pass the ball to my partner, Peter Mallouk, because, as you know by now, he is one of the top financial advisors in the country according to Barron’s and CNBC—and an estate-planning attorney to boot! In the pages that follow, he provides you, free of charge(!), the same advice he gives his own clients. So be sure not to miss any of this. Then bring this book to your meeting with your advisors and get your financial world in order.
TRANSFERRING AND PROTECTING YOUR WEALTH WITH PETER MALLOUK
Hold on! Before you put down this book with one of the many excuses I’ve heard before, let me just address them straight on:
“I Don’t Really Have That Much, So It’s Not Important to Set Up a Will”
If it’s not important, why do you work? Why do you invest? Why do you budget? Of course this is important, and you’ve probably put this off because it seems like a hassle. It can be done quickly and inexpensively, and your family deserves to be protected, don’t they?
“I’m Young, and This Stuff Is Irrelevant to Me”
This is relevant to you if you have people you care about—a mother, a father, a grandfather, an aunt or uncle—who have not taken the time to set up protection for themselves and their family.
“I Have a Lot of Assets, So It’s Going to Be a Hassle”
If you think it’s going to be a hassle to set up your estate plan now, imagine what it will be like for your loved ones if you become incapacitated or die. I’m sorry to be blunt, but I must nudge you here. If you have significant assets, you should begin your estate planning immediately! There is no time to waste. None of us knows how much time we have left. Putting this off can have catastrophic consequences.
“My Personal Situation Is Complicated”
If you think your situation is complicated and will involve tough decisions (for instance, children from multiple marriages, five ex-spouses, and so on), imagine what it will be like to have your estate go through probate. The probate court, with all the efficiency and effectiveness of a state-run program, will make all of those tough decisions for you without the benefit of your input. (I hope you picked up on my sarcasm.) “I Don’t Even Know What Probate Is. And Why Should I Care? I’ll Be Dead!”
Probate is the process that a court uses to establish the validity of a will (if there is one) and recognize the executor. If there is no will, the court will appoint an administrator of its choosing to handle the affairs required by probate.
Better the Devil You Know . . .
So let’s just admit that the downsides of avoiding the inevitable are more costly than the onetime hassle of meeting with your financial advisor or lawyer. In the four checklists that follow, we’ll tackle setting up measures to protect you if you fall ill, we’ll discuss your estate plan or will, we’ll talk about ways to protect your assets while you’re alive, and then, finally, we’ll talk about creating a legacy of generosity.
These lists are designed to be used with your advisor of choice. If you don’t have a financial advisor, a tax expert, an insurance specialist, and an attorney in your corner, or if you would simply like a second opinion, know that we handle all of these areas as part of our family office services at Creative Planning. If you have any questions or would like our guidance, feel free to reach us at www.getasecondopinion.com.
Checklist 1: I Got the Power
If I am incapacitated, I really don’t care who makes health care decisions for me, nor do I care who handles my financial affairs. If a choice has to be made, I think the government is the best choice to do all this for me.
—SAID NO ONE EVER
I had a client who, at 53, despite seeming to be in perfect health, suddenly became unresponsive. As her family rushed her to the hospital, it was soon determined that she had a brain tumor. She had not set up power of attorney, and thus her husband was unable to access any of her accounts and get her disability benefits activated. She passed away shortly thereafter, never having regained consciousness, and the family soon learned that she had not set up her will, leading her estate to go into probate.
The three items on this checklist could have been taken care of with a few simple decisions. This is not complex stuff. Any qualified attorney can quickly handle these core essentials, and these documents would have protected my client’s family. Here’s what you must do, if nothing else, to protect you and yours.
Durable Power of Attorney for Health Care (Health Care Proxy)
What if you or your spouse suddenly become incapacitated and are no longer able to make any decisions on your own? Who is going to make medical decisions about your care should this happen? This is something you should think about now, while you have, yes, the power. If you have a living spouse, he or she might be your first choice. Make sure to consider the implications of the person you choose. (For instance, if you have a lot of life insurance, you might want to give authority to someone who isn’t invested in pulling the plug!) Okay, I’m kidding, but all joking aside, you need someone you trust inherently who can make the entire range of decisions, from whether to remove life support as mentioned, or whether to change doctors, or whether to move you to a different health care facility. These decisions literally have life-or-death consequences. Make a wise decision and get it in writing now.
Durable Power of Attorney for Finances
Maybe you trust your family with your health care decisions but know that managing money can be a problem for them. Just like you may need someone to handle health care decisions, you will need someone you trust to be able to handle your financial affairs. This can involve paying ordinary bills such as your mortgage, signing legal documents, and even interacting with other entities on your behalf (like the phone company or your health insurance provider).
If you become incapacitated without this document in place, your spouse, relatives, or friends may have to go before a judge to get authority to handle your financial affairs.I
No one wants to have to jump through these hoops in the midst of what is already a difficult situation. Take care of this now so that you can know you will be in good hands, and your family members will be spared some stress during an already trying time.
A Living Will (Also Known as a Declaration, a Directive to Physicians, or a Health Care Directive)
If you are unwilling to turn over decision-making power regarding your health to anyone, you can set up a living will, which tells the doctors which procedures you would like provided or withheld in the event that you are unable to communicate such wishes yourself. Again, this alleviates stress for your loved ones, as your wishes are already stated clearly in writing.
Checklist 2: Estate Planning
The best things in life are free / But you can keep ’em for the birds and bees / Now give me money (that’s what I want).
—BARRETT STRONG, “Money (That’s What I Want)”
When most people think of estate planning, they usually think of simply drafting a will. But there is much more to estate planning than just who gets what when you die. There are a number of different things you can do today that can help decrease your taxable income, and increase your tax efficiency. Here are the four core essentials.
Setting Up a Will. Drafting a will is the first step in any estate planning, and there are four key decisions you must make.
• Who are the beneficiaries? In other words, who gets what?
• Who will be the guardian for your children, if you have any children under the age of 18 when you pass away? If this isn’t spelled out in a will, the courts get to determine who will raise your children. Let me say that again. The courts will get to decide who will raise your children! Are you paying attention yet?II • Who will be the executor of the will? This is the person who will be in charge of making sure that what you request in your will actually happens, and the one dealing with probate if your estate must go through that process. (See the box that follows on why everyone should avoid probate regardless of how much money he or she has.) • Do you want your assets distributed directly to the recipients or distributed to trusts set up on their behalf (a testamentary trust)? For example, let’s say a couple has $400,000 in assets that will be split equally between their two children, who are currently ages 19 and 20, when they die. If the parents both pass today, the children will each get a check for $200,000 with no restrictions. What would you have done with $200,000 at age 19 or 20?III Instead, the parents could include a provision in their will for a testamentary trust that would allow their children to receive principal and income for their health and education until they are 30, at which point the balance of the trust will be distributed to them.IV The will would also name a testamentary trustee, a person or company you select to hold the money, invest it, and distribute it in accordance with the terms of your testamentary trust.
WHAT IS PROBATE? AND WHY YOU SHOULD AVOID IT AT ALL COSTS
The main point of probate is to give your creditors time to seek payment of the money you owe them and your executor time to collect money owed to you. Probate involves payment of taxes and debts, and the distribution of what is left under court supervision. What are the other downsides of probate?
• Control of Assets. During the probate process, your beneficiaries cannot sell your assets; the executor can only sell assets only with the permission of the court.
• Time. The probate process takes approximately 6 months at a minimum, but it usually lasts at least a year. It can take even longer if matters become complicated by a will contest (where the validity of the will is challenged), business problems, or anything else unusual.V
• Expenses. It’s possible for the costs of probate to stretch into the tens of thousands or even the hundreds of thousands for some estates.
• Privacy. Probate is a matter of public record, which means anyone can have access to your personal financial affairs. For many people, the thought of their most personal information being made public is pretty chilling. You may think that no one will be interested in your affairs; however, some people actually “work” probate records, looking for people who are going to inherit substantial sums of money in order to find ways to take advantage of them.
A quick word on trusts: all too often, people assume that trusts are only for the Rockefellers and other 1-percenters, or something that you set up for your children should you pass away while they are still young. But I believe that trusts should be a centerpiece of estate planning for people with more modest assets as well. They don’t need to be expensive or complex to set up!
One important responsibility we all have is to make sure that whatever wealth we build, however large or small it may be, our families benefit from it, and it doesn’t get stuck in a legal process that drains the gift from our heirs. Trusts are an important tool to do just that. Read on to discover how to use them to your benefit. But first, a bit about tax planning.
Estate Tax Planning. As we discussed in chapter 6 on the Core Four, it’s not necessarily about how much money you earn, it’s about how much you keep. Tax efficiency is key to your financial freedom while you’re alive, but you also have to consider what taxes you will incur upon your passing.
For most people, estate taxes are not and will never be a concern. Why? The IRS will allow you to give away up to $5.45 million over your lifetime or at your death without paying any taxes; this is referred to as your lifetime exemption. Think of it as a onetime coupon.VI Married couples get to combine their lifetime-exemption amounts, so estate taxes are due only if their combined net worth exceeds $10.9 million.
If you are one of the wealthy that has more than $5.45 million to bestow upon your death, you will be paying an estate tax of 40%. Ouch! I hope you’ll agree with me that it is worthwhile to discover ways to pass on some of your wealth now, before you pass away, so that you can decrease the amount of your taxable estate.
So, how can you do this? The IRS allows you to give away $14,000 per year to whomever you choose without counting against this lifetime exemption limit; this is referred to as your annual exclusion. Any amount over $14,000 is taxed at the gift rate of 40%. This means that you could give away $14,000 per person to all of your friends and family every year and still give away $5.45 million when you die, paying no gift or estate taxes on any of it. That can add up to quite a sum (depending on how many friends you actually have!).
Below are a few strategies for passing along your wealth without handing a huge chunk over to the government:
• Help Pay for Your Children’s or Grandchildren’s College Education Expenses (and Get a Tax Benefit, Too!). Most people don’t realize that you can use part of your annual gift of $14,000 to fund a 529 college savings plan for your kids or grandchildren. You may even get a state income tax deduction for the gift as well. If the student is already attending college, tuition payments can be made directly to the school.
• Instead of Waiting to Pass On Your Wealth After You Die, You Can Give $14,000 per Year Tax Free Directly to Each of Your Family Members. Let’s say you have grown kids who are married. You and your spouse can each give your child $14,000 per year, for a total of $28,000 annually. You can also each give your son-in-law or daughter-in-law $14,000 per year, for another $28,000. That means one married couple can give another married couple $56,000 per year with no gift tax consequences and without reducing your lifetime exemption! They get the benefit today, and you get the joy of sharing with your children while you’re still alive.
• Pay for Medical Expenses. You can pay for the medical expenses of friends or family members without counting against your annual gifting limit, so long as the payments are made directly to the care provider. So what does this mean? If your grandchild needs an emergency appendectomy (costing $20,000), you can cover those costs and still give that grandchild an additional $14,000 in the same year without paying the 40% gift tax.
• Charitable Giving. Any money you give to charitable organizations does not count toward the estate tax calculation either. Why pay it to the government when you can give it away? That’s what the world’s wealthiest have done, including Bill Gates and Warren Buffett. We cover this in more depth in checklist 4.
Revocable Living Trust. As you begin to accumulate wealth, please don’t wait to set up a living trust. Everyone needs one. Why? Because all assets in the trust avoid the complex state-run proceedings of probate.
A revocable living trust is a simple, legal arrangement to hold assets (the trust part). Because this trust is put in place during your lifetime, it is a living trust. And because the trust is written to allow you to terminate the arrangement at any time, it’s revocable. So even though the name looks confusing, revocable living trust just means “a legal arrangement created to hold your assets, which you can end any time you want while you’re alive.” You will be named as the trustee (or the person in charge of the assets), so you make whatever decisions you want with the assets in the trust. If you become incapacitated, or after you pass away, a successor trustee you name will take over the administration of the trust for you. And nothing touches probate!
Ideas are a dime a dozen, and the implementation is everything.
Protect Your Assets with an Irrevocable Trust. Some of the wealthiest families in the world have known for centuries what any great asset protection expert will tell you: the secret is to own nothing and control everything. This can be done through an irrevocable trust. It is considered to be a separate legal entity, so the assets inside it are not subject to estate tax when you die.VII That’s right, your family will keep that 40% rather than see it confiscated by the government! Also, if the trust is established properly, the assets inside can be protected while you are alive from creditors, divorce, legal judgments, and other risks—thus its other name: an asset protection trust.VIII So what are the best ways to use an irrevocable trust to your advantage?IX • Giving Annual Gifts. As you learned a few pages ago, you are allowed to give an annual gift of $14,000 per person each year tax free. Rather than giving your annual gifts to your beneficiaries outright, it may make more sense to put that money in an irrevocable trust instead, and that person can be the beneficiary of the trust. This is particularly effective if a beneficiary is young, has difficulty managing money, or if there are extenuating circumstances that lead you to want to establish some benchmarks the person must achieve in order to obtain access to the funds, such as sobriety, attending college, or holding down a full-time job.
• Holding Life Insurance. Sheltering life insurance through the use of irrevocable trusts has become so common that this type of trust has acquired its own acronym: the ILIT, which stands for irrevocable life insurance trust. Most people know that the proceeds from a life insurance policy are not subject to income tax; however, it’s not as widely known that the proceeds are subject to estate tax (that pesky 40%). However, if the policy is held within an irrevocable trust, you are able to avoid both income tax and estate tax! A double whammy. Here’s how it works: you take the $14,000 annual gift ($14,000 per kid, per grandkid, if you want to contribute more) and use it to fund life insurance within an irrevocable trust, which allows your children or grandchildren to receive the life insurance payout completely tax free!
• For Ultra-High-Net-Worth Individuals, Use Your Lifetime Exemption Today. Giving away a portion or all of your $5.45 million limit (or $10.9 million if you’re married) today can be a great strategy, especially if given to a family member through an irrevocable trust for protection (for asset and tax protection). Why would anyone want to give away that much today? Let’s say that you have certain assets valued at $5 million today that you expect to increase considerably in value over your lifetime: for example, shares of a company or a piece of undeveloped land. By giving the assets to the trust today, you pay no taxes on the transfer because it’s under your lifetime exemption amount. At your passing, hopefully decades later, the assets could have ballooned in value by that time. If the original $5 million piece of land is now worth $20 million, the entire $20 million passes to the trust beneficiaries tax free.
Checklist 3: Insurance
Everyone’s got a plan until they get punched in the mouth.
Many of the scenarios that can take you down financially can be covered with insurance. That’s right, just like you insure your car because you don’t want to be stuck with a bill in the thousands for a car accident that was just that (an accident), or how you pay for health insurance in case something catastrophic happens to your health, and you don’t want hospital bills to cause you to go bankrupt, there are other kinds of insurance that can be a fantastic tool if wielded correctly. Listen, I get it: nobody likes insurance until he needs it. But you can do everything right—hire a fiduciary, reduce fees and taxes, construct an awesome portfolio—and in the blink of an eye, your efforts will be wiped out if you aren’t prepared for a catastrophic loss.
So let’s protect ourselves, shall we?
The fear of death follows from the fear of life. A man who lives fully is prepared to die at any time.
Life Insurance. If you have insurance on your cell phone but not on your life, we need to talk. I’m not kidding. Life insurance is a crucial aspect to protecting your wealth and family. I have seen devastating situations where people with substantial means didn’t have life insurance (or enough of it), and the family members quickly ran out of money when the income disappeared and the expenses piled up. So even if you have life insurance, let’s take a look at the different types and make sure you have the right policy for you.
• Term Insurance. Term insurance is the most appropriate type of life insurance for nearly all Americans; however, term insurance is not often recommended by insurance agents, because selling it results in the lowest commission.X With a term insurance policy, you’re insuring your life for a specific period of time (usually 10, 15, 20, or 30 years). At the end of the term, the policy ends, and you no longer have the coverage. Many insurance agents will use this as the reason that you should not buy term insurance: because you might never get a return on your investment. I find this to be quite a silly argument. It’s like arguing that I should feel disappointed that I have homeowner’s insurance and my home hasn’t burned down! But term insurance can be helpful if you want to safeguard your family in case something happens to you before you have secured financial freedom. How long you need the coverage depends on how far off you are from your financial goals. An insurance agent, or your financial advisor, can help you determine those numbers.
• Permanent Insurance. As the name implies, you have this type of insurance for your entire life; thus, it’s much more expensive because the insurance company is expecting to pay a death benefit at some point in the future. When is it a good idea to buy permanent insurance? As we discussed in the previous section, you can utilize permanent life insurance as part of your estate planning to both maximize your legacy and minimize your taxes by creating an irrevocable life insurance trust. You can also buy survivorship life insurance (also known as a second-to-die policy). This is a single policy covering the lives of two spouses or domestic partners. The policy pays out only after both insured individuals have passed. Because two lives are insured, the death benefit is greater than a policy would be on only one individual.XI And remember, if held in an irrevocable trust, the proceeds will be free of income tax and estate tax!
• Variable Life Insurance. This is a kind of permanent life insurance, except the cash value is reinvested in a number of “subaccounts” that are similar to mutual funds. Watch out for these! These quasi “investment” vehicles are bogged down with fees, huge commissions, and actively managed funds. They also have high surrender charges if you want to get out. The only exception is a tool for the ultra-affluent called private placement life insurance (PPLI, or sometimes referred to as rich-man’s Roth), where there is no commission paid, no surrender charges, and few limitations on the investments within. You probably haven’t heard of it because life insurance agents can’t make a dime selling it (and so it’s usually structured by sophisticated attorneys). That said, private placement life insurance typically requires a deposit of $1 million or more, so it’s truly a tool for those who have significant assets.XII HOW MUCH LIFE INSURANCE DO YOU REALLY NEED?
Determining how much life insurance you need should be an integral part of creating your financial plan and is something to be done with your financial advisor. There are many popular methodologies used to estimate how much life insurance a person needs. Most of them make no sense. For example, one popular rule of thumb is that you should purchase life insurance equivalent to five times your income. But when you think about it, if you make $100,000 per year and have $5 million, you likely don’t need life insurance; the family will get by just fine. If you just graduated medical school with $250,000 in debt, purchased a $700,000 home, and have three little kids, then five times your income is likely nowhere near enough. Obviously, the best method to determine how much you need is to customize the solution to your situation.
You’ll need to reassess this number as you age, as you reach certain goals, or as you create new ones. For example, once your children are through college, or your mortgage is paid off, you no longer need to carry insurance to cover those liabilities, but you may need to keep saving for retirement. Again, this is when your financial advisor will earn his or her weight in gold.
Time and health are two precious assets we don’t recognize and appreciate until they have been depleted.
—DENIS WAITLEY, speaker, writer, consultant
Disability Insurance. What do you think is your greatest asset? Many people think of their home or possibly their retirement account. For most, though, it’s your ability to earn. Your goals for financial security and freedom are often dependent on your ability to keep the paychecks rolling in so that you can sock away enough to compound into a substantial nest egg. A disability could seriously derail all that you have set up.
Employers typically offer both short-term and long-term disability coverage for their employees, so it’s a good idea to check what your employer offers before meeting with an insurance specialist.
Forty percent of individuals who reach age 65 will enter a nursing home during their lifetimes.
Long-Term Care Insurance: Covering the Costs of Assisted Living. Nobody likes to think about growing old. I understand. But unless you are Benjamin Button, you have to make sure that if you someday need long-term care, you have the necessary coverage. According to the New York Times: “Some 70% of those over age 65 will require some form of long-term care before they die. But only about 20% have a long-term care insurance policy. Instead, millions of those who end up needing long-term care pay for it out of pocket.” If you are fortunate enough to have a multimillion-dollar portfolio, a properly structured portfolio would spin off the money needed to cover your needs. However, the typical cost of a nursing home varies across the country, from $67,525 per year in Des Moines, Iowa, to $168,630 per year in New York City. Given that just 44% of the population over age 50 has more than $100,000 in liquid assets, it shouldn’t be much of a surprise that most people who enter a nursing home are broke within a few years.
How do we prevent this? You need to get a long-term care policy for yourself or those you love well before it’s needed. You can, for example, purchase a policy that will cover $200 per day, or $72,800 per year, for up to 3 years, for a 65-year-old person for just $5,000 annually. However, if you wait too long, it becomes cost prohibitive, and most insurance companies won’t insure people over the age of 84. Long-term care typically covers home care, assisted living, adult day care, hospice, nursing home, and Alzheimer’s facilities. Insurance policies like this are available for someone who is as young as 45 years old for as little as $100 per month.
Homeowner’s Insurance. Our homes are one of our biggest assets, and thus it makes sense to make sure that we are protected from certain things beyond our control, such as a fire, tornado, earthquake, or flood. Homeowner’s insurance protects you by covering the costs of damage to your home, within the limits of your policy. (This is key. Often we don’t fully understand the limits and conditions of these policies and then find ourselves stuck with bills we never expected to pay.) As with all insurance, your first step should be to determine exactly how much coverage you need. This requires you to evaluate the replacement value of your home, which can be different from the sales price of your home. Your dwelling coverage should match what it would cost to rebuild your home from the ground up, using the same or similar materials. In some areas of the country, the cost of materials has continued to go up while real estate values have remained level, so it’s important to understand what current building costs are and to calculate your dwelling coverage appropriately. However, it’s important to note that your insurance company will fully cover damages to your home only if your dwelling coverage is at least 80% of the replacement value of your home. What does that mean? Let’s say you own a home valued at $500,000, and your dwelling coverage is $350,000. If one of your water pipes bursts, causing $50,000 in damage, even though your dwelling coverage more than covers the $50,000 in damage, the insurance company is going to send you a check for $43,750 (minus any deductible) and not $50,000.XIII Many people are surprised to discover that their policies do not provide as much coverage as they think, because of internal caps on how much damage is covered by the policy or payout limitations for valuable articles. For this reason, it often makes sense for individuals with high-value homes, rental properties, or other valuable or unique properties (yachts, collectors vehicles, and so forth) to work with specialty insurers selling products designed to protect these types of assets, so that you don’t find yourself paying for insurance that ultimately doesn’t protect you the way you thought.
Umbrella Insurance. If your umbrella is not insured, you might be required to replace it if a windstorm rolls in. (I’m sorry, I’m just kidding. Writing about insurance is making me delirious.) An umbrella policy is an excess-liability policy that covers you above and beyond the liability limits of your home and auto policies. It’s effectively an asset protection policy that covers all sorts of things that can happen any time and for any reason, often unfolding in ways we couldn’t imagine. We live in an increasingly litigious society and the parents of that kid down the street might sue you if he gets hurt jumping on your trampoline. We may do everything in our power to secure our financial independence, but none of that would matter if we lost a big lawsuit. For this reason, it makes sense for many of us to have an umbrella policy. When we purchase an umbrella policy, we are also purchasing the ability to access the team of attorneys that works for the insurance company, in the hopes that any liability issues that may come up will be settled by this team.
Checklist 4: Leaving a Legacy
There is one thing in common among all the titans Tony interviewed: they not only love to earn money for themselves and their families but also love to give it away. They know firsthand the joy that comes from sharing wealth with causes that are important and mean something to them. Remember, one of the reasons that Tony and I wrote this book is to help feed a billion people!
However, when most people think of donating, they think of writing a check to their favorite charity or cause. But in the section that follows, I’ll suggest the best ways to share your wealth with these causes while also increasing your tax efficiency. Below are a few ways you can truly maximize your impact: • Leave the Right Assets to Charity. Many times, individuals name their children as the beneficiaries of their IRA or retirement account, and they specify a bequest of cash or other property to a charity. This isn’t always the best solution. For example, if you leave a traditional IRA valued at $100,000 to your children and a piece of land valued at $100,000 to a charity, your children will have to pay taxes on the distributions from the IRA. If, instead, you leave the IRA to a charity and the land to your children, the charity can cash out the IRA with no tax consequences, and your children can sell the property at your death without paying taxes either.
Here’s another example: let’s say that Mrs. Donor owned some Microsoft stock that she bought ages ago. If she sold it, she would have to pay significant capital gains tax. However, if the stock is donated, the donor avoids ever having to pay capital gains tax, doesn’t have to part with cash, and still gets the tax deduction for giving to a charity of her choice.
• Work with a Donor-Advised Fund. A donor-advised fund is a public charity that has two primary functions. First, it will help you find organizations that are making a meaningful difference in areas in which you have an interest. Second, when you donate to a donor-advised fund, it will segregate those donations into a separate account that is yours to direct. It’s kind of like your own private charity. So if you donate $25,000 to a donor-advised fund, first, you get an immediate tax deduction. Then, at your leisure, you can direct those funds to different charities as you see fit.
• Establish a Private Foundation. For ultra-high-net-worth individuals, creating your own private foundation can be a great way to create a multigenerational charitable legacy. A private foundation is an independent charitable entity with a staff and directors who administer the operations of the foundation and the distribution of assets to support the mission. While there are more rules and regulations regarding the use and distribution of funds from a private foundation—which, along with staffing needs, can make it more expensive to operate—family members can be paid a salary for their work with the foundation.
• Look for Creative Ways to Increase Your Impact. A number of companies are creating exponential impact in the field of charitable giving using crowdsourcing. For example, Crowdrise (www.crowdrise.com) was cofounded by actor Edward Norton and has exploded into the top 25 global philanthropies, according to Barron’s (Tony was one of its initial investors). Given new technologies and large social networks, Crowdrise has a unique approach for creating maximum impact: a friendly competition among charities that want your donation. Let’s say that you wanted to donate $100K to a charity focused on clean water. Crowdrise will approach ten (or more) different clean-water charities to compete for your donation. For 1 month, the competing charities will go to their own donor network, letting them know that whoever raises the most money in the month will win this $100K grant. If each charity raises $50K on average (10 charities x $50K = $500K), and the winner also gets your $100K, a total of $600K was raised—$500K more than you donated personally!
And Here’s Your Diploma!
If you have made it to this page, congratulations! You have now not only determined how to become unshakeable in building your wealth, but also learned exactly what you need to do to protect your family, reduce your taxes, and leave a legacy of giving. It may take a few conversations with your lawyer, your financial advisor, and your insurance specialist. A little bit of focus today can provide invaluable peace of mind for you and your family.
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