Businesswomen analyzing investment charts in meeting room

 

When it comes to investing, asset allocation is very important. This is the percentage of total investments that are allocated to different investment areas; the most common include stocks, bonds, and cash. It is crucial to diversify your investment portfolio so you’re not taking on unnecessary risk, but, for wealthy investors, it is also extremely important to consider where those different investments are put to maximize after-tax growth. Here is why asset location can potentially help you supercharge your investment, and why Peter Culver believes it may be more important than asset allocation when determining an investment strategy.

 

When It Comes to Taxes, It’s All About Location

 

Peter Culver often presents this simple example when discussing asset location: An investor with $2 million in investment puts $1 million in a personal account and $1 million in an IRA. The two are very different when it comes to taxation: personal accounts are subject to taxes on bond interest and stock dividends as well as capital taxes on any sales of the stocks and bonds. There are no taxes on the investments in an IRA account during pre-distribution.

 

Given asset allocation, an investor will have a percentage of his or her money in stocks and bonds. Now there are two types of bonds that can be purchased: government/corporate bonds and municipal bonds. Government and corporate bonds pay a higher rate of interest, but the interest is taxable. Municipal bonds are not subject to taxes, but they typically pay a lower rate of interest.

 

In order to take advantage of the benefits of both types of bonds, an investor will need to consider asset location. By putting those government and corporate bonds in a tax-free account like an IRA, he or she will be able to bypass paying taxes on the interest generated. At the same time, although a personal account is taxable, municipal bonds are not, which make it a good location to put this type of investment. By putting investments in the best location, investors can significantly increase their after-tax return.

 

 

 

 

 

When it comes to family wealth management, there is nothing more important than death and taxes, which according to Benjamin Franklin are the only two certainties in this world. When it comes to wealth management, everyone looks for low fees and high performance; however, they should really be concerned with these two certainties.

According to Peter Culver, wealthy families may not have complete control over death and taxes, and honestly, no one ever does, but they do have control over the impact of death and taxes on their wealth. When planning for the future, you should fully understand what you are investing in, and how that will affect future generations, especially since family fortunes usually do not last past the third generation. Ideally, you would want everyone (across all generations) to be financially educated to help not only preserve, but grow, the family wealth.

In today’s world, the wealthy are paying capital gains taxes anywhere between 20% and 25%, and another 40% to 50% in income, estate and gift tax. On the other hand, investment fees range from 0.5%to 2%. With this knowledge, it is more likely for you to lose your wealth due to bad tax management rather than to high fees or bad performance.

The words Benjamin Franklin wrote over 250 years ago to Jean Baptiste Le Roy still stand true today. While you can always prepare yourself for the certainties of life, it is harder to prepare for the uncertainties. Don’t let bad judgement or not being fully educated limit your family’s wealth.

You’ve worked hard your whole life to build your wealth and maintain it over time. Eventually, it will be time to leave it to your children. But are your children prepared for inheritance?

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One of the most difficult parts of passing wealth is ensuring heirs are ready. In most families, 70% of inherited wealth is lost by the second generation, and 90% by the third. Poor money management and bad investments are only a few of the causes. While these numbers are staggering, they reinforce the vital importance of ensuring your children are prepared to handle the inherited wealth.

Educate Your Children
Just as you are responsible for managing your wealth, you are also responsible for teaching your children how to manage it. Wealth and investment strategist Peter Culver offers useful tips:

1. Have Multiple Conversations
Speaking with your children about the family wealth is not a one-time conversation. It’s a continual dialogue that should take place over the years as your children get older. Inform them of the family’s wealth, your values and what’s important to your family, and their responsibilities in managing it.

2. Teach the Value of Money
Parents may feel conflicted in passing their wealth down to their heirs. While they want their children to benefit from the family wealth, they also want to ensure their children are independent. Tell your children what you want your wealth to accomplish for the family and model the financial behavior you want your children to follow.

3. Hold Family Meetings
The key to successfully transferring wealth is communication. While it can be difficult to talk finances with family, it is necessary. Family meetings will help ensure that everyone is on the same page as to what happens to the money over time.

4. Create a Mission Statement
This is a useful tool for defining the wealth and determining how it will be used. To help your children and future generations understand and appreciate how the wealth was built, include in the mission statement how family values contributed to the creation of the wealth.

piggy bank

Would you rather reach your personal financial goals or have your money manager beat a benchmark that they set? Read on to learn more about utilizing a “goals based” approach in order to avoid the pitfalls that come from “benchmark-it is.”

Many studies are out that show “active” money managers notoriously have a tough time beating the market. The “benchmarks” they are setting are too often fool’s gold considered to the figures they’re actually able to obtain.

What’s shocking is that most money managers are aware they won’t hit their benchmarks, but out of habit will continue to utilize the same system. This system shows customers statistics that just won’t add up. Despite rarely winning, they still set out to beat someone.

This approach is a disservice to most clients. The right approach is to utilize investments as tools to reach reasonable financial goals that are set with the client. It’s irrelevant how the money manager did, if the client didn’t reach their goals.

Here are some ways to tell if your money manager is too focused on benchmarks:

  • Do you have a Cash Flow Statement and Written Balance?
  • Have you decided on your specific financial goals for the next 3, 5 and 10 years?
  • Did you take the time to consider whether or not your goals are realistic?
  • Have you taken a deep dive into your current investments and considered making adjustments?
  • Are you reevaluating your investments at least once during any year?
  • Do your find your financial advisor rarely actually asks you about personal financial goals.

You’re at serious risk of missing your financial goals, if you answered yes to just one of these questions.   Don’t worry, there are better ways available.  Peter Culver can provide you with an approach that is focused solely on the goals that that you set together.

Don’t waste time worrying about your financial goals. Please contact Peter Culver at pculver928@gmail.com or 917.697.4156 and get the information you need.

 

 

Financial Planning

Asset allocation is the percentage of money you invest in different areas. These areas usually involve stocks, bonds and cash. Depending on your wealth level, asset location may be much more than asset allocation, but not many people understand why.

Let’s take a look at a common example. Imagine you have a couple of million in investments – half of which are in an IRA and the other half that are in a personal account. As you know, income taxes are due on stock dividends and bond interests in your personal account, as are capital gain taxes on stocks and bonds that are sold. On the flip side, no taxes on any investments in your IRA are taken during the accumulation phase of life. This phase ends at 70.

Now let’s consider an asset allocation of 60/40 stocks and bonds. You could consider corporate bonds, which pay a higher rate of interest, but with the interest being taxable, or municipal bonds that pay a lower rate of interest, but where the interest is tax free. How do you know which investments to place in the personal account and which investments to put in your IRA?

Peter Culver thinks there is a common formula for most investors. The formula is to buy municipal bonds for your personal accounts and government or corporate bonds for your IRA. The logic is this: all the interest on municipal bonds is tax free in a personal account. The interest on the government or corporate bonds will also be tax free in an IRA, because you don’t pay income taxes on investments that are placed in an IRA.

Now, let’s take a look at your bonds. With 40% invested there, you would have $800,000 to work with. When it comes to municipal bonds, there is usually a 4% interest rate and a 5% interest rate on government or corporate bonds. But here is the catch on the annual interest rates:  if you have government or corporate bonds in your personal account, all the interest is subject to tax. This tax will take out 1/3 of the income you could have been earning. Just a simple mistake like this could cost you hundreds of thousands of dollars over the years.

Knowing where to place your investments between your IRA and personal account is just as important – if not more important – than the percentages in which you allocate them. Peter Culver is excited for the opportunity to discuss asset location with you and help ensure your financial future is as lucrative as it should be.

For more information about this particular subject or any financial issue, don’t hesitate to contact Peter Culver at pculver928@gmail.com or 917.697.4156.