Beware of Orphaned Assets
The investments you lost track of can return to harm you and your family. Seemingly small orphaned assets can have painful effects.
King Solomon famously warned of “the little foxes that spoil the vines.” In a secular moment, he might have written, “It is the little assets that spoil the estate plan.”
Often at our firm, we uncover forgotten assets in a family’s financial portfolio. They may be perched in accounts that they no longer check. However, these neglected assets require attention.
It may be a small 401(k) from a first job, an old individual retirement account or a stock lingering in a long-forgotten lock box. While it is easy to focus attention on larger assets and the current day, investments are not meant to function on autopilot. Tax requirements and investment opportunities dictate at least occasional attention.
When reviewing your assets, some basic rules apply. Generally a family has a joint account and a couple of IRAs or other retirement accounts. Remember that retirement accounts must stay in individual names, and account holders cannot mix their money with their spouse’s accounts.
If you have three or four small IRAs in your name, you can place them in a single account to simplify and generally reduce administrative expense. If you have old retirement accounts, you may be able to move them to your current retirement plan or directly to your IRA.
Orphan accounts and long-lost dollars can affect vital decisions. You need to pinpoint everything that belongs to you.
Where do you begin? Always start with the end in mind. For most people, the starting point is their retirement plan. We call it your life after work because many people don’t vacation the rest of their lives after leaving the workforce. Instead, they transition into a new phase that may involve volunteering, hobbies or part-time employment. But they need to know all of their assets to properly plan for the shift.
You must do tax planning before the end of every year to properly determine contributions and other financial decisions. If you sell stock outside of a tax-deferred account, what are the consequences? Should you sell a long-forgotten stock whose price is lagging, allowing you to offset capital gains from sales elsewhere in your portfolio? Creating and following a good investment policy is crucial to surmounting the challenges of market turbulence.
There are also parts of life we prefer not to think about, but must, like planning how to dispose of your finances after you die. A legacy plan ensures your assets are distributed where and how you want them. Allowing orphan assets to float around without plugging them into your financial plan can create challenges.
When my firm uncovers investment decisions that create tax penalties, more often than not the situation occurred because a client totally disregarded an account off to the side somewhere. When estate plans fail, it is because accounts weren’t titled correctly.
Perhaps you put in your will that your mutual funds should go to your daughter, but the funds still list your ex-spouse as a beneficiary. The fund designation trumps the will, and the ex-spouse gets the funds. Similarly, when insurance policies don’t deliver as expected, it is because someone overlooked beneficiary designations. Each seemingly minor matter like that can create huge holes in your financial future and that of your loved ones.
Understanding the reciprocal relationship between investments and taxes is key. Just as important is keeping track of what you own.
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Written by Joseph “Big Joe” Clark, CFP, who is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
Securities offered through and by World Equity Group Inc. Member FINRA/SIPC. Advisory services can be offered by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
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