This post has taken me a while to get down. Every time I sit down to write it I get so angry. I got to experience first-hand the aftermath of some shoddy asset planning.
We lost a close family member about 1.5 months ago, and since I’m the tax accountant in the family, I offered to help with the inheritance tax and estate processes. It turns out, someone had talked him into setting up a trust many years ago. I can think of three instances where a trust makes sense:
- You have a family member with special needs, and you want to make sure they are taken care of after you are gone;
- You have some sensitive assets, and you don’t want a record of them passing through the court probate system;
- You are bumping up against the inheritance exclusion (currently $5.45 million per person) and want to avoid estate taxation.
Those are the only reasons I can think of off the top of my head, and since this particular estate has exactly zero of these uses, then it was really just a waste of money. The problem is, it doesn’t take any particular training to be able to call yourself a financial advisor or an elder-planning expert. In fact, many of these financial advisors are really just insurance salesmen.
That brings me to the second part of the estate that made me so angry. In addition to being talked into wasting money on a trust, this family member was also sold a series of annuities and life insurance policies. Why do I hate these policies so much?
- Guaranteed rates of return are incredible low (most of the policies were around 3% growth per year).
- Sales commissions on these products are incredibly high, which leads to point number 1.
- These products have named beneficiaries, thereby causing the trust to be redundant, and confirming that it was a waste of money.
A salesman is not a financial advisor. An insurance agent is not a financial advisor. Full stop.
If you go to a financial advisor, make sure you understand how they are paid. If they are paid on commission for the products they sell, how do you know if they are selling you products you actually need, or if they’re just pushing the product that has the highest commission that year?