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5 Life Changes to Tell Your Advisor About

The meticulous financial plan your advisor drew up is not Gibraltar, forever solid and unchanging. Altered circumstances require your plan to change, too. 

Here are the five life changes you should tell your advisor about: 

Marital Status. 

The way of the world: People get married, and some get divorced. Either way, joint assets are an issue. Your advisor can walk you through what you need to know and what to plan for. 

When you get married, there are a host of questions. Is it a two-paycheck marriage? You need to look at whether you will combine bank accounts, who will pay for what, will you invest separately or together, how will you handle debt, what are your insurance needs? If you both own a house, what do you want to do with your property, and what are the tax consequences of selling one of the dwellings? 

As you start your marriage, planning for its possible end seems like walking under a ladder. Most divorce proceedings split assets 50-50. A prenuptial agreement, while it seems to blight a romance, is good for special circumstances – say one spouse has children from a previous marriage who need to be looked after, and the other partner is childless. 

Whatever you decide, dividing assets is best done between the divorcing spouses, before lawyers get involved. “If you are on speaking terms, this makes the most sense,” says Craig Poeppelman, a financial advisor with Harper Associates in Upper Arlington, Ohio. “The attorneys have no incentive to settle things. They are on the clock.”

Becoming a Parent. 

As the saying goes, you not only add a child. You also add a future financial commitment to medical care, summer camps, new and ever-larger clothing, braces and college. Kids are expensive. 

Your advisor should provide a checklist of what you need to consider – and how you can afford it. Checking what your health plan covers for pregnancy is the first step. Day care, if both spouses will continue to work, is a pricey proposition, eating up as much as a fifth of a couple’s income. 

College expenses are enormous, so getting ready early is wise. The average cost for tuition and fees at a private four-year college is $25,000, and at public institutions for in-state residents, $6,500.  The most expensive top $35,000. A welter of loan and grant programs exist that an advisor can navigate for you. You need to figure out what part of college costs you, the parent, will pay. “Is it 75%, or 100%?” says Jeffrey Baumert, a partner at Advisor Financial Services in Woodstock, Ga. Very few kids get a free ride from scholarships and grants. 

The best means of getting ready is a 529 savings plan, named after the tax code section creating it. You sock away money now for tomorrow’s college bills. The beauty of this: Every dime your invested money earns in capital gains, dividends or interest is tax-free if used to pay for higher education. Should you invest in the plan your state sponsors, your investments may be deductible on state tax returns. You aren’t locked into your state’s plan, and can adopt another state’s. 

Health Problems.

These could mean higher spending from your own pocket. Your financial plan may need to be readjusted to reflect how much cash you must pull from investments. “The question is how much higher the distribution amount to you will be,” Gartner says. An advisor can help you decipher what your medical plan covers and what it doesn’t. Some have no lifetime maximums, good news if you have a serious illness. Others won’t pay bills over $500,000. 

An advisor should tell you beforehand what coverage you need, should you lack it. An illness or injury may strike at any time without warning. For someone without adequate coverage, says John Orlando, the chief investment officer at Financial Security Advisory, in Virginia Beach, Va., the expense “can destroy your life.” 

Inheriting Assets.

Gaining a sudden lump sum, the temptation is to spend the windfall right away. An advisor can steer you away from that and show you how to invest it so it bolsters your finances. The best plan is to shove the money into a well-diversified group of mutual funds. 

Tax planning is vital. If the money comes from the individual retirement account of your spouse, who just died, the IRA should be retitled in your name. Withdrawing some of the money for your personal use, before age 59 ½, can make all of it taxable. If you inherit an IRA from someone other than your spouse, an advisor can show you that the best course is to open a new IRA in your name and transfer the proceeds directly to it. That way, the money doesn’t run through your bank account, thus making it subject to taxation. 

The best way to regard inherited money, before you’ve received it, is not to count on it, Gartner says. “Your father dies and you believe you will receive his money, but then your mom re-marries” and may alter the will, he says. 

Buying Real Estate.

For many, purchasing a home is the biggest single outlay they will make in their lives. A home also is the largest asset for most, even after the housing bust that started in 2006. Yes, home appreciation won’t skyrocket any longer, as it used to. Prices are still falling in some parts of the nation. Once the housing market stabilizes, you likely can expect home appreciation to revert to its normal rate, which tracks inflation. 

Still, the classic benefits of homeownership remain. You can deduct mortgage interest and local property taxes on your federal tax returns. Your capital gains, up to around $500,000, are tax-free should you sell. Typically, house payments are less than rent. And you do build equity, albeit at a slower pace nowadays. 

Buying a second home has traps. If you rent it to tenants, you can treat it like a first home for tax purposes – but only by living in it at least 14 days a year. 

Buying undeveloped land is even tougher. Unless you can rent it out for farming or hunting, it generates no income and plenty of property taxes. You have to hope that you can develop it lucratively, or sell it to a builder. 

An advisor can show you how to work through these complexities. One of Gartner’s clients reported that he had just paid a large sum for several acres of raw land. Gartner thought it was a raw deal. “Fortunately, he had seven days to back out of the deal,” Gartner says. It pays to have someone like Gartner looking over your shoulder.

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