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Saturday, April 25, 2009

Personal Financial Planning

All of us could use a little help from time to time, especially in the financial arena. This is a guest post by Edward Clark, of the Lohengrin Group, a financial planning service located in the deep South. He describes how financial planning helped one of his clients save her million dollar nest egg that had been hatched from the poorest of beginnings.

"Sonia came into our office with a tale that should be in a book. She wiped her glasses with a beautiful handkerchief with her initials on it and said, “OK, but it’s kind of complicated.” And off she went. Sonia’s story was so captivating that we just listened as she spoke for half-an-hour.

She said that she was born in Russia well after the Communist revolution, and was caught in the ongoing chaos that ensued after the Communists took charge, but before the 2nd World War started to creep into the region. Renegade soldiers went through villages in her part of the Ukraine, searching for Jews, literally raping and pillaging peaceful villages, burning many of them to the ground as they killed with impunity. Her village had been spared, but one never knew.

Sonia said that she was the youngest of five sisters, ranging from age 11 to 19, and also has three brothers, two older and one younger. As Stalin seized absolute power, they were no better off. They were forced to work on collective farms, sharing the fruits of their labor with all for the good of the “Mother Country”. They had brutal “political officers” in the village watching their every move, and if they didn’t like anything about you, they could have you hauled away forever, beaten, brutalized. Sonia and her sisters experienced the soldier’s brutality one night, and they were left for dead. Her family’s possessions were confiscated.

It turned out one of the soldiers was a kinder man, a kid, actually. After his buddies left their home to go make more trouble, he stayed behind, secured a horse and cart, and told the girls to get out of town under the cover of darkness. By daylight they had made it to the next town, one that had been spared their village’s fate, and got help from the townsfolk. They all survived, and worked for while saving money, then escaped into Poland, then England, and eventually here, coming through Ellis Island.

Some of her sisters married and had families, and Sonia got married as well, but after the incident in her village, she said now that she looks back on it, she probably had emotional scars that left her somehow attracted to men that were, well, real jerks. Even so, she was a smart cookie and during her marriage she found a way to scrape together enough money to buy stock in the factory where he both worked. After divorcing her husband, she never remarried, but she did keep buying stocks. When the wall caved in, in 1929, she wasn’t even concerned. She knew these were long term investments, and even after the drop from the crash, she still had a higher value than what she had put in, although not much. But she sat tight, and as the years went by, she slowly became a millionaire.

By the time she came to me, she developed some very close relationships with her nieces and nephews and some not so close relationships (A couple of them were too much like her ex-husband for her liking). She had written and re-written several versions of her will over the years, and had kept changing it as the situations of her life changed. She admitted that she was recently diagnosed with cancer, and was worried about her advanced age, and her prognosis of getting better. Her doctors told her that with new treatments, she had a chance of recovering completely, but, Sonia wanted to see what would happen to her estate when she passed on.

We had an attorney review all her documents, and she told Sonia that she hadn’t updated her estate wishes since 1993, and that she had some of her relatives named as beneficiaries whom Sonia no longer had any relationship with. Plus, we told Sonia if the government does bring back estate taxes as they are threatening to do in 2011, and Sonia survives long enough for the estate taxes to come back, she will pay over half of her net worth in taxes

Then, of course, there is the problem of her stock portfolio having dropped 47% since its value at the beginning of 2008. We sat down with Sonia and the attorney, and worked out a plan to have Sonia:

  • Utilize income and estate tax planning strategies to work on reducing income taxes now, and reduce or eliminate potential estate taxes if the government keeps their promise to confiscate 55% of people’s assets. This includes gifting strategies, charitable giving strategies, and re-titling assets.
  • Establish a Living Trust and other trusts to control her estate during her lifetime, and remove most of the assets from taxation.
  • Use her life insurance policies for further charitable giving since Sonia doesn’t need the coverage any more, and the cash values and face values can be used to help charities…while saving Sonia a bundle in taxes.
  • Rearrange her portfolio to minimize capital gains taxes, (Sonia actually has them since she has held much of her stock for decades) and reposition some of the freed up cash into low risk, tax deferred savings vehicles.
Well, Sonia’s health is hanging in there, and we hope she shakes this one off. (After everything she’s been through, we think she’ll make it. She’s so tough.) She said she is so much more peaceful with life, knowing the nieces and one nephew who actually call her and help her will be well taken care of, and that a few of her favorite charities will get way, way more money than she thought she could leave as a legacy.

We’re glad she came in to see us. I would have hated to see her beaten by our IRS as badly as she had been abused by the soldiers in her home country.

While your situation might not be the same as Sonia’s, you shouldn't take that to mean your planning needs aren't just as critical! PLANNING BEFORE TAKING ACTIONS IS THE MOST FUNDAMENTAL, AND IMPORTANT ELEMENT OF FINANCIAL SUCCESS!!!"

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