Making Cents: Right answers usually aren’t easy ones

The most common answer delivered by financial professionals to their clients is “it depends". For some, it may be a quick way to skirt a direct answer. But in many financial situations, there is no black-and-white answer.

Let’s start with estate planning, an area where many feel that a set-it-and-forget-it approach is best. Nothing could be further from the truth. With the potential end to the Bush-era tax cuts looming, many wonder whether now is the time to engage in the $5 million substantial-gifting opportunity available under the current tax code.

Of course, much depends on what Congress does. But beyond the tax law, you may have concerns about your future ability to sustain your current lifestyle if you make such a large gift. You would also need to ask what can go wrong to make this gift look like a bad idea at some point in the future. These issues could include a long-term health issue that depletes funds faster than expected or, conversely, a much longer life than originally projected.

The “it depends” answer may also arise when planning for the funding of higher-educational expenses. The first side of this quandary deals with how you prioritize saving for your financial independence and other financial goals versus paying for four years of a private university. Then there are the realities of your future income, health and the earnings rate on your savings. Look at all contingencies and conceivable ways to fail before you charge ahead with your own ideas. Should you choose college funding as your first priority, it would be negligent to be underinsured to protect against the loss of life or income. Either possibility could cause failure of the funding plan. Diverting a small portion of your savings to possible contingencies for premature death or disability may be a prudent course of action.

If you choose to make financial decisions in a vacuum, then at least be aware of the possibilities of how your plan may become derailed. For example, holding on to an investment because you inherited it from your dad or because you’ve always owned it doesn’t mean that you should always own it. You’ll need to ponder the future of your current holding and weigh it against the alternatives you’re considering. Further conflict may arise if you ask whether capital gains taxes will be higher or lower next year.

There is a yin for every financial yang. Evaluating all of the possibilities with the help of a financial professional is the best you can do.

John P. Napolitano is CEO of U.S. Wealth Managementin Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth
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