Think Twice Before Preparing Your Own Tax Return

This piece was inspired by a meeting I had with a Trustee and her husband last week. The Trustee was named to manage both of her parents’ trusts after their deaths. Her father died decades ago, and her mother died just last month. Turns out that the Trustee’s husband likes to organize finances and prepare tax returns, including for her parents and their trusts. This proved to be a disaster because he was unaware (and didn’t think to ask) about how the trusts were set up. We will figure it all out eventually, but not without extra time, money and the help of an experienced CPA. These issues could have easily been avoided.

Taxes can be simple or complicated, depending on your specific circumstances. If you are single and retired, or young and just starting out, then doing your own taxes can make sense. However, things can become complicated quickly, and that’s where a professional tax preparer can save you time, money and stress. Here are some factors to consider:

1. If you are involved with a “taxable entity”, then see a tax professional. Taxable entities are enterprises that usually have their own tax identification numbers. LLCs, business partnerships and irrevocable trusts are taxable entities. (Revocable Living Trusts are not taxable entities because they use your Social Security Number as their tax id and thus are invisible tax-wise).
2. If you receive a Schedule K-1, then see a tax professional. A Schedule K-1 is a federal tax document that is used to report income, deductions, losses and dividends from taxable entities like LLCs and certain trusts. You could get a Schedule K-1 if you benefit from someone else’s trust (i.e. you are a beneficiary) or you have your own business. Any Schedule K-1 you receive becomes a part of your personal income tax return and without properly understanding them, you can cause yourself problems. One mistake I sometimes see is the filing of a personal tax return by a beneficiary before a Schedule K-1 is received by that beneficiary. That often requires going back and amending your return, ugh!
3. If you or a loved one have lots of medical expenses, then see a tax professional. Not only are those costs potentially deductible, but they also can dictate how best to prioritize which assets to withdraw from. (Hint – it’s often better to withdraw from a tax deferred account like an IRA in years when you have large medical expenses for the write-off). A good tax professional will walk you through the options and can save you a lot of taxes.

Sure, tax professionals can be expensive but so can mistakes made without proper guidance. The Trustee I mentioned at the beginning of this piece is about to find that out. I don’t want that to happen to you. In general, a good tax professional is more than worth the price.

Fun Fact: My wife has quite a backyard garden that includes bird feeders and inevitably, squirrels. It’s fun to see how resourceful a squirrel can be when they like what’s in the well-protected bird feeder. Not only are they resourceful, but they are also tricky. They sometimes engage in “deceptive caching” wherein they dig a hole and vigorously cover it up again without depositing a nut. Scientists think it is to throw off potential food thieves

Understanding Risk and How to Use It to Your Advantage

The term “risk” is as important as it is hard to define. The dictionary defines it as “a situation involving exposure to danger.” Of course, the word danger itself is ambiguous. Danger could mean all sorts of things from physical to mental to financial hardship. That’s why the term “risk” is so important – it applies to all elements of your life. In its broadest sense, risk is simply the probability of a negative outcome.

Risk is essential to quality of life because it drives innovation, fosters growth and opens doors to new opportunities. Identifying risk is different from being fearful of something. If you just gauge your fear in decision making, you’ll get nowhere. But risk can help you make better decisions if you approach it objectively. When you make an important decision, including a financial decision, consider this approach to risk:

1. Identify all potential risks. Lawyers are trained to do this quite easily because we essentially have been trained to look for what can go wrong. You need to sit down and make a bullet list of all the things that can go wrong in your important decision.
2. Assess the risks. As to each risk you’ve identified, attach a likelihood (probability) of that risk occurring. In addition, determine the potential severity of its consequences.
3. Develop a risk management strategy. For each risk, based on its probability and severity, determine whether your course of action should be as follows: 1. Complete avoidance. 2. Mitigation. Perhaps a slight alteration in your plan can substantially mitigate the risk. 3. Transferring the risk to a third party. That’s what insurance is all about. If you buy a home on a lake to enjoy lake activities you have a risk of injury to people you invite over. Homeowners insurance transfers that risk to a third party. 4. Accepting the risk. Once you’ve identified the risk and its probability you can decide whether it’s worth simply taking on the risk to enjoy the potential benefits of your decision.
4. Often missed in identifying the risks of a particular endeavor is the risk of not engaging in it at all. In my financial planning business, people sometimes think that if they hold their money in cash instead of in equities they eliminate a huge risk of volatility. While that may be true over the short term, holding all or most of your savings in cash creates a huge inflation risk over the long term because inflation slowly but surely eats away at the buying power of your money. Historically, nothing fights inflation as well as owning stock in good companies.

Risk is inevitable in life. I can think of very few things that I have accomplished in my life that didn’t involve overcoming one or more risks. In fact, I abide by the adage that the biggest risk in life is not taking any risk.

I’ve tried to teach my sons that success in life is directly related to the amount of risk you’re willing to take. However, I’ve also taught them to break down the risk elements of a decision objectively as I set forth above. Hopefully, you will take the time to do the same when making an important decision in your life. Not only will it help you to identify risks, but it will give you much more confidence in your decision-making.

The First Tee Beckons

I’ve counseled thousands of clients on issues concerning estate planning and elder law. Counseling in those areas is a big part of what I do. This weekend, the tables will turn. When you read this on Friday it’s likely I will be sitting at the kitchen table in the home of my 90-year-old father in Phoenix, Arizona. Also at the table will be my father who is still fairly mentally capable, my brother who is a physician in Florida, my stepmother who while substantially younger than my father, suffers from short-term memory problems, and last but not least, my half-brother who is 25 years younger than me, is a gregarious bartender in Phoenix, and has surely had his share of personal life challenges.

This meeting was triggered by a fall my father recently had in his backyard. He could not get up and his calls for help went unanswered. Eventually, he dragged himself into the house. That event scared him a great deal, which prompted his call to me asking that I come out to discuss his final wishes, review his estate plan and go to the bank to be put on his safe-deposit box. That might sound straightforward but looks (or sounds) can be deceiving. Just like it is for my clients, there is a lifetime of events and relationships that will swirl around this weekend in Phoenix.

I think that I am very good at identifying and addressing issues that arise for families confronting end of life issues. Lord knows I’ve had plenty of practice. But there is a great saying that golfers committed to the game know: “It’s a long walk from the practice tee to the first tee.” Golf swings seem effortless when they have no personal consequences. That’s the practice tee. But once you stand on the first tee and play for something, then every swing counts and things change substantially.

Counseling clients is kind of like the practice tee for me – I stay logical and draw on my experiences and knowledge of the rules. Sitting down in a personal family meeting is like the first tee – emotions, history and family dynamics take up residence in my lawyer’s mind—and try as I might, they’re not going anywhere.

Nonetheless, I will make every effort to stay committed and offer value to enhance my father’s quality of life moving forward. Here are my “pre-meeting” goals. I share them so that you can see if they might be relevant now or in the future in your own situation.

1. Make sure important documents are accessible. This can get complicated when you live out of state. We will need to go through my dad’s house so I know where he keeps his important documents, and we will likely need to go to the bank so that I can get my name on his safe-deposit box. He thinks he can get my name on the box on his own, but I know that I will most likely need to sign the signature card to have access. I also need to know where his “second” and maybe “third” hiding places are. There’s never just one.
2. Discuss any changes that need to be made to his plan. Despite being 90, my dad is recently remarried (back to his second of three wives – ah…family dynamics). His current estate plan was created before this remarriage and I suspect and hope that he will want to change his plan to provide more for his current wife. Two big issues arise there: First, telling the family what he’d like to do is one thing but having it put into a legally valid written estate plan is quite another. We will try to find the time to go to his attorney to get that process started. Second, my dad needs to revisit his decision-makers. I doubt seriously that my father’s wife will be able to manage assets on her own after his death. We need to have a long hard discussion about the best person to take on that role. My half-brother (who happens to be her son) is the obvious choice since he lives nearby and is a 40-year-old adult. However, he has not always shown himself to be responsible during times of challenge. This topic will not be easy to resolve.
3. Discuss living arrangements. My father has lived a long time for many reasons, including that he finds age to be just a number. He recently bought a convertible Mustang on a whim and lives in a 3,000 plus square foot home on the outskirts of Phoenix. Several factors come into play here. First, despite appearances my father is not a wealthy individual and maintaining all of his “stuff”, even while healthy, is going to continue to be an increasing financial challenge. Secondly, at any moment his whole situation could change, and his living arrangement may be unsustainable. I have arranged for tours of two high quality multistage senior living communities. They have everything from individual apartments to full nursing care as the situation changes. While my father has told me he’s interested in seeing the places, I hear through the grapevine that he really has no interest in moving. This is yet another topic that will get interesting, I’m sure.
4. The unexpected. As this section suggests, I have no idea what to expect, but I’ve known my dad all my life and I have no doubt that he will raise some topic, issue, and/or concern that neither I nor anyone else in the room will have anticipated. All I can say is it will be interesting, because…it always is with my dad.

It’s easy for me to sit in my office at my desk with no emotional attachment and address all sorts of issues like the ones above with my clients. I believe that I provide clarity and objective analysis that helps my clients wade through these difficult situations. The feedback I get seems to suggest that I’m right. However, this weekend I will be far from my office desk and sport coat. The person at the table won’t view me as his attorney, but instead as his son. I will make every effort to stay neutral, compassionate and understanding. Also seated silently at the table will be memories of our family history and relationships, both the good and the bad.

I hope that my topic today lets you know you’re not alone when you deal with these unique family issues. Further, I hope that if I survive this trip (LOL) I will be a better estate planning and elder law advisor for you going forward. I’m sure I will learn a lot during this trip.

I’m about to step onto the first tee. I hope I play well.

Fun fact: Phoenix is known as the “Valley of the Sun” and is consistently one of the hottest cities in the US. The average high in the month of July is 103°. My dad would tell you that it’s a dry heat. I would tell you that my body doesn’t recognize the difference between a dry and wet heat when I open a car that’s been sitting in the sun.