Gallery:Step 7|Step 7: Silent Partners

You Can't Take It with You—So Why Not Make Life Easier for Your Heirs?

Gallery:Step 7|Step 7: Silent Partners

Among the many arguments in favor of indexing, we recently encountered one that we have not yet put into writing, although IFA’s advisors discuss it frequently with their clients and prospects. To put it simply, if someone is following a complex strategy of stock picking, time picking or manager picking, he probably should not harbor expectations that his heirs have either the ability or willingness to continue in his path.

For most people who accomplish it, building up a large amount of financial wealth is something that takes decades. And unfortunately, it is something that can be easily undone in a much shorter period of time. A reasonable person would want to minimize the probability of this occurrence, and a simple way to accomplish this is to implement a purely passive portfolio that is rebalanced when needed.

An additional and important advantage for your heirs is the high tax-efficiency of index funds. This topic is extensively explored in this section of Step 7: Silent Partners of IFA’s 12-Step Recovery Program for Active Investors. The step-up in cost basis that occurs upon death is an especially valuable benefit for an indexed portfolio because the majority of its gains are unrealized.

Although taxes are not as much of an issue in the inheritance of a traditional IRA account, the annual required minimum distributions are far easier to accomplish with a passive portfolio. Permit us to explain. With a portfolio of individual securities or actively managed funds, the heirs are essentially put into the untenable position of becoming stock pickers or manager pickers. After all, deciding what to sell is as much of a “picking” decision as what to buy. Although in some cases a transfer of securities may make more sense than selling, it still requires a picking decision. With a portfolio of index funds that is targeted towards specific asset class percentages, the needed trades (or recommended fund transfers) are readily determined.

To summarize, life is already complicated enough, so why add on to the complexity when it is completely unnecessary and potentially hazardous to the future well-being of your heirs? If you have questions about the investment aspects of estate planning and would like to speak with a wealth advisor who will act as a fiduciary for both you and your heirs, please call us at 888-643-3133.