Red Flags to Beware of From Your Advisors

Tax time is drawing near. Never is the desperation more apparent than this time of year when panic sets in as April 15 (or 17th in 2007) fast approaches.

I estimate 4 of every 5 phone calls and emails are from those filling out tax returns and learning of the exact amount of taxes they have due. Many panic from having had no guidance prior to the sale of their asset in the previous tax year, but just as many are irate due to having had bad counsel.

In almost all cases, the amount they have to pay is much greater than they anticipated or were told. Most don't have the excess funds readily available and are desperately trying to find a way to defer their tax burden now due.

So, I've compiled a list of some of the most frequent scenarios I hear and where the initial problem started, often due to bad or inaccurate advice.

Consider these red flags if you find yourself selling an asset, and at least seek a second opinion before proceeding if you are told something similar.

1. From financial advisors: "Just pay your taxes and give me your proceeds to invest. I'll get you double digit returns and you'll be ahead in no time".

2. From Attorneys: "Let me evaluate the situation. That'll be 10K for my research and recommendation." No doubt the solution will be some sort of expensive trust or other fee for service plan and additional fees will be required to implement it.

3. From CPAs or other Tax Professionals:

• There is no solution but to pay your taxes
• You'll only have to pay 5% capital gains tax or at the most 15% so why consider anything else? The tax rates will never be lower (not usually true and due to lack of knowledge on how to calculate capital gains)
• I don't have time to research that plan. I'm just too busy.

4. From anyone you go to for advice:

• Either "I know all about that and it's not not a good idea" (without a solid reason why or without being able to explain the strategy in question), or "I've never heard of it so it must be a scam of come sort" (again without being able to explain why)
• "My Uncle Milt had a bad experience with the IRS. It's better to just take the hit and not have to deal with them down the road" (Problem usually totally unrelated and caused by other source of bad advice)
• "If you just take the lump sum up front you'll be in control of the money and you can do whatever you want with it. You can take that trip or invest it in the stock market"

5. "Whatever idea someone else presented to you is not right. This (whatever they are selling) is the only way to go. There's no use even discussing it further - you'll be sorry if you don't do what I'm offering you. There is no need for all parties to get together and talk. The other party is full of it"

Now, here are some of the things you want to hear from an advisor:

1. I haven't heard of this plan, but I'd be interested to know more. If it makes sense and is better for your situation I'm all for it. It may even be something I can use to assist other clients in the same dilemma.
2. I believe my plan is better for you. Let's set up a conference call with all parties and discuss the advantages of each so you can hear both sides and make an informed decision.
3. I'm not familiar with this. Do you mind if I contact the other party and find out more about it so we can make an informed decision?
4. Here are a list of questions I have concerning what you have shown me from the other party. If they can be answered to my satisfaction I will feel comfortable recommending the plan.

It is hard to know who to go to for advice and who to trust. I can usually tell if someone has my best interest at heart by how they answer my questions and how they use facts to support their proposal versus just blowing hot air or invoking fear for no reason.

If a professional has a plan they feel is in the best interest of their client, they will have no problem explaining and comparing the benefits of an alternate proposal. If all parties can hear both sides simultaneously, the party will the superior plan will become apparent.

Everyone can always stand to learn something. Anyone who thinks they know it all is usually the most ignorant. Just my two cents.

Don't let yourself be scrambling before next year's tax return and wishing you had done more before the sale to lessen your tax bill. It will be too late.

Paula Straub

760-917-0858

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