Finally an audience with my brother on Finances

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jerome99
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Finally an audience with my brother on Finances

Post by jerome99 » Thu Jul 10, 2014 8:34 am

My brother has been extremely successful business wise. He is in his mid 30s and has no debt, net worth around ~$5m.

He has never shown any interests in index funds or boglehead type philosphies...until now. He has done a relatively good job with his money through a advisor who charges him $25,000 a year as a flat fee. He invests in all Vanguard funds, but most of which are not indexed.

I can provide good guidance for him concerning 529s and index funds etc.

The question I am having difficulty answering is concerning monies outside of retirement accounts. He has his international accounts and some small caps there now.

However, as far as Tax Exempt bonds, IBonds, Treasuries, etc I am not real sure what sort of advice is best for a high income earner (high tax bracket) who has $18,000/ month of cash to put somewhere.

Thanks!

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TheTimeLord
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Re: Finally an audience with my brother on Finances

Post by TheTimeLord » Thu Jul 10, 2014 8:37 am

Personally I think your brother should be meeting with a tax attorney to discuss how to structure his finances at his level of income. He can afford it and he is getting advice without a disclaimer attached.
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jerome99
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Re: Finally an audience with my brother on Finances

Post by jerome99 » Thu Jul 10, 2014 8:41 am

Is your recommendation based on his net worth of his annual income?

Only reason I ask, is his net worth is made up of the below, which I am not sure how much tax advice would be needed.

Residence- $2,000,000
401K- $900,000
Cash- $100,000
Taxable Account- $2,000,000

cmr86
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Re: Finally an audience with my brother on Finances

Post by cmr86 » Thu Jul 10, 2014 8:54 am

jerome99 wrote:Is your recommendation based on his net worth of his annual income?

Only reason I ask, is his net worth is made up of the below, which I am not sure how much tax advice would be needed.

Residence- $2,000,000
401K- $900,000
Cash- $100,000
Taxable Account- $2,000,000
I think his recommendation is based on the fact that a) you're related and b) you're probably not a tax attorney.

I'd be wary of giving advice outside the three-fund portfolio and pointing them in the direction for self-education simply because any negative impact that their portfolio sustains might be blamed on you, and that can sour a relationship quickly.

jerome99
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Re: Finally an audience with my brother on Finances

Post by jerome99 » Thu Jul 10, 2014 8:58 am

I completely understand that comment and appreciate it.

I will recommend he meet with a tax attorney/cpa. However, I would like to provide him some simple guidance related to what available options high income earner's on this board do concerning I Bonds, CA Tax Exempt bonds, Treasuries, etc so he has some understanding prior to a meeting.

cmr86
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Re: Finally an audience with my brother on Finances

Post by cmr86 » Thu Jul 10, 2014 9:03 am

jerome99 wrote:I completely understand that comment and appreciate it.

I will recommend he meet with a tax attorney/cpa. However, I would like to provide him some simple guidance related to what available options high income earner's on this board do concerning I Bonds, CA Tax Exempt bonds, Treasuries, etc so he has some understanding prior to a meeting.
In that case, I would recommend to him that he do his own research about said investment vehicles and make sure that I asked the tax attorney/cpa what the consequences were prior barreling money into said vehicles.

livesoft
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Re: Finally an audience with my brother on Finances

Post by livesoft » Thu Jul 10, 2014 9:19 am

jerome99 wrote:The question I am having difficulty answering is concerning monies outside of retirement accounts. He has his international accounts and some small caps there now.
We have mostly international funds and small-cap funds in our taxable accounts. If by "international accounts" you really mean international funds, then it seems that your brother is getting the right thing done. If these are index funds, then they are typically very tax efficient.
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jerome99
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Re: Finally an audience with my brother on Finances

Post by jerome99 » Thu Jul 10, 2014 9:19 am

He asked my opinion based on my and other's experience on this forum. Responding with a "go do your own research" doesn't reflect well on the community in my opinon.

Grt2bOutdoors
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Re: Finally an audience with my brother on Finances

Post by Grt2bOutdoors » Thu Jul 10, 2014 10:19 am

jerome99 wrote:Is your recommendation based on his net worth of his annual income?

Only reason I ask, is his net worth is made up of the below, which I am not sure how much tax advice would be needed.

Residence- $2,000,000
401K- $900,000
Cash- $100,000
Taxable Account- $2,000,000
What are his goals? What asset allocation is he comfortable with? What is his tax bracket - Fed/State?
You're not filling in the blanks in the way - the link at my signature - Asking Portfolio Questions requires.
So my question to you is: what part of "do your own research" don't you think reflects well on the community at large, when you fail to post the basic pre-requisite for a thoughtful response from the forum members?

You have a residence of $2MM - mortgaged, no mortgage?
You have a high income individual - marginal tax brackets, please.
Cash - in a coffee can, a bank, mutual fund, his wallet? Rate being earned today.
Taxable account - funds or investment by amount or percentages with symbols and er's listed.
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HomerJ
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Re: Finally an audience with my brother on Finances

Post by HomerJ » Thu Jul 10, 2014 10:32 am

jerome99 wrote:He asked my opinion based on my and other's experience on this forum. Responding with a "go do your own research" doesn't reflect well on the community in my opinon.
Give him some books to read... The Four Pillars of Investing is an excellent one. He needs to understand for himself (not because you told him so) why low-cost indexing works.

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Re: Finally an audience with my brother on Finances

Post by pkcrafter » Thu Jul 10, 2014 10:46 am

jerome99 wrote:He asked my opinion based on my and other's experience on this forum. Responding with a "go do your own research" doesn't reflect well on the community in my opinon.
Actually, it's a reasonable response. Investors have a responsibility to know some basics about how to manage their money. Someone might ask why you are here asking rather than your brother. Having said that, I understand you trying to help your brother get on track. Looking at taxable investments here is a good idea because when asking professionals you might run into someone who will recommend the wrong thing due to his own self interests. You also might look at The White Coat Investor blog. It is primarily for doctors, but those with a lot of income and assets are subject to the same types of problems. Here's a link to some tax information:

http://whitecoatinvestor.com/retirement ... account-2/

Paul
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market timer
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Re: Finally an audience with my brother on Finances

Post by market timer » Thu Jul 10, 2014 10:48 am

jerome99 wrote:He asked my opinion based on my and other's experience on this forum. Responding with a "go do your own research" doesn't reflect well on the community in my opinon.
Why don't you suggest he register here and set up his own thread for advice?

jerome99
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Re: Finally an audience with my brother on Finances

Post by jerome99 » Thu Jul 10, 2014 10:52 am

I thought my initial post answered almost all, if not all the questions asked. He has no debt. The cash he has is an online savings and cash in a safety deposit box. All of this retirement and taxable investments will go into index funds and both him and I are capable in doing that change. He is interested in what was stated- if there are areas which are better for him to put money based on his income level than just continuing to plow money into taxable mutual funds. From my research this could include tax exempt bonds, I Bonds, Treasuries, EE Bonds etc. Federal tax rate is 39.6 and no state income tax.

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TheTimeLord
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Re: Finally an audience with my brother on Finances

Post by TheTimeLord » Thu Jul 10, 2014 10:55 am

jerome99 wrote:I thought my initial post answered almost all, if not all the questions asked. He has no debt. The cash he has is an online savings and cash in a safety deposit box. All of this retirement and taxable investments will go into index funds and both him and I are capable in doing that change. He is interested in what was stated- if there are areas which are better for him to put money based on his income level than just continuing to plow money into taxable mutual funds. From my research this could include tax exempt bonds, I Bonds, Treasuries, EE Bonds etc. Federal tax rate is 39.6 and no state income tax.
Is there a reason he would not want to consult a tax attorney about structuring his assets?
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jerome99
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Re: Finally an audience with my brother on Finances

Post by jerome99 » Thu Jul 10, 2014 10:58 am

his initial comment to me was he wasn't interested in getting investment advice from an attorney. Not sure if this is due to a previous bad experience or not.

livesoft
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Re: Finally an audience with my brother on Finances

Post by livesoft » Thu Jul 10, 2014 11:02 am

@Starbuxinvestor, can you give us a hint why a tax attorney would be helpful? I can see a corporate tax person helping out on the business side, but personal taxes are reasonably straightforward and uncomplicated.
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lws6772
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Re: Finally an audience with my brother on Finances

Post by lws6772 » Thu Jul 10, 2014 11:11 am

cmr86 wrote:
jerome99 wrote:I completely understand that comment and appreciate it.

I will recommend he meet with a tax attorney/cpa. However, I would like to provide him some simple guidance related to what available options high income earner's on this board do concerning I Bonds, CA Tax Exempt bonds, Treasuries, etc so he has some understanding prior to a meeting.
In that case, I would recommend to him that he do his own research about said investment vehicles and make sure that I asked the tax attorney/cpa what the consequences were prior barreling money into said vehicles.
+1

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TheTimeLord
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Re: Finally an audience with my brother on Finances

Post by TheTimeLord » Thu Jul 10, 2014 11:20 am

livesoft wrote:@Starbuxinvestor, can you give us a hint why a tax attorney would be helpful? I can see a corporate tax person helping out on the business side, but personal taxes are reasonably straightforward and uncomplicated.
Maybe I am assuming there is a business involve and the tax attorney would be addressing both business and personal since they are most likely very closely related as well as addressing the formations of any vehicles like trusts. Not expecting any investment advice just advice on structures used for tax purposes which might effect investments that would populate them.
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HornedToad
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Re: Finally an audience with my brother on Finances

Post by HornedToad » Thu Jul 10, 2014 11:25 am

At his asset/income level, $25k/year fixed fee for advisor who puts him in Vanguard funds isn't terrible if he doesn't have interest/time in managing it himself.

I think the key question you are missing though is what are his goals and I'm assuming reasonable expenses? He's young, he has it made, does he want to try to join the jet set or comfortable with life. If he's comfortable and if it's just to assure himself of income in the future, then you could just do 50/50 stocks/bonds and be relatively conservative since the focus should be on asset preservation and growth instead of just asset growth.

Each year do I-Bonds. If he hasn't yet, supercharge (5 years worth of contributions) 529's if he has kids. Taxable foreign stocks should give him the foreign tax credit to deduct. Wealthfront also has some good blogs on this.

I wouldn't consult a tax attorney for taxes, I would consider a good CPA or CPA firm at least for one year to organize everything if it's currently confusing a mess.

livesoft
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Re: Finally an audience with my brother on Finances

Post by livesoft » Thu Jul 10, 2014 11:25 am

The money available for investing is not atypical of many folks on the forum who seem to use a so-called 3-fund portfolio or a slice-and-dice small-cap and value-tilted portfolio. Any of the standard recommended tax-efficent investment portfolios would seem to be called for here. Nothing fancy. Just the same ol' ol' same portfolio that is often recommended. The only decisions are what fraction of US, int'l, fixed income to have along with whether to use tax-exempt muni bond fund in taxable and whether to oveweight small-caps.
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Grt2bOutdoors
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Re: Finally an audience with my brother on Finances

Post by Grt2bOutdoors » Thu Jul 10, 2014 11:28 am

EE bonds and I bonds have a final maturity date of 30 years. If your brother redeems prior to 20 years on the EE bond - not for him. If your brother anticipates having a 39.6% or 33% tax bracket at the time of redemption - not for him, as currently tax-equivalent yields in the Intermediate Tax Exempt space is higher than the EE or I bonds today.

Cash in a safe deposit bank? :oops: That is "dead" money - it's doing absolutely zip for him.

All the other responses by other posters are all valid - the best investor is an "informed" investor. It's usually when you fail to investigate or research that problems start to crop up - just ask Madoff's investors how that turned out for them.
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Re: Finally an audience with my brother on Finances

Post by Grt2bOutdoors » Thu Jul 10, 2014 11:31 am

HornedToad wrote:At his asset/income level, $25k/year fixed fee for advisor who puts him in Vanguard funds isn't terrible if he doesn't have interest/time in managing it himself.

I think the key question you are missing though is what are his goals and I'm assuming reasonable expenses? He's young, he has it made, does he want to try to join the jet set or comfortable with life. If he's comfortable and if it's just to assure himself of income in the future, then you could just do 50/50 stocks/bonds and be relatively conservative since the focus should be on asset preservation and growth instead of just asset growth.

Each year do I-Bonds. If he hasn't yet, supercharge (5 years worth of contributions) 529's if he has kids. Taxable foreign stocks should give him the foreign tax credit to deduct. Wealthfront also has some good blogs on this.

I wouldn't consult a tax attorney for taxes, I would consider a good CPA or CPA firm at least for one year to organize everything if it's currently confusing a mess.
If OP's brother continues to be in super high tax bracket - holding I bonds is not the most tax-advantaged way to go. Yes - you defer income but if tax rate is 39.6% at time of redemption, you fork over nearly 40% of the return. Intermediate Tax-Exempt yield more on a tax-equivalent basis.
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Re: Finally an audience with my brother on Finances

Post by HornedToad » Thu Jul 10, 2014 11:42 am

Grt2bOutdoors wrote:
HornedToad wrote:At his asset/income level, $25k/year fixed fee for advisor who puts him in Vanguard funds isn't terrible if he doesn't have interest/time in managing it himself.

I think the key question you are missing though is what are his goals and I'm assuming reasonable expenses? He's young, he has it made, does he want to try to join the jet set or comfortable with life. If he's comfortable and if it's just to assure himself of income in the future, then you could just do 50/50 stocks/bonds and be relatively conservative since the focus should be on asset preservation and growth instead of just asset growth.

Each year do I-Bonds. If he hasn't yet, supercharge (5 years worth of contributions) 529's if he has kids. Taxable foreign stocks should give him the foreign tax credit to deduct. Wealthfront also has some good blogs on this.

I wouldn't consult a tax attorney for taxes, I would consider a good CPA or CPA firm at least for one year to organize everything if it's currently confusing a mess.
If OP's brother continues to be in super high tax bracket - holding I bonds is not the most tax-advantaged way to go. Yes - you defer income but if tax rate is 39.6% at time of redemption, you fork over nearly 40% of the return. Intermediate Tax-Exempt yield more on a tax-equivalent basis.
You are right, I was making the probably bad assumption that eventually he'll early retire of early semi-retire and tax bracket would go down. But tax exempt bonds is probably safer unless he has a defined plan.

jerome99
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Re: Finally an audience with my brother on Finances

Post by jerome99 » Thu Jul 10, 2014 12:43 pm

No business is involved. He is a consultant with income between 480k and 600K each year. He is single.
Expenses are low partially cause he has no mortage or any other payments or toys.
His goals are to grow his net worth responsibly for the next 20 years and then move to Florida and join his non profit helping at risk youth full time.

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Re: Finally an audience with my brother on Finances

Post by White Coat Investor » Thu Jul 10, 2014 12:58 pm

I'm not sure you're quite qualified to be his advisor yet. You might start by suggesting that he can get very high quality asset management for far less than $25K a year. He could probably save an extra month's worth of contributions ($18K) each year and still get excellent advice and asset management.

I'm afraid we simply do not know enough about him yet to give you any kind of reasonable advice for his taxable account. But I would treat all money invested toward the same goal as one big account, no matter how many types of accounts it is spread across.

Broadly diversified international equity index funds and municipal bond funds tend to do well in taxable accounts as a general rule.

It's also wise to make sure he is actually using all available retirement accounts. That includes HSAs, backdoor Roth IRA, an individual 401(k) and perhaps even an individual defined benefit/cash balance plan, although I'd hope that for $25K a year, someone else has already made sure that is all happening.

Seems sad to pay $25K a year and then have to go to an internet board for free advice because you don't trust it.
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Re: Finally an audience with my brother on Finances

Post by letsgobobby » Thu Jul 10, 2014 1:24 pm

Your brother has a net worth of $5 million. He doesn't need your advice or help and frankly I don't see that being a good idea on any level.

Give him 4 or 5 Boglehead books and tell him they changed your life, and leave the rest to him.

Bogle - Common Sense on Mutual Funds
Ferri - All about Asset Allocation
Bernstein - 4 pillars
Swedroe - Winning Investment Strategy
and maybe a couple of classics by Ellis, Malkiel, etc.

livesoft
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Re: Finally an audience with my brother on Finances

Post by livesoft » Thu Jul 10, 2014 1:29 pm

As a consultant who is paid a lot of money, he probably thinks that consultants such as his advisor should be paid a lot of money. He could probably re-negotiate the payment to the advisor to a much lower value simply by showing other places that cost much less for the same service.
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TheTimeLord
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Re: Finally an audience with my brother on Finances

Post by TheTimeLord » Thu Jul 10, 2014 1:41 pm

jerome99 wrote:No business is involved. He is a consultant with income between 480k and 600K each year. He is single.
Expenses are low partially cause he has no mortage or any other payments or toys.
His goals are to grow his net worth responsibly for the next 20 years and then move to Florida and join his non profit helping at risk youth full time.
So he isn't an S corp or Sole proprietorship? Does he have a foundation already?
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jerome99
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Re: Finally an audience with my brother on Finances

Post by jerome99 » Thu Jul 10, 2014 2:02 pm

nope, he is an employee who receives a w-2.

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TheTimeLord
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Re: Finally an audience with my brother on Finances

Post by TheTimeLord » Thu Jul 10, 2014 2:12 pm

jerome99 wrote:nope, he is an employee who receives a w-2.
And he already has his non-profit set-up and has consulted someone on the most tax efficient ways of making contributions to it?
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

jerome99
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Re: Finally an audience with my brother on Finances

Post by jerome99 » Thu Jul 10, 2014 2:14 pm

It was set up by someone else and he sits on the board. Contributions so far have been in the area of his professional services pro bono.

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Re: Finally an audience with my brother on Finances

Post by Calm Man » Thu Jul 10, 2014 3:09 pm

OP, it is nice of you to offer help. Frankly and please don't misunderstand me, he doesn't really need advice from you on specific investments. I think he can get his needed help free. I had a detailed conversation with a Vanguard Senior CFP yesterday. Your brother with 5MM plus is flagship material. He can get the consultation at no charge and they will co a great job for him. You will have done a great job by referring him there. Also, the books recommended by others are quite worthwhile. Good luck.

ralph124cf
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Re: Finally an audience with my brother on Finances

Post by ralph124cf » Thu Jul 10, 2014 6:28 pm

If he is a consultant, and gets a W-2, then does he work for a regular C Corp? Most consultants do not get W-2s, unless they work for a consulting company, or own the consulting company. Is there a defined benefit plan at work?

Ralph

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Re: Finally an audience with my brother on Finances

Post by rsterbal » Sat Jul 12, 2014 9:02 am

How does he get his taxes done every year? Isn't that when the tax efficiency question rears its ugly head? Some CPAs are also attorneys. Some accountants have a better understanding of the advice needed for a client than either an attorney or CPA.

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