Avoid “Emergency Room” Financial Planning

“An ounce of prevention is worth a pound of cure.” Most of us are familiar with this tidbit of immense wisdom. That doesn’t necessarily mean we follow it when it comes to either our physical or our financial health.

According to a Modern Healthcare article, 60% of visits to the emergency room in 2017 were preventable. Had patients taken steps to exercise, modify their diets, or seek a doctor’s opinion for an annoying ache that “probably was nothing,” they could have avoided a health crisis that sent them rushing to urgent care.

This same scenario plays out with our finances. Here is just one example.

Steve called our office in a panic. “My accountant just told me that I am going to lose 20% of the sale of my real estate to capital gains taxes. He said an investment advisor may be able to give me some options as to how to avoid the taxes. Is he right?”

“Yes, he is absolutely right.” I explained some of the strategies he could use to offset the gains: selling other assets that have losses and using those to offset the gain, an installment sale, or doing a 1031 tax-deferred exchange for another property, an interest in private REIT or a DST.

I also suggested that, if we analyzed his financial situation and his real estate property, we might find options other than selling. Strategies like refinancing, pulling cash out of a paid-off property, leasing the property, or hiring professional management. These sometimes can net more cash flow than you can get on a portfolio of stocks and bonds.

“So you have a lot of potential options, but I will need to know a lot more about your situation,” I told him. “When does your sale close?”

“Tomorrow. Can I get an appointment with you this afternoon?”

Tomorrow was December 31.

In hindsight, I should have asked about his closing date far sooner and saved us both time. He was financially DOA. There was nothing I could do at this late date to save him.

Over the years I’ve seen a number of similar “emergency” scenarios that with adequate lead time to plan could be completely avoided. These fall into two categories: those with known deadlines and those that we know will happen but we don’t know when.

For example, the date of retirement usually is a known deadline. Waiting until the month before that date is usually far too late to do the necessary planning to optimize all the decisions that need to be made, such as whether to take a pension in monthly payments or a lump sum, when to file for Social Security benefits, and how much to withdraw from your investment portfolio. It may take weeks to get an appointment with a financial planner and several months to do the thorough analysis necessary to make an informed and personalized recommendation.

Other common financial events with hard deadlines can be marriage, divorce settlements, paying off a mortgage, property closing dates, college tuition payments, buying or selling a business, tax payments, and terminal illness.

Financial events without foreseeable deadlines include a sudden death or disability, lawsuits, being fired from a job, and natural disasters. All these require planning. Preventive measures can be drafting wills, trusts, durable powers of attorney, incorporating a business, proper insurance, asset protection planning, and premarital agreements.

Most financial crises that I see are totally preventable. Yet in the midst of a crisis, there’s usually nothing that can be done. The key is to obtain financial advice well in advance. Advisors have many tools, but financial emergency surgery is not among them.

Related: Market Crashes To Be Expected, Not Feared