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Posts Tagged ‘Will’

All your ex-es may live in Texas as the country song says but do you really want your hard-earned money to follow?  And you may be a generous sort but would you rather have your wealth pass on to your family or Uncle Sam?  More examples of smart people doing dumb things when it comes to estate and legacy planning.

What do you think of when someone says “estate plan?”

If you think that it’s only for “old” people or those with lots of money, then think again.  If you have someone or something you care about, then you need a plan regardless of age or the amount of money involved.

Honey, I forgot the kids …

Think of Ana Nicole Smith and her infant daughter.  Think about the King of Pop, Michael Jackson. Take away the money and there is still the drama about custody and guardianship for the children that could have been avoided with a proper plan.  And this sort of thing happens daily with families of much lesser means but the same need for care of a loved one.

There is an old saying:  Those who fail to plan, plan to fail.

What Estate Planning Really Means to You and Your Family

The easiest definition of estate planning is controlling how and who gets what you have when you pass away or become disabled.

As estate attorneys in the Esperti Petersen Model define it:

Estate planning provides the ability to:

  • Give what I have
  • To whom I want
  • When I want
  • The way I want.

Legacy planning takes it a step further and provides for the transfer of wisdom, memories and experiences along with the material wealth.

Most estate attorneys and financial advisers start from the point of view about the money and taxes.  Most clients are categorized into three groups:

  1. Individuals
  2. Married with assets above the federal estate tax exemption (now through December 31, 2010 at $3.5M)
  3. Married with assets below the federal estate tax exemption.

But a more client-focused and value-oriented planning approach to estate and financial planning begins with conversations about what is important to the client.  Only then will a client understand the context of a plan as well as why there may be need for changes to keep it current and aligned with the goals expressed by the client.

Too often, I hear that “I’m all set” because “I took care of it” or drafted a will when their college senior was about 2 years old.

In an increasingly complex world with changing state and federal tax codes, fluctuating asset values and a litigious culture, it is even more important to create a plan and routinely review it.  (If you were traveling on a highway cross-country, you wouldn’t simply turn on cruise control and take a nap, would you? I hope not. Even if you have good insurance, are you sure who’s going to get the proceeds?)

17 Major Mistakes

There are more than 17 significant common  mistakes that people make regarding estate planning.  These include failing to coordinate the financial plan, improperly structuring life insurance policies, choosing the wrong executor, improperly gifting assets, failure to properly create and fund trusts and the list goes on.

We could talk about Qualified Personal Residence Trusts, Installment Sales to Defective Grantor Trusts, Family Limited Partnerships and Credit Shelter Trusts.

But that’s all legalese.  It’s sort of like asking someone for the time and they tell you how to build a watch.  That doesn’t matter to you as much as knowing the time.  There are lots of tools in the tool kit of a qualified estate and financial planner.  You probably don’t care about which tool to use as long as the right tool recommended by a professional does the job.

What happens when you deal with real people? (1)

Jack and Jill and a Boy Named Dale

Jack recently turned 32.  He and Jill have been married for nearly three years. Dale was born nearly 13 months ago.  When not at work as UPS delivery driver, he enjoyed getting his heart pumping by cycling with a local riding club.  During a weekend ride as the group of cyclists were descending a hill quickly, a car being driven by a dentist who was late for a client appointment overtook the riders thinking that he had enough time and distance to safely clear the group.  He abruptly turned right onto the street where his office is located.

Unfortunately, the other car coming from the opposite direction to the stop sign on the street the dentist was driving onto was being driven by a young driver who was distracted by her incoming text message which lead her to cross over her lane.  When the dentist’s car hit her at the corner, it caused the cyclists to swerve in confusion.

In the resulting melee, Jack went down hard breaking his collarbone and vertebrae in his lower back leaving him without the ability to walk more than a short distance and unable to lift more than a couple of pounds.

Richard and Anne and the Day that Changed Everything

Richard and Anne lived in an old colonial overlooking the river in a quaint New England town.  Richard had a successful position with Cantor Fitzgerald, one of the world’s premier bond trading shops located in the World Trade Center of New York City.  While Anne managed the home front and their two rambunctious boys age 7 and 4, Richard would commute by plane to meet clients or for meetings at the corporate offices in New York.

By all accounts, they had an ideal life.  They had family and close ties to the community.  Their weekends were filled with home improvement projects on their home or one of the three investment properties they rented out.

Their world was turned upside down a little after 9 AM on September 11, 2001 when Richard’s plane was flown into one of the World Trade Center towers.

Paul and His Long Lost Love

Paul had been married to Bertie for more than 5 years when Bertie asked for a divorce in 1967 fed up by Paul’s late night carousing. After a couple of years of the single life, Paul found Carol, a long lost love from high school days.

Flirtations became something more and Paul and Carol got married and lived a nice life together.

After more than 30 years of working at his job with the state, he decided to retire. But before he turned in his papers, Paul died suddenly from a heart attack.

Although the loss of Paul, her long time love, was devastating, the news that followed was even worse.  It seems that Paul had never quite gotten around to fixing the beneficiary listed on his pension so the estate of his ex-wife Bertie, long since dead, would be going to Bertie’s younger, sole-surviving sister from Texas leaving Carol without an income source for her retirement.

Sal and Pauline

The romance that would result in seven children, thirteen grandchildren and 4 great-grandchildren began when Sal and Pauline met at a USO dance at Fort Devens in 1943. Before shipping overseas with his Army unit, they got married.  More than sixty years later, they enjoyed the retirement years shuttling between family visits and weekly dances at the local senior center.

Then Sal noticed that Pauline started forgetting things.  With that many kids and grand kids, it wasn’t hard to imagine forgetting all their birthdays but soon she started forgetting to eat and dress.

Eventually, her doctor gave Sal the hard news that Pauline had Alzheimer’s and despite his best efforts she would need professional care.

After Sal and his sons brought Pauline to the nursing home, the reality hit home.  Despite their frugal lifestyle, Sal and Pauline had a sizeable nest egg and home.  After the first 120 days in the nursing home, Sal would need to start writing checks in the amount of $7,500 each month for Pauline’s care.  A lifetime of hard work and saving was being threatened.  What could he do?  Was there any other way?

Lots of Things Can Happen

Divorce.  Disability. Law Suits. Remarriage. Car Accidents. Business Partners.

If you think that these things can’t happen to you, think again.  Seek out the help of a good planning team that can coordinate these pieces.  While no one can predict what may happen, putting together a proper plan will help you and those you love with picking up the pieces after a personal loss or tragedy.  

Value-Oriented Estate Plan Foundation

(1) Note:  All names have been changed and situations presented are a compilation of various facts.

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On Wednesday, March 11, I launched the inaugural event of my Financial Road Map Series teleconferences.

I want to thank each of you who stopped by to listen in to my brief discussion on taking control of your financial future by controlling what you can.

To recap the important points we discussed:

1.) Control What You Can:  No sense in worrying about things that are beyond our individual control.  There’s plenty enough for us to handle and impact directly.  Things that you can control can include:  Your saving and spending habits, your health and exercise programs, your asset allocation, your investing costs, and most importantly, YOUR ATTITUDE.

2.) Have SMART Goals:  Begin with the end in mind.  Be Specific with Measurable goals that are Attainable and Realistic and tied to a specific Timeframe.  It’s one thing to say “someday I want to be rich” or “someday I want to own a boat.”  But if you can put a number to that vision, your mind’s eye can picture it as reality and it becomes a real target to shoot for.

3.) Understand Your Risk:  These past seventeen months have tested what it means to be an investor.  It has highlighted the reality that most individuals do not have a handle on their own risk appetite.  Understanding risk is more than simply answering a few questions on a form.  It involves an open and honest conversation with yourself, your spouse (significant other) and your advisor. Go beyond the standard form and consider what does money mean to you, how your family treated money, what has been your best and worst financial decision and how you came to those decisions.  Ask yourself (or your advisor should ask) how you feel about these risk attitudes.  You may even want to consider using an impartial tool located at www.riskprofiling.com to provide additional insight into your risk tolerance.

  • NOTE: In my practice I utilize multiple risk profile formats to get a handle on how a client thinks and what motivates a decision.  This is helpful to be able to better communicate with a client. 

But having an honest conversation is also integral to proper investment planning.  For instance, I can use the standard risk profile tools, my questions and the website tool listed above and determine a Risk Capacity Measure for a client.

A person who has verifiable emergency reserves (3 to 12 months depending on their particular circumstances), has a positive cash flow and net worth, low debt ratio and adequate life insurance in place has a capacity for higher risk than someone not demonstrating these attributes.  For someone lacking these attributes, the financial plan will likely focus on improving these measures before investing in something risky.

4.) Have an Investment Road Map: Most people would not go on a trip without a map or GPS.  The same should be true about investing.  Having a road map (called an Investment Policy Statement) is something that professional investors like pension funds, insurance companies and endowments use all the time.  It outlines the end result desired (for instance, growth of capital with the investment generating $X in income per year), the types of investments that will be considered (i.e. no investment in nuclear power or tobacco), and the criteria for determining when to buy, when to sell and what to replace it with.  This helps take the emotion out of investing and avoids having a long-term plan sabotaged by the chatter of “talking heads” either in the media or at the office water cooler.

5.) Risk Allocation:  You don’t need a graduate degree in finance to understand that some things just make sense.  More than ever the old adage makes sense: Don’t Put All Your Eggs in One Basket.  While it is true that all asset classes have lost value from their peak nearly 18-months ago, that is no reason to give up on the wisdom of diversification. Just because someone doesn’t win a race the first time doesn’t mean you give up running ever again, does it?

But let’s be sensible about this.  Having a target risk allocation (based on investor age, timeframe until goal, risk capacity and risk tolerance) does not mean simply that you “buy and hold” or “set and forget.”  While academic literatute indicates that a buy and hold strategy will win out over time, in reality most investors do not have the stomach for the occasional and frightening roller coaster rides that happen like they have recently.  In which case in makes sense to buy, regularly and tactically rebalance while exploiting short-term trends and hold cash.  (Most investors do a poor job at following trends, implementing a disciplined trading strategy without emotion and sometimes having to go against the grain and do what seems uncomfortable like buying when everyone else is selling).

6.) Control Your Costs and Your Investment Vehicle: Invesment costs can weigh you down like an anchor.  And choosing the right investment vehicle helps you ride in comfort to your destination. 

Consider this:  Not all mutual funds are created equal.  Actively managed mutual funds have costs that detract from performance.  And typically more than 50% of active mutual funds do not match much less beat their benchmark index.  Does this mean that you give up on investing?  Heck, no. It just means you find another ride.  When a star football player gets hurt, does the team forfeit the remaining games?  No, they have a back up ready for replacement.  With a solid investment policy and using ETFs, you can make a quick switch, too.

This is why you should consider a strong core of index mutual funds and Exchange Traded Funds (ETFs) as part of your investment stratetgy (see “Top 8 Reasons to Use ETFs in Your Portfolio,” March 10 blog post).

7.) Estate Planning is for Everyone: Be prepared.  That’s the motto that every Boy Scout knows.  It’s good advice here as well.  Having the best investment strategy and record-breaking performance on investments will mean absolutely nothing if you’re not on a strong foundation.  This is what an estate plan will help do by laying the groundwork on how you want to control disposition of your assets and control your affairs.  Regardless of age or portfolio size, an estate plan is important throughout the various stages of life.  This goes for seniors and newly married couples.  If you have something or someone to protect, you need to talk with an attorney to draft a plan that includes at the very least: a Last Will, a durable Power of Attorney, a health care directive.  And if you have minor children it is imperative to have your guardianship issues addressed.

8.) Insurance: In uncertain times, it is even more important to make sure that you protect yourself from contingencies that can blow up your plans and get you off track.

Please review these items annually.  Consider putting it on your calendar to coincide with the seasonal change for clocks.

  • Make sure you have full replacement coverage on your property
  • Add an “umbrella liability” policy to your home and auto.  In a litigious world you don’t need to lose everything because of a lawsuit.
  • Make sure you have filed a “homestead declaration” recorded at the Registry of Deeds on your primary residence.  This will protect you from creditors placing a lien on your property that could force you to sell to settle a suit.
  • Review your employer-sponsored benefits and consider group Long-term Care Insurance, Short and Long-term Disability and Supplemental Accident coverages in addition to standard health/vision coverage.
  • You really need to consider coordinating these coverages with individually owned policies because when you leave your employer you will lose these coverages. 
  • Life Insurance:  Do speak with a financial planner who will do a detailed expense analysis to determine the appropriate level of insurance.  This approach is more likely to result in an appropriate level of insurance at a lower cost than rules of thumb based on income.  As with employer-benefits, consider having policies separate from your work.  A level-term policy is relatively inexpensive and offers cost-effective coverage during the peak years when you may have considerable debts and family responsibilities.

For specific advice on any of these matters, please consider speaking with an independent board-certified planner.

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