Volume 14, Issue 8
Estate Planning: Not Just For The Wealthy
Many people think estate planning is necessary only for those with sizable estates. However, even small estates require smart planning to protect loved ones. Here are some important steps you can take now to ease your family’s emotional and financial burden:
- Where There’s a Will, There’s a Way. A will is a formal, legal document that specifies how you want your assets to be distributed after your death. If you die without a will (intestate), your estate will be distributed through the probate court according to the intestacy laws of your state. State intestacy laws function like a “one-size-fits-all” will; as a result, your assets may or may not be left in the hands of those you would have chosen. You must have a will if you wish to designate an executor for your estate, name guardians for minor children, or appoint other fiduciaries. When preparing a will, it is best to seek qualified, legal advice and ensure the document is properly witnessed. You may also want to consider setting up a living trust. This arrangement can allow you to transfer specific assets to your heirs without going through probate.
- Easy and Inexpensive Property Transfers. One of the simplest and least expensive estate planning techniques for married couples is to own titled property as joint tenants. A typical example of jointly owned property is a personal residence. When you own property jointly and either you or your spouse dies, the property automatically passes to the surviving spouse with-out going through probate. However, bear in mind there are several other methods of joint ownership. For instance, community property states have their own laws governing the disposition of assets. Therefore, you may want to consult a legal professional to determine which arrangement is best for you.
- 3. Life Insurance. Life insurance can help provide your family with the immediate funds needed to meet key financial obligations. Life insurance can also provide replacement income for your familyan especially important consideration if you have outstanding debt and/or provide all, or most, of your family’s support.
- Plan for the Worst. Consider purchasing disability income insurance while you are healthy. If you have a disability income insurance policy, review it periodically to be sure it still covers your needs. Also, appoint a durable power of attorney and set up a living will or health care proxy to handle financial and medical decisions in case you become physically or mentally incapacitated. Many people select a spouse, a trusted relative, or a friend to represent them.
- Knowledge Can Help Bring Peace of Mind. Although it may be tempting to shield family members from life’s harsh realities, you may find you can best serve your loved ones by informing them of your financial, medical, and estate arrangements.
These are just a few tips for protecting estates. Consider taking these initiatives now, while they are fresh in your mind. Although smaller estates may have different concerns from larger ones, the key to successful estate preservation is planning, not size!
Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
Good Credit: Teach Your Children Well
Many parents teach their children the ABCs at a very young age, but do they teach them the ABC's of good credit early enough in life?
At certain points in life, everyone will have to deal with banks, loans, credit, and finances. You may have learned your lessons through the “school of hard knocks,” and with your insight and experience, you may be able to help your children steer clear of some of the headaches you have encountered.
The Three “C’s” of Good Credit
It is essential to teach your children the importance of capacity, collateral, and character. When issuing a loan, a bank may consider how the applicant measures in each category.
Capacity poses the question, “What financial resources do you have to pay back the loan?” As the creditor,the bank most likely will ask, “How long have you held your job? How much do you earn? How many dependents do you have and do you pay child support?”
Collateral concerns what the applicant will use to secure the loan. For example, a creditor may want to know if your child owns a car or has any personal savings that can be used as a pledge against the loan. When your child pledges an asset as collateral, he or she is promising to use the asset for repayment if, for any reason, he or she is unable to pay the balance of the loan. Personal loans generally do not require collateral, but they may come at a higher interest rate.
Character is what a creditor will use to determine the reliability of a loan applicant. The creditor may consider such points as how long an applicant has owned a car or home, or whether the applicant pays his or her rent and other loans or bills on time.
Establishing a Good Credit Record
It is often difficult for young people to establish good credit, because they have no previous track record of paying bills or making loan payments. Lacking a credit history makes securing a first loan difficult, and yet, without that first loan, your child can’t establish a good credit record. As a parent, you can help your child take the first step toward attaining credit by helping him or her open a checking and/or savings account. A creditor will look at such accounts as an ability to manage money.
Another step on the road to good credit would be for you to co-sign a loan application for your young adult child. As a co-signer, you are agreeing to pay back the loan in the event that your child fails to do so. Therefore, communication and trust between you and your child is paramount to ensure payment will be made by your child.
Maintaining a Good Credit Record
There is only one way to keep a good credit record: Pay everything off on time! Make sure your child is aware of how much he or she owes at all times. In addition, try to have your child avoid owing more than can be paid back. No one should dig a hole so deep he or she won’t be able to climb back out.
If you take the time to teach your children these basic concepts, they will have a solid foundation to help them avoid the pitfalls that many young people face when they begin to build their credit foundation.
Is Your Current Life Insurance Coverage Up To Speed?
When Judy Fielding (a hypothetical example) purchased her life insurance policy ten years ago, she assumed her insurance planning was complete. She figured that if she just paid her premiums on time, she could sit back and not think about life insurance anymore.True, Judy’s policy has provided her with peace of mind by helping to protect her family. However, that doesn’t mean she should let her insurance policy run on autopilot. Life insurance is just like any other piece of your financial puzzle. It should be monitored periodically as your circumstances and needs change. This way, you can help ensure your life insurance is achieving its desired objective(s). Here are some of the things that Judy, like all policyholders, should review at least annually.
Is Coverage Up-to-Date?
Judy must first determine if her original reasons for purchasing her policy are still current. She should also evaluate whether or not she’s developed any additional needs.
For instance, when Judy initially purchased her policy, she was newly married and owned a modest home. Now Judy and her husband, Jim, have four children and a much larger home. Is Judy’s existing policy appropriate for these new responsibilities—covering a substantial mortgage, funding college for four children, and contributing to the protection of her family’s financial independence? More than likely, Judy may require additional life insurance.
If Judy’s existing policy is term insurance, she may want to consider converting it to a permanent contract. Permanent insurance contains a cash value component that offers the potential for tax-deferred accumulation, as well as the same death benefit features of term insurance. In later years, the cash value could come in handy to help supplement retirement income needs. Keep in mind that withdrawals and loans taken against a policy’s cash value could affect the death benefit and may have tax consequences.
Beneficiaries May Change, Too
As it stands now, the primary beneficiary of Judy’s life insurance policy is her husband, Jim. If Jim were to predecease Judy, the policy currently names Judy’s nephew as a contingent beneficiary. However, now that Judy has her own family, she will likely want to update her policy’s beneficiary arrangement to name her children as contingent beneficiaries in place of her nephew. In addition, if Judy and Jim eventually set up a living trust, their legal professional may suggest naming their trust as the policy’s beneficiary.
Plan for a Growing Estate
Regardless of the type of life insurance Judy owns and the beneficiary she chooses, the death benefit proceeds from the policy will be included in Judy’s estate. As their asset base increases, they should plan accordingly to help reduce the effects of estate taxation.
Life insurance can help play a significant role in solidifying the family finances of couples like the Fieldings. However, it is also important to recognize that, like all financial matters, life insurance policies need to be reviewed on a regular basis. A qualified insurance professional can be a valuable resource when it comes to evaluating your present situation and determining an appropriate course of action.
A Quick Look at Employer-Sponsored Retirement Plans
Many companies offer their employees a retirement savings option as part of their benefits pack-age. The tax advantages, and in some instances matching contributions, make employer-sponsored plans popular retirement savings vehicles and common complements to Social Security benefits and personal savings as sources of retirement income.
Because retirement savings options are often unique to the employer, it is important to understand the specifics of your company’s benefits package. Common options include defined benefit plans, 401(k) plans, 403(b)plans, Roth 401(k) plans, Simplified Employee Pensions (SEPs), and Savings Incentive Match Plans for Employees (SIMPLEs). Here’s a quick look at each:
A defined benefit plan is a traditional pension designed to provide an employee with retirement income. Benefits are generally based on a variety of factors, including salary, length of service, and a benefit formula that averages the employee’s earnings over a prescribed period of years. In some instances, an employee may make additional contributions. Upon retiring, you may have options as to how and when you collect your benefits, such as in monthly payments or in one lump sum. The prevalence of pension plans has decreased with the rise in popularity of the 401(k) plan.
A 401(k) plan, offered by many private employers, provides you with the opportunity to defer part of your salary, with restrictions, into a retirement account. Your employer may match your contributions, up to a predetermined percentage and subject to a maximum. For example, if your employer matches your contributions by 50%, for every dollar you put into the fund, your employer will add $.50. Your contributions are pre-tax and any earnings are tax deferred; payment of income taxes will not commence until you begin taking withdrawals. If you withdraw money from your 401(k) before the age of 591⁄2, you will incur a 10% federal tax penalty, except under certain circumstances.
A 403(b) plan is similar to a 401(k) plan, but it is designed for employees of certain educational and non-profit or exempt organizations. You can defer part of your salary, with restrictions, to a tax-deferred annuity contract. Any earnings are tax deferred, and you are not taxed until you begin receiving payments.
Roth 401(k)s incorporate elements of both traditional 401(k) plans and Roth IRAs. Employees contribute after-tax dollars, potential earnings grow tax free, and distributions at retirement are tax free, provided the employee is at least age 591⁄2 and has owned the account for five years. Matching contributions made by an employer must be invested in a traditional 401(k) account, not a Roth. Some 403(b) plans may also offer a Roth option.
Simplified Employee Pensions (SEPs) are a common option for small businesses. In SEPs, employers make use of Individual Retirement Accounts (IRAs) as a simplified way of providing their employees with a retirement plan. The discretionary employer contributions and employee contributions are pre-tax, and they have the potential to grow tax deferred; you do not pay income taxes until you make withdrawals.
SIMPLE plans utilize either IRAs or 401(k) plans, and they are used by small businesses with 100 or fewer employees. Subject to restrictions, your employer may choose to match your contributions up to a certain percentage of your salary, or the company may choose not to match, but rather to make contributions on behalf of all eligible employees based on a percentage of salary. Again, your contributions are pre-tax and you defer payment of income taxes until you begin taking withdrawals.
The earlier in your career you take advantage of an employer-sponsored plan, the longer the funds have to work for you. If your employer makes matching contributions, you can potentially increase your principal. And, with tax-advantaged savings vehicles, any earnings grow tax deferred, which may increase your savings over the long term. When it comes to saving for retirement, time can be money, and it’s never too soon to start.