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Volume 15, Issue 9

Ten Tips for Creating an Effective Estate Plan

Whether your estate plan is simple or complex, there are many details that can undermine the effectiveness of your plan. But, there are also ways of ensuring that your plan is effective. Below, are ten common estate planning mistakes, along with ways to remedy or avoid such mistakes.

Consider using a will to transfer property to children instead of owning property jointly. Unlike a will, a transfer of an interest in your property is irrevocable, which may prevent you from changing the disposition if circumstances change before your death. Holding the title to your personal residence jointly can result in partial loss of the capital gain exclusion if it is sold before your death. It’s often recommended that you use your will to make any property transfers that will occur upon your death.

Think before gifting property to your children. Parents often regret having made outright gifts to their child for the following reasons: if the child subsequently divorces and the ex-son- or daughter-in-law is awarded an interest in the gifted property by a court; or when the property is taken pursuant to a legal judgment against the child. Such problems can be minimized through proper use of trusts or a business entity, such as an LLC.

Ensure your assets pass in accordance with your wishes upon your death. Many types of assets can pass to your heirs or others based upon beneficiary designations (life insurance, IRAs, brokerage accounts). The provisions of your will cannot change a beneficiary designation. Remember to account for things you’ve already designated when you create your will. Review your will, as well as all other beneficiary designations, when formulating your estate plan.

Understand your estate’s true value for Federal estate tax purposes. Many people don’t know that life insurance proceeds are included in their taxable estates if they own the policy. This could increase their total estate value to more than the amount sheltered from estate tax by the estate tax exemption ($3.5 million in 2009).

Consider state death taxes in light of recent law changes. Many states have “decoupled” their death tax from the Federal estate tax, which means your estate could be subject to death tax in a state even if no Federal estate tax is due. This could result in problems that might be avoidable with proper planning. The laws of each state where you own property should be carefully reviewed to determine the potential exposure to state death taxes and how to minimize them.

Know the difference between the amount you can transfer gift tax free during your lifetime and the amount that can pass free from estate tax upon death. The maximum amount that can be given away during your lifetime without incurring gift tax is $1 million, whereas the amount sheltered at death is currently $3.5 million. The estate tax (but not the gift tax) is currently scheduled for repeal in 2010. Without further legislation, the estate tax will be reinstated in 2011 at levels in effect prior to passage of the Economic Growth and Tax Relief Reconciliation Act of 2001. You can make yearly gifts up to the annual exclusion amount (currently $13,000 per person) that don’t count against your $1 million gift tax exemption.

Maximize income tax basis “step-up” benefits at death. Low-basis/high-value assets should generally not be given away during your lifetime, since the basis for capital gain computation purposes will be increased to fair market value at death. If the asset is given away, the basis remains at the property’s original cost. Based on current law, basis step-up is limited for deaths after 2009.

Specify your desired funeral arrangements. A pre-arranged funeral can relieve family members from additional stress upon your death.

Plan for a potential disability. In the absence of advance directives, powers of attorney, or designated trustees, costly and time-consuming court proceedings may be required in order to appoint a guardian or conservator to act on your behalf if you become disabled.

Review and update your estate plan regularly. Changes in the law and in your personal situation make it essential to periodically review and update your estate plan so that it still reflects your wishes.

Early and thorough estate planning can help you reach your financial goals and help ensure that you leave behind a lasting legacy. Be sure to consult with your tax, legal, and financial professionals.

Ten Ways to Stretch Your Money

We all want more money. Many of us would also like to work less. While this may seem like a dilemma, there may be a solution. The best way to increase money without increasing your hours is to avoid excess spending. Some people call this a budget, but you could just as easily call it a spending plan.

Here are ten tips to help you maximize and stretch your hard-earned cash:

  1. Create a spending plan. Many people resist the idea of a budget, and associate it with hardship. Instead, look at it in a positive way. Create a monthly “spending plan” for your fixed and discretionary expenses. When you plan your spending, you may find you spend more wisely because you’re taking control.
  2. Pay yourself first. Put savings at the top of your spending plan. If you wait until the end of the month to save any leftover cash, you may find yourself without a nest egg when you need it most. A good rule of thumb is to save at least 10% of your income before spending the rest.
  3. Track your spending. Record your expenditures for a month, especially for small, optional items. You may be surprised to discover how easily purchases costing only a few dollars can add up. At the end of the month, review your expenditures and adjust your spending plan accordingly. Once you see where your money is going, you may want to make different choices about your spending.
  4. Live within your means. Many people feel they never have quite enough to live on, yet they probably know people who manage successfully on less. Spending is relative. If your expenses are in line with your income, you are living within your means.
  5. Shop for value. Look for opportunities to get more value from each dollar. Join a warehouse or shopping club and buy in bulk. Purchase clothing, furniture, and household goods when they are on sale. Consider buying used cars and appliances. Big-ticket items like these often depreciate substantially in the first one or two years.
  6. Minimize debt. Keep your debt level low. By reducing debt, you also minimize interest and finance charges. When you are tempted to charge a purchase, remember that you are committing to pay for it from income you have not yet earned.
  7. Eat in. Restaurant dining can be expensive, since you are paying for service as well as food. Tips and meal taxes add 20% or more to the bill. Liquor and desserts (which you might not eat at home) can boost the tab even higher.
  8. Reduce housing costs. Housing is a major fixed expense. Consider reducing this cost by buying or renting a smaller place, or one with fewer amenities. If you rent and plan on staying in an area for more than a few years, consider buying. Owning a home is often more expensive than renting at first, but the costs are usually lower in the long run. Remember, a house is an investment that generally appreciates over time.
  9. Trim transportation costs. Transportation is another large expense for most families. Many households now own more than one vehicle. The more cars you own, the higher the costs for insurance, repairs, fuel, and parking. Use public transportation or carpool, if possible. The savings in vehicle-related expenses may offset any inconvenience.
  10. Create a cash reserve. A cash reserve can help you stick to your spending plan and help keep you out of debt when emergencies, such as a major car repair or short-term disability, arise.

Cutting back on excess spending does not have to be difficult, nor does it mean that you must continually deny yourself life’s simple pleasures. You will find that when you live within your means, and pay yourself first, your debts will decrease as your savings grow. A personalized spending plan can help provide that “extra” income and stretch your hard-earned cash.

Tips You Can Use to Prevent Credit Card Blues

Credit card debt is a major problem in the United States. According to the Consumer Federation of America (2009), 80% of all households have at least one credit card. For households that carry a balance, the average credit card debt is more than $10,000.

Here are some tips to prevent the credit card blues:

  • Start paying the debts that carry the highest finance charges first.
  • Don’t charge any more until your present debts are under control.
  • Reduce your finance charges by using cards with the lowest possible rates.
  • Avoid using checks that arrive in the mail from your credit card company. The value of each check you use will be added to your existing debt—plus extra transaction fees!
  • Keep your cards in a safe place when you aren’t using them.
  • Reduce the number of credit cards you carry to one or two.
  • Avoid giving your credit card number out on the telephone, particularly if you did not place the call.

Remember, if you’re charging more than you’re paying, your credit card debt will continue to increase. Your financial professionals can help you develop strategies for improving your spending, saving, and debt habits.

Financial Planning and Divorce

Divorce ranks as one of the most stressful of life’s events. Because it often involves change in every conceivable area of life, it usually requires a fundamental reexamination of future goals and expectations.

Once divorce has progressed from a possibility to a reality, it is essential that you learn how to protect your legal rights. From a financial perspective, divorce involves three things: division of marital property, child support, and alimony. Understanding the divorce process will help you to take actions that protect your future and that of your family.

Instead of merely reacting to events as they occur, the following may help you anticipate what may lie ahead:

  • Consult an Attorney. As soon as divorce has become a possibility, find out about your legal rights. An initial consultation does not obligate you to file for divorce; it allows you to preview the proceedings, and it can help reaffirm your personal sense of control. You may want to explore the pros and cons of litigation and mediation as methods to settle property and custody arrangements.
  • Draft a Chronology. Start tracking the details of your marriage. Dates are important, including the date of your marriage and separation, as well as the birth dates of your children.
  • Inventory Everything. Compile a complete list of what you own and what you owe. Gathering recent tax returns, insurance policies, retirement plan documents, and financial statements will allow you to present a comprehensive financial picture. Begin thinking about which possessions you would like to keep and which you wouldn’t mind relinquishing.
  • Determine Your Cash Flow Needs. Analyze your current expenses, while married, and attempt to estimate their cost once you are on your own. This information will help you prepare a cash flow statement that will become the basis for negotiating your financial support needs. Remember to consider potential new expenses, such as counseling or childcare. Also evaluate your future insurance needs.
  • Explore Your Career Options. Whether you have been working full-time, part-time, or not at all, now may be a good time to assess your career options. If you have put your career on hold for the sake of your spouse’s career or your family, you might consider seeking additional support for any necessary training to resume your career. Clearly, your financial situation will determine if you are going to further your education or possibly work a second job. Keep in mind that a crisis, such as a divorce, can often be the catalyst for planning and achieving a more satisfying future.

The emotional aspects of divorce may tempt you to give all of the responsibility to your attorney. However, keep in mind that once the divorce is final, you, not your attorney, will have to live with the consequences. Active participation may be the best way to help achieve an outcome that protects your interests and meets your needs.

The information contained in this newsletter is not written or intended as tax, legal, or financial advice and may not be relied on for purposes of avoiding any Federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

The information contained in this newsletter is for general use and it is not intended to cover all aspects of a particular matter. While we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and financial advice. The publisher is not engaged in rendering legal, accounting, or financial advice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any securities. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA, COPYRIGHT 2009.



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