Free Money Finance

Be Sure Money Isn't the Only Thing Your Leave Behind

Here's a piece from Bankrate that says our money and possessions shouldn't be the only thing we leave behind for our heirs -- we also need to leave our online info, specifically passwords. It's a good point.

Just think of all the online connections you have -- to banks, brokerages, personal websites, etc. -- and the vital information that each of these contain. If something happens to you, especially if you're the only one that has access to them, what will be the impact for your loved ones? How will the access the information/funds/whatever? And in some cases, how will they even know such a site/connection exists without a list from you.

Overall, this was a good reminder IMO. I am in the process of writing down everything for my wife, and I'll certainly add passwords and such to my document.

How about you -- do you have this covered? Or do you think it's not that big of a deal?

Achieving Family Harmony in Estate Planning Part 2: Make Sure Your Plan Fits Your Unique Needs

The following is a guest post from Marotta Wealth Management.

Estate planning must begin with family harmony as the goal. Thus personal dynamics are more important than avoiding probate and estate taxes. Planning begins by selecting the right trustee. Here are some additional principles to help you assure family harmony in your estate planning.

First, have an up-to-date plan. Too many people either fail to prepare an estate plan or let their plan become outdated. Changes in the law occur frequently. As Will Rogers said, "The only difference between death and taxes is that death doesn't get worse every time Congress meets."

Plus, your circumstances can change. Toward the end of your life they seem to change faster. Between ages 40 and 65, have a new estate plan drawn up every decade. In your 70s and 80s, consider revisions every 12 months.

Second, you have unique circumstances that your estate plan must address. Everyone does. As a result there are very few "simple estate plans."

For example, an attorney related to me the story of a man who wanted so-called simple estate plan drawn up for him and his wife. In the first 15 minutes, the estate planner learned the client was a citizen of the UK, his 25-year-old son had bipolar disorder and the son was actually not his biological or adoptive child, although he and the young man's mother have been married for 23 years.

In another case, a very wealthy man was seeking "a simple estate plan" for him, his wife, and his family. But he was in a second marriage, had three children from his first marriage, his new wife had four children from her first marriage and one of his daughters was in a prison for kidnapping.

You are unique. Here are some of the questions you may answer in a unique way: Do you donate regularly to charity? Or make substantial gifts to family members? Do you want those gifts to continue if you lose capacity? Do you own a business? Do you own property that should not be sold? Do you have a beneficiary who is likely to cause trouble or owes you money? Do you want to provide for the continuing care of a pet? Do you have a working farm or farm animals? Do you want to be cared for at home regardless of the cost?

Your estate plan should be carefully crafted to address your specific needs and circumstances. The more tailored your plan, the less room there is for family disagreements.

Third, be careful not to change your plan inadvertently. Suppose, for example, you have a will that provides for your estate to be distributed equally among your three children, and you have named your daughter Susan as your executor.

To make it easy for Susan to access your bank accounts in the event of a medical emergency, you have added Susan's name to all of them. What you have done without realizing it is to change your plan. Under Virginia law, those bank accounts will belong to your daughter at your death and will not be shared by your other two children. As a result, your estate might be distributed differently than you intended. It can also result in family feuds or adverse tax consequences.

Before doing any self-help planning--even something as simple as adding a child's name to a bank account--check with your legal advisor to see how it impacts your plan.

Fourth, make sure your fiduciary/executor gets adequate help. The actions of your executor, trustee or agent under a power of attorney are subject to a rigid and sometimes unforgiving legal standard. It is easy unintentionally to run afoul of those rules. If you name a child to serve in these capacities, introduce him or her to your legal adviser. Make it clear in your legal documents that your fiduciary is authorized to pay for that help from your estate.

Fifth, check that the person you choose is willing to act as your fiduciary before naming him or her in your legal documents. You may find an unwillingness or a reluctance related to some concerns that need to be addressed. For example, a child may never feel comfortable giving consent to take you off a ventilator, even knowing that was your wish.

Finally, use your discretion, but consider telling your family in advance what arrangements you have made. Explaining your plan to your family upfront gives you the opportunity to address any concerns, answer questions and clear up misunderstandings. Once you lose capacity or die, it is too late. Many family fights could have been avoided with an open and frank discussion, so everyone is best prepared to handle a loved one's loss of health or life. Eliminating surprises helps eliminate family fights.

In summary, most people who plan do pay enough attention to concerns such as probate and estate tax avoidance. But the best estate plans are drafted with family harmony as a priority.

Is Inheritance a Right?

Here's an interesting question a reader asked on my post titled Achieving Family Harmony in Estate Planning Part 1: Leave Your Estate in the Right Hands:

I have a more basic question - as an adult child, is inheritance my right - legal or moral?

My personal take is that there is no legal or moral obligation for parents to leave an adult child with any sort of inheritance. That said, I think parents should be responsible for helping a child/young adult "get established" in the financial world, which generally means helping them get through college. Even then though, there's certainly no legal obligation to do this and morally I don't think it's required either.

Having said that, I can say that we plan to not only get our kids through college but to help them financially in other ways if needed. We will NOT be a financial crutch for them (if you've read The Millionaire Next Door, you know doing this can hurt your kids dramatically), but maybe small gifts here and there as we get older and work to give away our estate rather than have them get a big lump sum at our deaths.

What's your take on the situation?

Achieving Family Harmony in Estate Planning Part 1: Leave Your Estate in the Right Hands

The following is a guest post from Marotta Asset Management.

The most important product of estate planning isn't avoiding probate or reducing estate tax exposure, it's achieving family harmony. As a result, we must watch out for personal dynamics that might threaten disharmony when a person dies or becomes incapacitated.

First, think carefully when you choose your executor or trustee. Being selected to manage an estate for someone who can no longer do so because of death or incapacity is an implicit compliment. It shows you trust the person you've named to do the right thing in the right way.

But it is also a very big job. Unfortunately, it can--and often does--feel like a thankless one. And what's worse is that lack of thoughtful planning too often results in irreconcilable family feuds.

We all know that someone must settle our estate when we die. But because people live longer these days, more of us will experience a period of incompetence before our death. We must plan for the possibility that someone will become responsible for our physical and financial well-being long before a final settlement of the estate can be made.

We often choose a close family member, who probably has no knowledge of what's required of a "fiduciary," the term used to describe a person to whom property or power is entrusted for the benefit of another. Taking on a new and unfamiliar task is stressful and difficult, especially if your life is already full.

Remember that serving as a fiduciary, whether as an agent under a power of attorney, an executor under a will or a trustee under a trust agreement, is a post of honor, but it is not an honorary post.

Don't name an oldest child just because he or she was born first. Ask yourself if your oldest has the traits of a good executor or trustee. Is he organized? Is she trustworthy? Will he see a job through to completion? Is she diplomatic and fair-minded? Might he abuse the position to settle old scores and wounds that are sometimes 30 years in the making? Is she sensible? Will she know when she is over her head and needs professional help?

In short, given all your available choices, is this child the best person for the job?

People sometimes want to name more than one executor so no child will feel left out. If you're so inclined, ask yourself, "Am I putting two scorpions in the same bottle?" The administration of an estate is not intended to be a therapeutic exercise that will ameliorate 20 years of bad feelings between brothers. Now don't get me wrong. Coexecutors can be a good way to go. But ask yourself first if they are people who can work together. Will they help or hinder each other?

Second, think through how you are leaving your estate behind. Family disharmony provisions are all too common.

For example, if you are in a second marriage, it's sometimes hard to be fair both to your spouse and to the children of your first marriage. In one situation, a 50-year-old man had concerns about his father's will. His dad left virtually everything in trust for his second wife. Such a trust commonly provides limited amounts of income and principal to the spouse during the surviving spouse's lifetime. When she dies, the assets pass to his children from his first marriage.

But because the stepmother is 55 years old, Dad effectively disinherited his kids. Don't set up a plan where your children are waiting for their stepmother to die to get their inheritance. Think of creative ways to be evenhanded to your present spouse and your children when you die. And there could be problems naming either the stepmother or the children as trustee.

Another planned disaster is leaving real estate equally to all your children. In Virginia, real estate drops like a rock through probate. It's not like money you can divide up equally. If your kids can't agree unanimously on what to do with the real estate, it can be a serious problem, for the only remedy the law provides is a partition suit. To keep the peace, provide an enforceable mechanism for either one child to buy out his or her siblings or for an executor to sell the real estate and divide the net proceeds up among the children.

Here is another dilemma that requires special consideration. You might recognize the need for one of your children to have his or her inheritance left in trust because of a poor credit record, mental instability, financial instability or a bad marriage.

Suppose that child resents the arrangement, which is quite possible. Who are you going to name as trustee of that child's trust? Are you going to name a sibling as the trustee of another sibling's inheritance? How will that decision affect the sibling relationship?

And if you name a professional trustee, such as an attorney or bank, are you putting your child at the mercy of that professional trustee? What if they provide poor service after you die? Or raise their fees? All those problems go away if you give someone you trust--such as the child you were thinking about naming as trustee--the unlimited power to fire the professional trustee and appoint a new one. It's no surprise how much better professional trustees perform when they know they can be replaced at any time.

Estate planning begins with selecting the trustee who will handle it best. Probate and estate tax avoidance is easy. Selecting the best trustee is critical. Be sure you structure everything legally in a way that will create unity, not animosity. Make that decision well, and you are halfway to drafting your estate plan with family harmony in mind.

Dropping the Baton in Estate Titling

The following is a guest post from Marotta Asset Management.

How you "title" the property you own is a lot more important than you might think. Failure to title your assets properly could undo the best will and trust planning that money can buy. And it could make a huge difference in how much estate tax your estate will pay and how much hassle your heirs will experience when you die.

Consider the case of Jonathan and Martha Kent. Jonathan spent his entire adult life building his business in Smallville to a value of $5 million. Then the Kents were in a car accident. Jonathan was killed instantly, and his wife Martha died four months later from her injuries. Their son Clark returned from Metropolis to handle their estate.

Let's look at the different ways the Kents could have titled their property and the effect of each one. We'll think of Jonathan's estate as a baton. The various ways of titling that ownership are alternative ways to hold the baton.

Sole ownership

If Jonathan was the sole owner of his small business, he was the only one holding the baton. When he died as sole owner, the baton fell to the ground. The required legal process called "probate" would determine the next holder of the baton. If he did not have a will, the laws of the state where he lived at the time of his death in effect would write his will for him, under its laws of intestate succession.

In Virginia, state law assumes you would leave a third of your estate to your current spouse and two thirds to children, if you have children from a former marriage. If you don't have any children from a former marriage, state law provides that your entire estate goes to your current spouse.

The probate process can take months, even years. The personal representative must gather together the decedent's assets, pay his debts and taxes, and distribute the estate as directed in the will (if there was one) or as the laws of the state dictate if there was not. In Virginia, probate fees of about 0.15% of the value of the estate, are paid to the clerk of the court, and the executor of the state could charge an additional 3% to 5% of its value. On the Kent estate, probate costs alone might be well over $150,000.

You don't want to drop a $5 million baton into probate.

Also, if Jonathan was driving and a lawsuit was brought about the accident, his entire estate could be subject to any subsequent legal action. During the probate process, it might be difficult to pay Martha's medical bills.

Fortunately, no estate taxes apply when a spouse inherits assets. But just as probate has finished transferring assets to Martha, she dies, dropping the baton again and requiring another probate process.

During this second probate, assets are passed to the children, and all of the assets over $2 million are subject to 45% estate taxes. So the taxes on a $5 million estate would be $1.35 million. Even though the business is worth $5 million, Clark and his brother don't have the money for the estate tax, and they are forced to sell rather than inherit the business. Clark must return to his dead end job as a reporter for a city newspaper.

Joint tenancy with rights of survivorship (JTWROS)

In a JTWROS arrangement, two or more people hold the baton, and each one has an equal share. One person can sell his or her share and pass their grip on the baton to someone else. They can also break off their piece of the baton and keep the piece. But if they die, their share is given to those still holding on. The last one holding the baton owns it outright.

JTWROS does not require probate, which would make the transition of ownership from Jonathan to Martha easy and straightforward. But it does not protect the estate from legal action. Nor does it help solve the estate tax problem for Clark.

Joint tenancy titling trumps a will. Even if you have been careful in your estate planning documents, if you are not equally purposeful and intentional in how you title your assets you can ruin your plan. Financial accounts that use POD (payable-on-death) or TOD (transfer-on-death) arrangements, if sloppily done, can also thwart all your best estate planning intentions.

Tenancy by the entirety (TBE)

Only persons married to each other can hold property jointly as tenants by the entirety. With TBE, each spouse holds the entire baton. They can't sell their share and pass the grip to someone else because they don't hold a piece of the baton separate from the other tenants' pieces. And they cannot break off a piece of the baton and keep it for themselves.

TBE can provide asset protection features unavailable in other forms of joint ownership. Suppose Jonathan's accident was due to his negligence. If he and Martha held the baton as TBE, Martha can inherit the entire baton at Jonathan's death, free of Jonathan's liabilities.

In our litigious culture, wealthy individuals often have a bull's-eye painted on their backs. Everyone should make asset protection a priority. You should probably have an excess liability insurance policy, often referred to as an umbrella. If you are married, your real estate should be held in TBE. Virginia law also allows married couples to title their investment assets (called personal property) as TBE. Generally speaking, creditors cannot seize assets held in TBE because doing so infringes on the other tenants' rights to the entire baton. TBE isn't perfect, but it does give some liability protection to married couples.

TBE, like JTWROS, trumps a will. It has to be integrated carefully with your estate planning documents to ensure that it will not thwart your plan to reduce your estate tax exposure.

Revocable living trust

With a revocable living trust, the trust owns the baton. Think of it as a glove. The trustee controls the glove, and usually you name yourself trustee during your lifetime. Your hand is in the glove and holds the baton. Because the trust is revocable, you can do anything you want while your hand is in the glove. You can pass the baton from your gloved hand to your ungloved hand, passing the baton between the trust and sole ownership.

So long as the glove is holding the baton when you die, the baton does not fall into probate. The trust still holds the asset in the same way the glove still holds the baton. On your death the trust becomes irrevocable. The trust documents specify the next trustee and the distribution of the assets. The next trustee slips his or her hand into the glove and immediately controls the assets.

Revocable living trusts are common estate planning instruments. They avoid probate and thus help families hold on to the baton. By themselves they don't limit estate taxes or creditor claims, but they can be effective estate planning tools. In Virginia and many other states, the assets in your revocable living trust at your death are still subject to the claims of your creditors.

Bypass Trust

A bypass trust is someone who will hold the baton in a trust after you die, for the benefit of your surviving spouse. A bypass trust may provide Martha Kent with income from the business while she is alive, but it passes ownership in the business to her sons after she dies.

Upon Jonathan's death, with proper planning he could have arranged to put as much as $2 million free of estate tax in a bypass trust for the benefit of his wife for her lifetime. Upon her death it will pass tax free to the children. Martha can leave an additional $2 million to her children tax free. With the wise use of a bypass trust upon the death of the first spouse to die, up to $4 million can pass to the children tax free, leaving only $450,000 worth of tax owed on the remaining million. With additional estate planning, the family can avoid even this tax.

Depending on the asset, the process for changing the title of your assets varies. To change the title on your house you must record a new deed. Changing the title on your car requires a trip to the Department of Motor Vehicles. If you want to change the title on your investments, you must send your custodian a letter. Drawing up legal trust documents to facilitate asset titling and transfer requires professional legal advice, which could be expensive. But the alternative is often even more costly.

Aside from the expense, estate planning remains a topic that few people want to contemplate. On the one hand, raising these issues with family members can make you feel like the prodigal son wishing his father was dead and he could enjoy his inheritance now. On the other, avoiding these issues can mean a lifetime of regret.

I'm very grateful that my father asked for an hour of family vacation each year to talk about estate planning issues and explain the plan. It may feel morbid the first time, but after a while, it seems loving and caring.

When people die without proper estate planning, the state distributes their assets in their own time. If someone involved is incapacitated, you may not be able to act on their behalf. Just because you are expected to take care of their affairs doesn't mean you will have the legal right.

Clip this article and send it to your parents as a way to begin the discussion. They will realize you want to know exactly what to do in an emergency. For your own estate, bring this column to your financial advisor and ask for a review of your titling and beneficiaries.

How Do You Plan to Divide Your Estate?

Here's and interesting piece from the Wall Street Journal discussing how to share your estate with your kids. It made me think about how an estate can be broken up in different ways depending on the circumstances and I thought I'd list our current plans. Here they are:

• Our current will divides our estate evenly between our children if anything happens to both of us before they graduate college.

• Once they get through college, we'll likely decrease the amount they get, giving them part of our estate as well as giving some of it to charity.

• As the years progress and we're more comfortable with the amount we have saved for retirement, we'll start to give the kids (and grandkids, hopefully) part of the estate each year. We'll also give some to charity as well.

That's the plan for now, but since our kids are young there's a looooong way to go and the plan is highly subject to change.

How do you plan to divide your estate? Equally among kids? More to one (or a few) kid? Have you even thought of it? Do you even have a will? If not, you get a "tsk, tsk" from me. ;-)

And in case you're wondering, you can find a ton of information about wills by visiting my estate planning category.

We Got Our Will Updated

Well, I've had this one on my to-do list for some time -- to get our will updated. And we finally did it. After a few months of meetings, emails, reviewing boring legal documents, and talking to people to make sure they were willing to care for our kids/manage our assets if we should both die, we have our wills completed. And it's not only our wills -- here's a complete list of what we had completed:

• Last Will and Testament -- One each for me and my wife

• Joint trust -- Helps avoid probate and costs associated with it

• Designation of Patient Advocate (PDF) -- Gives my wife decision-making authority for my healthcare should I be incapacitated and vice versa.

• Acceptance of Designation of Patient Advocate -- Simply says that we accept the responsibility that the other gave to us.

• Medical Records Release -- Allows records to flow freely from one health professional to another.

The whole thing cost us $700 which was worth it to me to have a professional we knew and trusted take care of it.

The most important thing to us was to update who would care for our kids if anything ever happened to us as well as to make sure that the kids would be fine financially if we were dead. That's one less thing we need to worry about now.

For more on wills and estate planning, see these links:

• Answers About Health Care Legal Documents

• The Biggest Mistake in Estate Planning

• What You Need to Know About Wills

• How to Decide Who Gets Your Kids When You Die

• Benefits of a Will

• You Still Need a Will

• What Happens When You Die Without a Will

Estate Plans: Moving States and Living Trusts

The following is an excerpt from A Parent's Guide to Wills & Trusts: For Grandparents, Too (2nd edition), copyright 2007, 2008 Don Silver and excerpt reprinted with permission.

QUESTION: I just received a promotion and my wife and I will be moving out of state. From all of my job-hopping and what’s going on in the real estate market, we now own houses in three different states. Fortunately, all of our houses are still worth more than what we paid for them. Our other main asset is our stocks. We’re dividing our assets between our children and our grandchildren. Do we need to have our wills reviewed after we move or are the laws the same everywhere?

There are some tax and retirement-related laws that apply across the U.S.

However, the state laws on wills, trusts, inheritance, state income tax, state death tax and state property tax may be different in different states.

So, what might make sense in one state may need to be changed in another state.

Property tax laws may favor real estate left to children, not grandchildren

You are leaving the three houses and stocks to your children and grandchildren. One state, for example, might allow property taxes for your children to be based on what you paid for your real estate many years ago (and not on its higher current market value) only to the extent your children, and not your grandchildren, inherit a house or other real estate.

To take advantage of this real estate benefit, you might change your estate plan to allocate a house in that one state only to your children and a compensating amount of the other assets just to your grandchildren.

HINT: When you move to a new state, have your entire estate plan reviewed to make sure it will produce the results you want in every state where you have assets.

QUESTION: I own my home, a rental property, stocks, bonds, savings accounts and IRAs. I just signed a brand new living trust. I’m so relieved that my estate won’t go through probate—will it?

If all you’ve done is sign a living trust, there’s still a good chance your estate may still go through probate.

Why is that? It’s not enough to just sign a living trust to avoid probate. It takes three steps to avoid probate: (1) signing the living trust; (2) coordinating how you hold title (ownership) to your assets and (3) completing your beneficiary designations so they work with, and not against, your living trust and overall estate plan.

Assets without a beneficiary designation

With some assets you change title by signing separate documents so the owner is the trustee of the living trust or by listing assets in a schedule that’s attached to the living trust document. With other assets, you do not change title—there may be complications if you do so.

For example, you may be one of the owners in a business where the agreement between owners restricts transferring ownership interests. Or, you may own real property (other than your principal residence) that has a loan on the property. Unless you get prior consent from the lender, a transfer to a living trust may trigger a due-on-sale clause that would make the loan all due and payable at the time of transfer. Oil, gas and mineral royalties, annuities, partnership interests, leaseholds and other assets may require special attention. Transferring a car to a living trust might present insurance issues. Get advice.

State law may determine the right course of action. For example, some states have special creditor protection through a homestead exemption (this is different from the homestead tax exemption that lowers property tax). This creditor exemption may be lost if title were transferred to a living trust. Your best bet is to get advice on transferring your assets before you make any transfers.

Assets with a beneficiary designation

In general, you do not transfer ownership to the living trust on assets that have a beneficiary designation (e.g., retirement plans and IRAs). The way you can avoid probate on those assets is by naming a primary and secondary beneficiary to make sure someone survives you to receive the assets.

It is generally not a good idea to name your estate as the beneficiary. If you name your estate as a beneficiary, then you’re asking for a probate of the asset. Probate means extra fees, delays and exposure of assets to creditors.

For life insurance, you may want to change ownership to a different kind of trust—an irrevocable life insurance trust.

HINT: Asset transfers and beneficiary designation changes may sound easy to do but there are often tax and other minefields just waiting for you to take a misstep. That’s why you should get advice before doing any asset transfers or beneficiary changes.

Questions on Wills and Beneficiary Designations

The following is an excerpt from A Parent's Guide to Wills & Trusts: For Grandparents, Too (2nd edition), copyright 2007, 2008 Don Silver and excerpt reprinted with permission.

QUESTION: It has been over 30 years since my husband and I signed our last wills. Our kids were so small then. I guess the wills aren’t good anymore since so much time has gone by. I sure hope so because in the wills we named my brother as the executor and he’s the last person we’d want as our executor now. Would our wills still be valid even though the paper has yellowed through the years?

Yes. A vintage wine may mellow and an old will may yellow, but only one of them may be easy to swallow.

HINT: Run, don’t walk, to get help if your will or trust is out of date.

QUESTION: I am a widower. Many years ago, I named my brother as the beneficiary of my life insurance, IRAs and retirement plans. That’s all I really have. Now I don’t want my brother to receive those benefits when I die. I want my daughter to get the benefits. I recently signed a new will naming my daughter as the only beneficiary of my estate. Should I bother to take the time to fill out new beneficiary forms or does my new will automatically protect my daughter?

Usually, beneficiary designations have a life of their own outside of your will or trust. In general, your will or trust will not override the beneficiary designations naming your brother. So, why leave any doubt as to your intentions?

You’ll want to fill out new designation forms as soon as possible naming your daughter as the primary beneficiary (be sure to fill in a secondary or contingent beneficiary designation, too).

Make sure your intentions are clearly stated

If the beneficiaries in your will or trust differ from those selected in other designations (e.g., life insurance, retirement plans and IRA beneficiary designations), you may want to make it clear in your will or trust or in a separate, notarized letter saying that this has been done intentionally. This can help avoid costly fights and help keep family harmony by clearly spelling out your intentions.

Avoid having benefits paid to your estate

The reason it’s important to complete a secondary or contingent beneficiary is that in many cases the benefits will be paid to your estate if your primary beneficiary dies before you and you haven’t named a second choice.

There are two main problems with these benefits going to your estate. First, the benefits probably will be subject to legal fees and also delays in a probate that might otherwise have been avoided. Second, if the benefits are paid to your estate, you may have converted an asset that was exempt from creditors’ claims into one that may be taken by creditors.

HINT: To reflect your current intent, always keep your beneficiary designations up to date.

Avoiding Probate with Joint Tenancy

The following is an excerpt from A Parent's Guide to Wills & Trusts: For Grandparents, Too (2nd edition), copyright 2007, 2008 Don Silver and excerpt reprinted with permission.

QUESTION: I want to avoid probate upon my death. I’ve heard that I can avoid probate by putting my adult children on the title to my house as joint tenants. Is that a good idea?

Maybe, maybe not. You must understand that joint tenancy means more than just a way to avoid probate in the event of your death. Co-owning assets with your children as joint tenants also has an effect while you’re alive.

Risky business with joint tenancy

If your children become joint tenants with you, they are co-owners of your house while you are alive. Putting aside some of the technical gift tax, income tax, property tax and death tax issues, let’s just talk about the financial risk you are taking when you hold title as joint tenants with your children.

If one of your children has a business that goes under, your child’s creditors may go after your child’s portion of the house while you are alive. If one of your children is at fault in a car accident where your child’s car insurance is not enough to cover the damage, the injured party may go after your child’s portion of the house while you are alive. And how would you feel if you had a big fight with a child and your child decided to sell his or her share of the house you’re living in? Why take these risks?

The bottom line is that while a technique such as joint tenancy may be good for one purpose (e.g., avoiding probate), it can have other unintended effects that could be a disaster.

Also, if you hold title (ownership) to an asset (such as a house) with your children as joint tenants and you and your children pass away simultaneously (e.g., in a car accident or a plane crash), the house may go through several probates, yours and your children’s. So, joint tenancy may not even avoid probate.

If you have minor children, all of the above applies and even more so as there are additional complications and issues.

(In this book, I am using the short-hand phrase joint tenancy to refer to joint tenancy with right of survivorship [also known as JTWROS] where the surviving joint tenant(s) become(s) the sole owner(s) after another joint tenant passes away.)

A living trust is less risky

To avoid probate and being responsible for your adult children’s debts and actions, get advice on setting up a living trust instead.

Although living trusts are more fully described later, for right now you just need to know that a living trust keeps you in control while you’re alive, acts as a type of will substitute when you die and allows your successors to avoid the probate court after your death.

HINT: If your goal is to avoid probate upon your death, look into setting up a living trust instead of holding title as joint tenants with your adult or minor children. That way you’ll be able to sleep at night and not be your children’s keeper for the rest of your life.

Beneficiary deeds

There may also be another alternative to joint tenancy or a living trust available to you to avoid probate on your house.

In some states, an inexpensive beneficiary deed can be used to keep title and control in your name during your lifetime and also avoid probate upon your death. Note that your ability to name contingent beneficiaries may be limited with a beneficiary deed.

Also, since a living trust has other benefits besides avoiding probate on real estate (and other assets) and is usually an easy way to do death tax planning, get advice on the best approach for your particular situation.

Answers About Health Care Legal Documents

The following is an excerpt from A Parent's Guide to Wills & Trusts: For Grandparents, Too (2nd edition), copyright 2007, 2008 Don Silver and excerpt reprinted with permission.

QUESTION: I am a widow. I have two sons. I have a wonderful relationship with one of my sons, John, but things aren’t going so well with my other son, Bill. If I become incapacitated, I would only want John making personal decisions for me, such as where I’m living and my medical decisions. What documents can I sign to make sure John will be in charge?

There are several health-related documents you can sign. Some may overlap one another.

Health and personal care documents

Different states have different documents or different names for the documents. While you are still competent, you should spell out your health-related choices in various documents: a durable health power of attorney (or an advance health-care directive or a health-care proxy), a living will and a nomination of conservator.

Durable health power of attorney, advance health-care directive and health-care proxy

You’re probably familiar with the concept of a power of attorney where you give someone the ability to act on your behalf. You can have a power of attorney for health matters.

A durable health power of attorney is a document by which you appoint an agent to make health-care decisions for you if you are unable to do so for yourself. The decisions can be big (pull the plug) or small (e.g., you need a minor operation, you’re unconscious and there are two types of possible procedures the surgeon can use). Ordinarily, there is no court involvement with a durable health power of attorney. A properly written and signed form should be honored by health-care professionals.

Since a power of attorney can give your agent a great deal of power over your future, you’ll want to choose your representative wisely. The agent you appoint is called an attorney-in-fact although in fact, the person doesn’t have to be an attorney—it could be your spouse, child, a friend, etc.

You need to trust your agent completely. You should consider whether that person has any financial conflict of interest. For example, will that person inherit from you if the plug is pulled for you? Since the person(s) you select as your agent usually inherits from you, too, you should not rule out a person just because of their status as a beneficiary. However, keep this possible conflict in mind.

Also, be sure that the personal or religious beliefs of the persons you select will not prevent them from carrying out your wishes.

The “durable” in a durable power of attorney means that the document is still valid even if you become incapacitated.

Similarly, an advance health-care directive lets you appoint an agent and give instructions about your health care whether you’re in a coma, terminally ill or just unable to make your own decisions. Health-care proxies operate in a similar fashion.

Living will

Don’t confuse a living will with a living trust. Don’t confuse a living will with a will either. A living trust and a will are asset-related documents. A living will is a health-related document that deals with just one big issue—pulling the plug.

This document is usually put into effect if you have an incurable and irreversible condition that (a) will result in your death within a relatively short time without the administration of life-sustaining treatment or (b) has produced an irreversible coma or persistent vegetative state.

Under such circumstances, a living will directs your physician to withhold or withdraw treatment that only prolongs an irreversible coma, a persistent vegetative state or the process of dying. Such treatment could include the use of a respirator as well as artificially administered nutrition and hydration.

Nomination of conservator for day-to-day living decisions

A nomination of conservator is sometimes known as a nomination of guardian. This type of document is put into effect only after you become incapacitated.

Your representative under this type of document is known as a conservator. In the document you name your choice for conservator and that person applies to a court to act on your behalf. The appointment happens after there is a court proceeding to determine your incapacity.

There are two types of conservator—a conservator of the person and a conservator of the estate.

A conservator of the person makes your day-to-day living decisions, including where you’ll be living.

A conservator of the estate handles your money and other assets that aren’t already managed under other documents such as a living trust and a durable power of attorney for money matters.

Who should be your conservator of the person? In some cases, you might want two people to make decisions jointly for you rather than relying on the judgment of just one of them. In your case, you just want John involved.

Since a representative acting on your behalf under a nomination of conservator would be entitled to a fee for the services provided to you, this kind of situation sometimes brings relatives out of the woodwork who are not close to you. That’s why you’ll want to sign a nomination of conservator stating your choices for a conservator.

Medical identity theft

A growing area of concern is medical identity theft. If someone gets treatment under your name or health insurance policy, you may be more concerned by the effect on your medical records than on your finances. Someone posing as you can have their medical information (e.g., allergies to medicine and current medications) entered under your name.

A medical imposter may affect you in other ways. For example, erroneous information may cause you to become uninsurable or unemployable (if you fail the pre-employment medical exam).

That’s why you’ll want to file a report right away with your health insurer if your health-care ID or pharmacy cards are ever lost or stolen.

For tips on preventing or resolving medical identity theft, see
www.worldprivacyforum.org/medidtheft_consumertips.html.

HIPAA consents

Make sure you sign HIPAA medical consents so your representatives are able to act on your behalf for treatment, payment and insurance issues.

HINT: For any document where you name a representative, also name alternate choices in case the first person you have in mind can’t or won’t serve on your behalf.

You may want to have both a durable health power of attorney and a living will. If you travel a lot or have residences in more than one state, get advice on signing forms in more than one state since states usually have their own requirements.

One final thought. You may also want to have a living trust to minimize any court involvement (and legal fees and court costs) concerning your financial affairs.

529 Plans Help with Estate Planning

The following is a guest post from Marotta Asset Management.

While many parents are struggling to fund their retirements adequately, the size of some grandparents' estates are prompting them to look for ways they can avoid paying excessive taxes. One effective estate-planning technique is using a 529 account both to fund their grandchildren's college and also help them avoid significant tax liabilities.

Families are finding it increasingly difficult to save for college. Four years costs about $55,000 at a public in-state school. With college inflation averaging 6.2% in the past decade, new parents in 2008 can expect the bill to swell to $160,000 by the time their children graduate from high school at age 18. Private schools are about twice as expensive.

Imagine Grandma and Grandpa Smith. Having come of age during the Depression and World War II, they built great wealth through an entrepreneurial can-do spirit. They are reluctant to subsidize their grown children, who already spend more frivolously than they should. But they love their grandchildren and support giving them as much of a debt-free higher education as they can achieve. And, of course, saving on taxes is a welcome benefit as well. So funding a 529 plan for each of their three grandchildren is an easy choice for them.

Investing in a college 529 plan offers several layers of tax savings. Virginia allows residents to deduct $2,000 of contributions from their 2008 state taxes. If Grandma Smith opens an account for each of the three grandchildren and Grandpa Smith opens his own accounts for each one, they can deduct $12,000 (six accounts times $2,000). Any contributions over this limit can be carried forward for deductions in following years. In 2009 the limit goes up to $4,000 a year per account. That year the Smiths can deduct $24,000, saving them $1,380 at Virginia's 5.75% rate. Saving $690 in 2008 and $1,380 per year for 17 years gives them $24,150 in Virginia state tax savings.

The Smiths can also use 529 plans to reduce their large estate. Anyone can gift $12,000 per person without being subject to the gift tax consequences. With a 529 plan, you are allowed to give five years ($60,000) all at once to get the account started by filing tax form 709.

Great benefit accrues to gifting the entire $60,000 in the first year rather than gifting $12,000 a year for five years. By putting the entire gift upfront, all of the growth is compounding completely in the child's estate. Gifting $12,000 each year leaves the remaining $48,000 compounding in the grandparents' account, exacerbating their estate-planning problem.

But gifting the entire $60,000 in the first year puts over $16,000 in extra compounded growth out of the Smiths' estate by the end of the fifth year. This extra contribution will continue to compound in each grandchild's college account for further savings. Because both the Smiths have an account for each of the three grandchildren, the extra estate exclusion by funding them upfront is $96,000. At a 45% estate tax rate, they will avoid $43,000 in estate taxes by the end of the five years.

And the tax-free compounded growth continues to provide estate tax savings. Over the 18 years before the Smiths' grandchildren go to college, the compounded growth is both tax free and out of the Smiths' estate. After 18 years of growth at 10%, their initial $360,000 investment will have removed over $2 million from their taxable estate, for a total estate tax savings of $900,706.

There is also a savings from tax-free compounding. Had the investments remained in the Smiths' accounts, the growth would at least have been subject to a 15% capital gains tax, if not higher. Avoiding this additional tax saved another quarter of a million dollars.

And after 18 years, as if to add the cherry on the top to all of these tax savings, each account will be worth $333,595. Stanford, my alma mater, currently costs more than $60,000 for four years. Growing at 6.2%, after 18 years it should cost about $180,000. With two accounts each, the Smiths' grandchildren should only be limited by their drive and academic achievement.

You might wonder why Grandma and Grandpa Smith are overfunding their 529 plans with more money than their grandchildren will likely spend on college. Any unused money can be allocated for the college expenses of future generations. Beneficiaries can be changed to the children, stepchildren, grandchildren, parents, grandparents, aunts, uncles and first cousins. After the grandchildren have finished college and gone through graduate school, the beneficiary of any existing money can be changed to their own children. The Smiths could be starting an educational dynasty with generations of tax-free growth.

The Smiths retain full control of these assets, even though they have been removed from their estate. Typical estate-planning instruments would require the Smiths to make irrevocable gifts. But with 529 plans, they can switch the beneficiary, change owners or even withdraw money for their own use if they are willing to pay the taxes and the 10% penalty on earnings. They could even make themselves the beneficiaries and enroll in classes themselves. If one of their grandchildren receives an athletic or academic scholarship, the Smiths can receive a tax-free refund up to the amount of the scholarship. And with a grandparent as the owner, a 529 plan is not considered as a resource for financial aid.

Unlike 529 savings plans, we do not recommend prepaid college tuition plans. At best, they match college inflation, and if used at an out-of-state institution, returns may not even keep pace with inflation. Virginia has several different flavors of 529 college savings plans. VEST, the Virginia Education Savings Trust, is marketed directly to the public. Another, CollegeAmerica, is offered through financial advisors. It has different share classes, some of which have loads that make them unattractive. No-load shares are available through fee-only financial advisors. The advantage of CollegeAmerica is that it allows an advisor to create his or her own asset allocation mix from a few dozen different funds.

Five Tips You Should Know About Inheritance

Here's a post I was sent that lists five tips you should know about inheritance. It contains "one financial planner's advice on how to leave a financial gift to your grandchild." Her suggestions:

• Don't Leave Money Directly to Minors. Set up a trust. You might consider distributing the money in one-third chunks when your grandchild turns 25, 35, and 45.

• Talk About Your Expectations. Start a conversation with them now about where the money came from, how you earned it, and what you hope they will do with it.

• Don't Attach Strings. Be careful not to "control" the inheritance.

• Be Specific. Ambiguous language or instructions are susceptible to attack.

• Consider Giving Now. Another option is to give your grandkids their "inheritance" while you're still alive. You can give an annual exclusion gift of $12,000 per child — tax free — to an unlimited number of recipients every year.

Personally, the last piece of advice is my plan for reducing my estate as I get older. I'll probably be above the estate tax threshold (depending on where it finally nets out after this year's election) and plan to reduce my estate below the taxable limit by giving gifts to my kids/grandkids (assuming I ever have any of the latter.) I'd much rather they get the money than it going to the government.

Is This a Good or Bad Way to Die?

Here's an interesting story. A couple in Grand Rapids, Michigan passed away and left a boatload of money to family and friends. The details:

About 70 people in three farm communities on the Kent-Ionia line are reeling from generous windfalls Willis and Arlene Hatch quietly arranged before the couple's bittersweet deaths two months ago.

The gifts -- about 100 certificates of deposit in all -- range in value from $5,000 to well over $100,000. They total at least $1.6 million, shared among dozens of friends and neighbors in Alto, Lowell and Clarksville.

Ok, so they were quite generous. That's something to be commended, right? Of course. That's the good side of this story.

But there's a bad side as well. It appears that the couple lived a fairly frugal life and even to a tightwad like me, it seems like they could/should have spent some of it on themselves -- or at least given some away earlier. Here's why:

For any estates settled in 2008, a 45 percent estate or "death" tax is assessed on assets over and above $2 million. Behler and Story have been advised that the Hatch estate is worth an estimated $2.9 million -- including the shared CDs, the farm, and stock worth more than a half-million dollars spread among extended family -- so the personal representatives estimate they will need $405,000 to pay taxes. The 14 percent reflects the entire estate divided by that $405,000.

So they could have spent $900,000 on whatever (gifts, trips, etc.) and it would have only cost them around $500,000 to do so. Now, Uncle Sam's going to get over $405k. Seems like this could have turned out even better if they had done a bit of advanced planning.

For more thoughts on estate planning, see these links:

• Will You Be Impacted by the Death Tax?

• The Biggest Mistake in Estate Planning

• What You Need to Know About Wills

10 Commandments of Personal Finance, Commandment #10: Thou Shalt Legally Protect Thyself and Thy Family

Bankrate offers a list of the 10 commandments of personal finance that I'll be sharing with all of you as well as providing my thoughts on their selections. The commandment for today:

X. Thou shalt legally protect thyself and thy family

Whether you're single or married, you should have a will or trust. Actually, these documents are not for your benefit but for the benefit of your heirs. If you don't have a will or trust, it becomes a legal nightmare for them.

We're in the process of updating our wills (it's been far too long since we've done it.) And while most people do not have wills, almost everyone should have one. And if you're a parent, you HAVE to have one -- otherwise, you'll have people who know nothing about you (a judge) deciding who will get your kids in case of your untimely death.

For related thoughts on this topic from Free Money Finance, see these posts:

• The Biggest Mistake in Estate Planning

• What You Need to Know About Wills

• How to Decide Who Gets Your Kids When You Die

Click here to read part 1 of this series.

Are Your Kids Really that Important to You?

I've talked about this before, but I ran into this quick fact in the February issue of Money magazine and had to discuss it again:

57% of Americans don't have a will, including 69% of parents with kids under 18.

Here's my take on this:

1. Almost everyone needs a will. Assuming you own something, don't you at least want a say in where it goes -- relatives, friends, charity, etc.?

2. The 69% number simply floors me. Do you really want the court deciding where your kids would go in case of your death?

3. We're having our wills updated because the guardians we'd appointed a few years ago have since moved away and we've lost contact (for the most part) with them. We're naming new guardians. In addition, we're dividing up our property a bit differently and deciding when the kids get various amounts from the estate.

I understand that getting a will can be a difficult emotional process for some, but it's a key part of good financial management. And if that's not enough to get you to have one, think about your kids and who might raise them if you let the court pick their guardians. Do you really want that to happen? I sure don't!!!

If you'd like some tips on how to get a will that's right for you, check out these posts:

• What You Need to Know About Wills

• How to Decide Who Gets Your Kids When You Die

• What Happens When You Die Without a Will

Will You Be Impacted by the Death Tax?

Ha! I chose that title because I know it will rile some people up that I called the "estate tax" the "death tax." That's just the sort of mood I'm in today.

Bankrate lists the estate tax exemption levels as well as the maximum tax rate on the estate for various years as follows:

• 2008 -- Estate tax exemption: $2 million; Maximum rate on estate greater than exemption: 45 percent
• 2009 -- Estate tax exemption: $3.5 million; Maximum rate on estate greater than exemption: 45 percent
• 2010 -- Estate tax exemption: Tax repealed; Maximum rate on estate greater than exemption: Tax repealed
• 2011 -- Estate tax exemption: $1 million; Maximum rate on estate greater than exemption: 55 percent

A few thoughts on these:

1. We're right now in the middle of having our will updated and this is an issue for us. I'll be updating you later on the process once we're through with it.

2. Don't forget the impact of life insurance. If you have a net worth of $1.2 million and life insurance of $1.5 million, you're $700k over the $2 million limit for 2008.

3. Husband and wife can pass as many assets to each other upon death as they want. But when the second one dies, then the estate tax is due.

4. I'm sure there's some rule around it, but couldn't people pass along assets forever (through marriage) and avoid estate taxes? For example: A marries B. A dies and passes all assets to B. B marries C. B dies and passes all assets to C. C marries D. C dies and passes all assets to D. See how this could go on forever?

5. For those of you who've been in a cave the past year, we're in a presidential election year. And the first thing whoever gets elected is going to do is change taxes (including the estate tax.) So these numbers could go up or down depending on who gets elected and so on (though the numbers for 2008 are solid -- they won't be able to change those, and I don't see Bush/Congress changing anything in 2008.)

6. Now you see why people joke that rich, elderly people are trying to hold on until 2010. I'm sure there will be some sort of story/litigation about a wealthy person who's kept alive until January 1, 2010 or prematurely allowed to "expire" before December 31, 2010 because of the repeal above (that is, if it's kept in place.)

7. Tons of people are going to have a rude awakening if the tax exemption goes down to $1 million again.

The Biggest Mistake in Estate Planning

Want to know the biggest mistake in estate planning? Here's what Vanguard says about it:

If someone asked you what the most common mistake is in estate planning, how would you answer? Surprisingly, the number-one mistake is simply not getting around to it at all.

The article also gives short thoughts on wills, your beneficiaries, your house and other real estate, incapacitation, a durable power of attorney and a medical power of attorney. I know, not exactly pick-me-up sort of reading. Nevertheless, it's a key part of financial planning, vital to protecting those you love, and essential if you want to pass along your assets upon your death.

FYI,  Bankrate reports that 57% of consumers do not have a will. Furthermore, 69% of parents with children under the age of 18 are not prepared with a will.

Not a pretty picture.

What You Need to Know About Wills

Here's a great, general piece listing what you need to know about wills. It details the following:

• Who needs to have a will?
• Which assets does a will direct?
• Do you need an attorney?
• Make sure your will is valid
• How often should I update a will?

In particular, the third question is one I'd like to address in this post. Do you or don't you need an attorney?

Generally, my take is that if you're single, don't have many assets, and someone isn't depending on you for an income (like a parent), then go ahead and do your own will using a software program or some sort of kit. All others I would suggest consult an attorney.

Why? Because you want to make sure it's right, legal, and will do what you want it to do. Is it really worth saving a couple hundred bucks if your estate doesn't ultimately go where you want it to go? Worse yet, what if your kids end up with someone you don't want them to end up with? Besides, a lawyer will think of issues you haven't even dreamed of -- and some kits won't address either. Go ahead, get a lawyer and make sure it's done right. If nothing else, the peace of mind will help you sleep better at night.

Now if you finances are complicated in the least bit, you really have to use a lawyer. What's complicated? Let's say your estate is over $2 million and you want to limit taxes when you die. Then you need the help of a seasoned attorney. Otherwise, your heirs could get a not-so-welcome estate tax bill upon your death. And I know what some of you are thinking -- that not many people have $2 million estates. Well, it's becoming more and more common to be a millionaire and I'd venture a guess that many of these people have more than $1 million in life insurance, hence a good number of them are over the $2 million limit.

As you know, I'm generally a do-it-yourselfer when it comes to personal finances, but not on this one. Just like I use a CPA to do my taxes, I hire a lawyer to do my will. In fact, I'm in the process of a will update right now. I'll keep you posted on my thoughts as the process progresses.

How to Decide Who Gets Your Kids When You Die

I know, I know. This is a real downer of a subject. But money talk can't be all smiles and laughter -- you have to deal with some really hard issues some of the time. And since we'd all probably agree that our kids are MORE important than money, considering the subject of who they go to in case of your death is certainly time well spent.

MSN Money has a few thoughts on how to decide who gets your kids when you die. A few of their suggestions I found worthwhile:

• Lower your expectations. Be real: Is there anyone on the planet, including your spouse, whose parenting skills are perfect in your eyes? So why are you expecting perfection from a guardian? What you want is someone who will love your kids and raise them with the values that are most important to you.

• Widen your net. Many people pick family members to be their children's prospective guardians, but that's not the only option. Good friends, especially those who already have kids, might be a better choice in some situations. A neighbor could be a workable option for an older child who might otherwise have to be uprooted and moved across the country.

• Pick someone "for now." It's OK to have a "placekeeper" guardian, somebody who'll do in a pinch or whom you fully plan to replace eventually. Children and relationships change, and you can alter your will later to name someone else.

• Keep the money separate. Occasionally, there are folks who are great with money and great with kids, but the skill sets don't necessarily go together. It's perfectly acceptable, and often preferred, to choose someone other than the guardian as trustee of the kids' assets (any money, property and life insurance proceeds they'll inherit should you die).

We've applied several of these in our will including:

• We picked friends as the primary guardians. They have kids, share our same values, and are about the same age as we are. Everyone in both of our families are either too young/old, not good with kids, or wouldn't be decent parents. So we talked to this couple friend of ours, got their permission, and put them in our will.

• We put our money for the kids in the hands of my parents (in other words, someone separate from the guardians.) As the article notes, people who are great with kids aren't necessarily great with money -- not that my parents are either, but at least we'll have a couple people involved in managing how the kids are provided for.

• When we made our will a few years back (we're due for an update), we set an executor (a family member) who was older and likely not going to outlive us. This was the "placekeeper" noted about above and at our will's next updating, we'll probably decide to assign a new executor.

For more on the issue of wills and planning how your estate is distributed, see these posts:

• Benefits of a Will

• You Still Need a Will

• What Happens When You Die Without a Will

What Happens When You Die Without a Will

I've noted the need for us all to have a will (see You Still Need a Will and Benefits of a Will for details), so when I got an email a couple weeks ago about wills, I was interested to see what the sender had to say. Here's his note:

As 65% of us die without a will, the majority of your existing and potential audience is affected by intestacy laws.  In fact, most people don’t realize that their surviving spouse is frequently required to share the estate with the children.

You can show your audience exactly who gets their property and how much is given to each person with the free “Intestacy Calculators” at MyStateWill.com. 

These are the first interactive programs that interpret intestacy laws and present an easily understood summary of what really happens when you die without a will. They also show the amount of Federal Estate Tax that is due.

I stopped by the site and it's actually pretty slick. It took me about two minutes to do my current state, then a couple more minutes each for me to do the two states I've lived in in the past (just for fun.) There were interesting results -- differ for each state -- including these options:

1. Current state: 60% to my spouse and 20% to each of my kids.

2. Last state lived in: estate divided evenly between wife and kids (each getting 33.3%)

3. "Home" state: 100% to my wife.

Just goes to show you -- different states have different rules and if you want to control the destiny of your estate, you need a will.

Check out the site and let me know what you think!

What to Do When Your Term Life Insurance Expires

As you probably know, I'm a believer in buying term and investing the difference when it comes to life insurance. I know others disagree (mostly those who are in very special circumstances), but this is what I'm doing. My plan is to cover my earning ability/life for the next 15 years or so (that's what's left on my 20-year policy) and in the meantime build a nice net worth that will allow me to self-insure myself past that.

But there will be a point when my term insurance runs out. It will be the same for many of you. And what should you do at that point -- simply let it expire or get a new policy? Here's what Smart Money suggests to help you decide:

To make sense of these or similar situations, ask yourself one fundamental question: Will your death cause unmanageable financial hardship for the people you leave behind? Odds are you have more savings and fewer people relying on them today than earlier in life, so you may not need to hedge against death at all. "The traditional, old-fashioned reason to buy life insurance is to replace earnings," says Joseph Belth, editor of the Insurance Forum in Ellettsville, Ind. "By the time you are retired, you are supposed to have accumulated some reserves, and presumably, your children are independent."

This is where I hope to be. My kids will be grown and through college and my savings should be significant (especially after a couple more decades of saving and compounding), so I'm thinking I'll be fine. In fact, much of my planning will need to center on keeping my estate low enough and managing it correctly via estate planning not to get hit by a big tax bill when I pass on. That's a good problem to have, huh? ;-)

What about you? What are your plans regarding life insurance for the future?

Timeless Money Rules: Investing, Debt, and Estate Planning

Money magazine has a series on 20 timeless money rules that's pretty interesting. Over the next few days, I'll be sharing a few of these as well as my thoughts on them. The first one for today is to invest abroad. Money's thoughts:

Most Americans have less money in foreign funds than the 15% to 25% experts recommend. But you don't have to be like most Americans.

I'm in the category of "most Americans" here but I've been working on putting more money in international index funds the past couple of years. I should be in the 15% to 25% range in a couple more years.

Money next gives some thoughts on how not to panic when the market drops:

When the Dow sheds 300 points in a day, it's natural to feel doomed. And when the market surges, it's easy to be convinced that stocks have entered "a new paradigm," to echo a bubble-era phrase. Don't delude yourself. As Sir John Templeton notes, "The four most expensive words in the English language are, `This time it's different.' "

This is why I've been going against the flow recently and why, despite the fact that the market's been rocky, I think it's a great time to invest.

Money now moves off investing and suggests people need to borrow responsibly:

Face this truth: If you let them, lenders are only too willing to advance you more than is good for your family. Mortgage banks and credit-card issuers don't care if your monthly payment makes it impossible for you to sock away money in your 401(k) or fund your kid's 529 plan.

So what should you do? Get out of consumer debt, pay off your credit cards, and save for major purchases like cars. And if you're really disciplined, work on paying off your mortgage.

Finally, for today, money suggests that you exit gracefully. In other words, they say that you need a will and an estate plan. I couldn't agree more.

For those of you who want more details on these thoughts, check out the following:

• Nine Ways to Pay Off Debt

• You Need a Will

• Why You Need Some Investments in Foreign Markets

Make Your Death Easier on Your Heirs by Writing a Letter of Instruction

Something I've had on my to-do list for quite some time is to write a letter of instruction to my wife and kids. It basically tells them where all the financial records are, what key passwords are on our computer, what's in each account, etc. -- stuff that I know well but that would take them awhile to sort out. I go through all of this verbally every year with my wife, but I'm positive she doesn't remember most of it and I need to write it down for her.

Money magazine recently covered this issue and listed some things you should consider in writing a letter of instruction. Their thoughts:

• Be specific. Include the sort of end-of-life wishes you want the person who holds your health-care proxy to know.

• Consider what not to write. Resist the temptation to unload and say all the nasty things you might have liked to say in life.

• Talk about it. Make sure your kids know the letter exists.

• Update it. Read the letter once a year to make sure it reflects any changes you've made in your financial life or in your thinking.

They also have a list of what you should write including:

• The location of key documents
• Policy/account numbers for key policies/accounts
• Phone numbers for all your major family contacts

After getting your will straightened out, this is probably the best thing you can do to make sure your death is as easy as possible on those you love.

What to Do When You Inherit Money

Ever wonder (or dream) what you would do if you inherited a windfall of money? For most of us a large inheritance is only a dream but a "lucky" few will receive an amount so substantial that it can change their lives. So, what should people do when they inherit money? Here's what Money Central advises:

Your first move should be to deposit your new wealth in a bank or brokerage account -- possibly one that isn't held jointly with your spouse, advises Martin Shenkman, a tax and estate lawyer in Teaneck, N.J.

In other words, put it somewhere safe so you can take a deep breath and think about what you want to do. You have all the time in the world to spend it. Relax a bit, get through the loss in your life (the passing of a loved one) and then decide how to move on and spend your windfall.

Sounds like good advice to me. Oftentimes when people get into a rush and make spur-of-the-moment decisions, they end up doing something they regret. Wise counsel says to wait a bit before making any financial moves.

For me, I'd certainly take some time to think about what to do. And the decision would depend on how much money was inherited. If was enough that I could potentially quit my job, that would be one whole set of decisions I'd have to go through. If it wasn't enough, I'd likely just invest it in an index fund and keep going about my business as usual.

Giving Away Money to Reduce Your Estate and Minimize Taxes

I mostly write about accumulating assets and saving for the future because 1) that's the stage of life I'm in now and 2) most people need help in this area more than any other. But what if you're past this point and have more than enough money? What can you do to get rid of your wealth while you're living and reduce your estate taxes when you pass on?

Actually, it's quite simple: you can give your money away. But you can't give all of it away immediately without incurring some tax consequences.

So what are the details involved in doing this? Yahoo lists a few of the keys in a piece listing how shrewd gifts can cut your estate tax. Let's start with the basics:

In 2007, each person can give away up to $12,000 of assets to any number of recipients.

In other words, each person can give another person up to $12,000 with no tax consequences. That's about as plain and simple as it gets.

But there are ways to give away even more with no tax impact:

Married couples can both use the $12,000 exclusion. Together, they can give away up to $24,000 a year.

So, for example, I can give someone $12,000 with no tax impact and my wife can give that same person $12,000 as well -- again with no tax impact. That way, we can give someone $24,000 without any tax issues being raised.

BTW, please do not email me asking for money. I'm using the fact that we CAN give money away as an illustration. I'm not making an offer to give anyone $24,000. ;-)

Using this method, you can give away some serious money:

If Jim and Joan Smith have three children they can give away $72,000 in 2007. At current levels, they can repeat that yearly. After a decade, they will have shifted a total of $720,000.

And, there are other no-tax ways to lower the value of your estate:

There is no tax on gifts to charity.

Most gifts between spouses aren't taxed. For married U.S. citizens, generally there is no limit to the amount that one can give to another.

Some gifts qualify for medical and education exceptions. You can pay someone else's medical bills without owing gift tax, no matter how large they are.

The same is true for payments of another person's school tuition. Either way, the payments must be made directly to the school or to the health-care provider, Finn says.

But, there are limits:

Each individual is entitled to a $1 million lifetime gift tax exemption. You and your spouse each can make $1 million of taxable gifts without paying gift tax.

I know -- most of us will never be in the place where we will give away $1 million and have plenty left over to live on. That said, many people will leave behind $1 million in their estate -- and you definitely want to be able to direct where that money goes. As such, we all need a will.

How to Clean Out a Dead Parent's House

Ok, that's a bit of a strange title, but it's the best I could come up with.

A few years ago, my wife's father passed away and we helped (with several other relatives) clean out his home. It was an interesting experience for sure -- seeing a lifetime of stuff that had been accumulated. I had responsibility for the garage, so I had mostly tools, screws, and the like to go through. He was an organized guy, but still he had a TON of what I could only deem as junk. It was a tedious process.

In this piece from MoneyCentral, they list several tips on what you should do when cleaning out a dead person's home. There are several good tips in the article, and I'd like to highlight a few of them. Let's start on what to do from a financial perspective:

Getting a handle on your parent's financial life is the priority. To keep the homeowners policy in force, ask the insurance company to change the name of the insured to the estate; that way, you ensure that property-damage and liability coverage stay in force. Continue to pay the mortgage (if any) and utility bills. As soon as possible, change the locks on the house -- you never know who might have a key.

Scout through the house for wallets, checkbooks, financial statements, information about safety-deposit boxes, birth certificates, insurance policies, stock certificates and so on. Did Dad write a will, and do you know where it is? Jeanne K. Smith, a professional organizer in Palo Alto, Calif., says that many seniors don't keep all their paperwork together and may have filed it in unexpected places. Keep any keys you find in one location so that they can eventually be matched to the proper locks.

My wife's father had a will and named his lawyer as executor. Things ran fairly smoothly on the financial end as a result. But we still had to clean out the house. Here are some tips for what to do during this process:

• For each item, decide whether to keep it, donate it, sell it or trash it.

• If you and your siblings get hung up on the 20% of things with emotional or monetary value, professional organizer Barry Izsak recommends that you set them aside and focus on the 80% no one cares about: the Tupperware and lawn tools.

• Look everywhere and in everything. Poitras found $1,100 in cash in a boot. When Izsak closed his parents' home, he gave a piano bench full of music to a neighbor, who returned the $50,000 life-insurance policy he found among the sheaves. Smith has found diamond rings in Band-Aid boxes and stock certificates in folders behind kitchen curtains.

• Get an appraisal. If you have doubts about an item's value, hire a personal-property appraiser. Miller knows of a case in which $30,000 worth of 17th-century Japanese prints ended up at the dump.

The one tip that stood out to me was to look everywhere. I know my parents have stored money in socks in the past (a place I would never think of looking), so I will certainly use this tip if I ever have to clean out their home.

There are several other great tips, so check out the article if this situation applies to you.

BTW, I plan to keep less and less stuff as I get older so my kids don't have to sort through as much stuff. We'll see how that plan goes. ;-)

You Still Need a Will

Hi. It's me again. And, yes, I'm talking about wills again. After writing about giving up smoking, this is my favorite "public service" topic.

I was reminder to post about it by this piece on MSNBC which said most people who need a will don't have one. The details:

“Everyone needs some kind of plan,” says Laurie Siebert, CPA and a certified financial planner with Valley National Advisers, Inc. in Bethlehem, Pa. “Yet, estate planning tends to be the elephant sitting in the room that many people seem determined to ignore,” she adds.

According to a recent survey conducted by the online legal document service provider LegalZoom.com, 70.2 percent of Americans lack a last will and testament. Even worse, survey respondents who were parents with minor children were the least likely to have prepared a will. The most commonly cited reasons: Disagreement or indecision over naming the children’s legal guardians.

Yikes! 70% don't have a will -- and parents with young kids are the worst of the lot?! Double yikes! (Which reminds me -- I still need to update our will.) For those with kids and no will, you're playing with fire:

Unfortunately, not making such decisions still has consequences. “If you don’t decide, the state will. However, the results will likely be undesirable for everyone,” says Siebert.

And even young people -- some who think they probably don't need a will -- do need one:

“As soon as you start a career, you are likely to have assets such as a 401(k), IRA, or even an employer-paid insurance policy,” observes Joseph Corriero, a director in online marketing for Merrill Lynch in Hopewell, N.J.  All require thought and decisions regarding beneficiary designations. They also require periodic review to ensure the listed beneficiaries are still those who should be named and their contact information is current.

And finally, here's a great way to talk to your parents about the fact that they need a will:

Siebert suggests one way adult children can have this conversation with their parents is to begin by asking advice: "Now that I’m working and have a 401(k) and have a baby on the way — how did you and Dad decide who your guardians and beneficiaries would be when you were my age?"  Or they could ask: "If something were to happen to you Dad, how would Mom be taken care of?"

Nice. ;-)

So, what are you waiting for -- go out and get a will!!

In addition, I'd be interested in hearing your thoughts. Do you have a will? Why or why not? If you have one, is it current?

Estate Planning Lessons from Anna Nicole Smith

Every so often I post on estate planning to remind others and myself of the importance of having a complete estate plan. For most people, that means a simple will and a few accompanying documents. For others, it means a trip to the lawyer's office for more complicated planning. But no matter what your situation, it's vital that you have a plan for what happens to your money and belongings in the case of your death.

Yahoo recently discussed lessons to be drawn from Anna Nicole Smith's lousy estate plan. It appears it would have been easy for her to avoid the entire mess by following a few, simple steps such as:

Clearly defined language and the vetting of a professional estate planner would have avoided the mess Smith's estate is in.

This is why I use a professional for my estate plan. Then again, I assume she used a professional as well.

Regardless, consider this my reminder to us all to either 1) get a will or (if you have one already) 2) update your will if it's been some time since it was written.

For more on the topic of estate planning, see these links:

• You Need a Will

• Benefits of a Will

• How to Choose a Guardian for Your Children

Don't Count on an Inheritance to Get Rich

Here's an interesting piece from MoneyCentral on surviving the parent/kid squeeze. It deals with the financial issues associated with trying to take care of parents as well as adult children who need help. It's kind of scary to be honest -- makes you want to talk to your parents about their financial plans and teach your kids all you can about handling money. Otherwise, your finances might be impacted dramatically.

But the part that really caught my attention was some information on inheritance. In particular, this statement:

The median inheritance was $37,700. About 1% of those surveyed received an inheritance greater than $1 million, and 5% inherited between $250,000 and $1 million.

Wow.

When you think of it, this isn't that much of a surprise. After all, most people have low net worths, so as a result they'll have low inheritances to pass along. That said, I have always thought of an inheritance as being a big number -- one that if it didn't make the receiver wealthy at least made him comfortable. Now I find out that a lifetime's worth of savings may buy the receiver a really nice car and that's it. Yikes!

So what's the issue? Many people I know seem to think they'll "have it made" when (fill in the blank -- parents, aunt and uncle, grandparents, etc.) leave them an inheritance. Granted, some of these people know that the amount will be large, but I think many are simply assuming they will reap a windfall when someone passes away. Not only is this a morbid thought (waiting/hoping for someone to die) but it seems unrealistic for the average person.

In addition, as people live longer, they'll be spending more and more of their own money which I expect to make inheritances drop as a result. Worse yet, they'll outlive their assets and have to depend on their children for support. So for many, a negative inheritance is what they'll get.

My point in all of this? If a significant part of your financial plan is built on some sort of inheritance that may or may not ever materialize, I suggest you make alternative plans. Otherwise, you may be the one living off of support from your children.

Planning for a Funeral

Here's a piece on planning for a funeral courtesy of Marotta Asset Management:

Funeral expenses are often a family's fourth largest expense after paying for a house, college expenses, and a car. The average funeral costs between $5,000 and $7,000, but it's not uncommon for funeral expenses to top $10,000. Planning a funeral may be an uncomfortable task, but, planning early will save you or your family members from having to make difficult decisions during a time of bereavement. Last-minute planning often leaves family members feeling pressured to spend more than they should in order to demonstrate their love for the departed.

When my mom was dying I went with my father to help make arrangements. Having me along helped him through the painful process of planning for an event we all wanted to deny would actually happen. Having two of us made it easier to see that a $12,000 casket wasn't really the best decision.

Bringing a friend can help you go through the process of selecting funeral products and services. And, if a friend of yours is faced with planning a family member's funeral, you can provide great support by going with them and helping them stay within whatever budget they have set.

It is always good to get the list of prices for at least three different services. The Federal Trade Commission requires all funeral homes and cemeteries to provide you with a free itemized price list of their services during your visit. My father and I visited a few different funeral homes in order to find one that fit with our family's purpose in holding a memorial service.

Having your own values in mind during the process can help avoid unnecessary expenses. My own philosophy is that a funeral is all about gathering friends and family to remember the loved one's life. The products and services of a funeral home should be relatively plain so as not to distract from that focus.

We do not recommend that our clients purchase prepaid funeral services. Pre-paid arrangements are expensive and impossible to get your money back out of, if you change your mind or move. Setting aside a certain amount of funds for funeral expenses is the best option. Money properly invested will appreciate faster than inflation and provide better financing for funeral services. Alternately, you can purchase a small life insurance policy to cover funeral expenses. Only if you are purposefully trying to spend down an estate for some reason should you prepay for funeral expenses.

Similarly, family burial plots rarely work as planned. Parents often want to be buried near their children while children often want to be buried near their own children.

Where you are buried can be especially tense if you have been remarried. Children often want to reunite mom and dad in death while your current spouse may have other wishes. Communicating your love for everyone as well as the reasons for your decision can help avoid those tensions being combined with the powerful mixture or grief and anger.

If you want to make planning your funeral easier for your surviving family, draft one page that gives your wishes. Oral or written instructions about burial aren't legally binding. They are only intended to make things easier for your family, not harder. Be sure to include instructions regarding the following important decisions:

• Preparation and care of the body. Do you want your body to be buried immediately after death, embalmed and buried, cremated, or donated to science?

• Place of burial. Do you have a cemetery or burial plot? Where would you like a service? Who would you like to perform or speak at the memorial service? Do you have favorite music or flowers that you would like included in the service?

• Communication with friends and family. Who should be contacted regarding your death? What would you want included in your obituary and headstone? Is there a charity where contributions should be made in your name?

• Important documents. Where is your will? What is the contact information of your executor, lawyer, CPA, financial planner? Do you have an inventory of your assets that is kept up to date annually? Where is your safe deposit box and key? Where are all the important documents such as birth certificate, marriage, divorce, prenuptial, deed, business, insurance, financial, social security, pension, and benefit records?

Keep these instructions handy, not just sealed away with your will or in your safe deposit box. They should be reviewed annually with family members along with your estate plans. More information can be found online at www.aarp.org or www.fpanet.org/public/tools/lifeevents/.

You Need a Will

Here's my semi-annual reminder that you need a will:

Many people think wills are just for people who are rich, old, own property, are married or have children. But even if none of those applies to you -- in fact, even if you're flat broke -- you still need a plan.

Drawing up a simple plan can be one of the best gifts you can give to your family and friends. Without it, your spouse, parents, partner or other loved ones could spend countless hours and dollars battling courts and each other to carry out what they think you would have wanted in the event of your death or a medical situation.

There are two main areas of estate planning with which you need to concern yourself. The first is a standard will that gives instructions for how your assets are to be handled and distributed after your death. The second is a plan that details your wishes in the event you are alive but unable to make financial or medical decisions for yourself.

Do yourself, your family, and your friends a favor and get a will today. If you already have one but it needs to be updated (like mine), please do that as well. It's relatively simple and not that expensive (can be only $100 or so for a simple will), yet provides a whole host of benefits to those you leave behind.

For my past thoughts on wills, see these links:

• Do Yourself (and Your Family) a Favor: Read This, then Do Something About It

• Benefits of a Will

• How to Choose a Guardian for Your Children

• How to Write a Good Will

Roth IRAs Make Great Estate Planning Tools

Here's a piece courtesy of Marotta Asset Management on how Roth IRAs make great estate planning tools:

If the tax-free growth of a Roth IRA wasn’t enough to wet your appetite, the estate planning benefits it offers should seal the deal. Bequeathing a Roth is much the same as setting up a life-time tax-free stream of income for your heirs. Because Uncle Sam has already taken his cut of the principal when you put the money in, withdrawals from a Roth can be made tax-free, either by you or by your beneficiaries. All this happens simply by naming the appropriate beneficiaries for your Roth.

A Roth will protect your investments from its worst enemies: taxes and required distributions. Unlike their traditional counterparts, Roth’s don’t require you to begin withdrawals from the account once you reach the magic age of 70½. With time on your side and your investments sheltered from taxes, your Roth will begin to experience what Einstein called the "greatest discovery of all time" - compounding interest.

The traditional IRA is an unwieldy estate planning tool in more ways than one. Account owners must begin distributions from their account at age 70½, whether they need the cash or not. What’s more, investments in a traditional IRA grow tax-deferred, not tax-free. Uncle Sam won’t let you defer those taxes indefinitely.

By taking the required minimum distributions out of your traditional IRA each year, you put the brakes on the snowball effect of compounding interest. Plus, your required withdrawals deplete the account, making it difficult to control what you actually leave to your beneficiaries.

However, it won’t make much difference whether you leave your heirs a traditional or a Roth if they plan on draining the funds right up front. A Roth can offer a goldmine, but only if the owner keeps the funds in their tax-free environment over the long haul.

A Roth can help you keep more of your money by sheltering your investments from capital gains and from minimum distribution requirements — at least for a while. Spouses who inherit a Roth can also forgo taking distributions, preserving the account’s ability to grow unchecked year after year.

All of that changes once the Roth is passed on to the next generation. All other beneficiaries of a Roth must begin taking distributions after inheriting the funds. It is best to drawn down an inherited Roth as slowly as possible over the beneficiary’s expected lifetime. The required distribution amounts are based on the beneficiary’s age: the younger the heir, the smaller the required distribution. Taking the smallest distribution each year will ensure the beneficiary achieves the maximum tax-free growth of tax-free income.

Let’s look at an example. Dad opens a Roth at age 60. He takes no withdrawals in his lifetime, and the funds grow tax-free. His wife inherits the Roth after her husband’s death at age 75. She wisely passes up on the opportunity to take withdrawals from the account. Ten years later she passes away and the Roth is inherited by her son, Dwayne. Thus far, the Roth has enjoyed 25 years of growth, without being depleted by withdrawals or taxes. Dwayne, age 55, must begin minimum distributions and does so for 30 years. Thirty years later, the funds are fully depleted; however, over its lifetime the Roth has provided 55 years of tax-free earnings and withdrawals. The benefits are even greater if the account is left to grandchildren!

No traditional IRA can offer that kind of benefit to your heirs. If they were to inherit a traditional IRA of equal value to a Roth, the IRA of the traditional variety would run dry long before the Roth. Because taxes are due on withdrawals from a traditional IRA, larger amounts must be taken out to match the tax-free sums taken from the Roth. Those hefty withdrawals from the traditional IRA eventually drive it to zero. Meanwhile the Roth account would still be growing and withdrawals could still be made.

So, what can you do if your funds are sitting in a traditional IRA? If you already own a regular IRA, you may have the option to convert it to a Roth. With a Roth conversion, you pay taxes now so that your beneficiaries won’t pay later. Even if you inherited a traditional IRA from your spouse, it is still not too late to convert to a Roth.

Converting to a Roth and paying Uncle Sam now may be a good thing, especially if you plan on leaving more than $2 million to your heirs. Paying taxes for the conversion will mean you reduce the size of your estate, and therefore your estate’s tax liability. Your heirs will pay less estate tax, and they will inherit a tax-free income stream.

Currently, the option to convert to a Roth is only open to those with a modified AGI less than $100,000. But not to worry if your AGI exceeds that number. Thanks to the recent changes in our tax code, Roth conversions will be open to all Americans beginning in 2010.

Even if you are currently taking distributions from a traditional IRA, you can still do a conversion. However, the amount you withdraw for the conversion, also known as your conversion contribution, won’t count toward this year’s required minimum distribution from your IRA. The rules and options are complex, so seeking professional tax advice before doing a Roth conversion is important.

A Roth IRA can provide your heirs with a life-time stream of tax-free income. But, a Roth in itself cannot provide a complete answer to your estate planning needs. Please seek the advice of a financial planning professional who can provide you with a comprehensive financial plan.

Five Money Mistakes to Avoid

Here are five money mistakes we should all avoid according to personal finance author Suze Orman. She claims that these are moves that men are more inclined to make than women, so pay attention, guys (and don't turn away, ladies). Here goes:

1. Funding early retirement with a home equity line of credit.

2. Not paying off the mortgage early.

3. Neglecting to make a will.

4. Refusing to take the investing long view.

5. Assuming the role of the family's sole money manager.

Ha! Boy, has she got us pegged! ;-)

Here are my thoughts on each of these:

1. Does anyone really do this? What a crazy idea! How about the strange concept of funding early retirement with something like, say, savings? What a novel concept, huh?

2. Oh, yeah, she's talking my language now! If you buy the right house, you should be able to pay your mortgage off in 10 years at the most. So what's the issue?

3. Yep. No one wants to make a will (including me). But we have to. Just read Do Yourself (and Your Family) a Favor: Read This, then Do Something About It and see if you don't agree.

4. Many people want to get rich quick with a "hot" stock tip. Me? I'd rather get rich slowly -- investing in index funds and letting the power of time and the power of compounding work for me.

5. I do most of the money management in our family, though my wife and I have regular money meetings to make sure we're on the same financial page.

Do Yourself (and Your Family) a Favor: Read This, then Do Something About It

I've covered the reasons you need a will in prior posts, but it's a topic we all need to re-visit every now and then. A will is a vital part of any financial plan, but this piece from USA Today says that many people are woefully unprepared in this area:

Nearly 60% of Americans lack even a simple will, according to a 2004 survey by Lawyers.com.

The piece goes on to detail instances when it's especially important to have a will. Their list:

• You have minor children.
• You're part of a non-traditional couple.
• You have children from a previous marriage.

Finally, they list some ways to get a will done if you don't have one:

If you don't already have a family attorney, finding someone to prepare a will can be intimidating. Belcher suggests seeking referrals from relatives, friends or professionals, such as your accountant or financial planner. Costs vary depending on the complexity of your estate, but a straightforward will typically costs $500 to $1,000, Belcher says.

Another option is a do-it-yourself will. With most of these programs, you can prepare a basic will for less than $100. Quicken WillMaker Plus, a software program from Nolo Press, includes a long list of documents, from a basic will to a living trust. LegalZoom.com allows you to prepare a will online and will check your work for spelling, grammatical errors and consistency. But LegalZoom's review won't correct substantive legal errors, Liu says. The company doesn't give legal advice.

We currently have a will, but it needs to be updated. Hence, updating our will is one of my New Year's resolutions for 2006. I'm planning on using a lawyer (I have a couple referrals from friends) as I don't want to take any chances on a do-it-yourself mess up. A will is that important -- it's the security of our children -- so it's certainly worth the extra cost in my mind.

For those of you reading this who don't have a will, please, please, please get one. Even a simple do-it-yourself will is much better than none at all. Especially if you have kids, it's vitally important for you to get one. Don't put it off.

If one reason you're "waiting" to complete your will is that you don't know who to name as guardian of your kids, see my post titled How to Choose a Guardian for Your Children. It will help you select a guardian and keep your kids protected from a very bad situation caused by not having a will.

Eight Secrets of Financial Happiness

Here is a simply great article from Market Watch that lists the eight secrets of financial happiness. It starts by describing the relationship between money and happiness:

The psychology of money, now known as behavioral finance, has a positive side. It turns out you can use psychology to increase your financial happiness by reducing your money stress.

Fortunately, this psychological formula is simple: Stress down equals happiness up. So how do you cut the stress? Try a new mindset: Stop blaming "them," take responsibility and then take positive actions. What's happening "out there" is no excuse for whining. You can't change them, but you can control you.

The piece then lists their eight secrets of financial happiness:

1. Learn to want less.
2. Get organized.
3. Set goals.
4. Plan your spending.
5. Invest sensibly.
6. Protect what's yours.
7. Start talking about money.
8. Find work that fits.

Here are my thoughts on each of these:

1. Learning to want less is the first step in spending less than you earn, which is the first step in becoming a millionaire.

2. I use Excel to budget, Quicken to track, and have files for all my paperwork. Being organized makes managing your finances easier, more effective, and less time-consuming.

3. We set annual goals as part of our budgeting process.

4. Yes, we plan our spending -- it's called a budget. Here are some good budget-related posts to review:

• Why We Hate Budgeting - But Shouldn't


• A Great Alternative to Quicken and Microsoft Money, Part 2


• Five Keys to Developing a Successful Budget

5. Three keys to investing for me: 1. Invest regularly. 2. Time/the power of compounding. 3. Index funds.

6. Yes, you need to protect what's yours by making sure you have a will and have all your insurance needs covered.

7. Communication is key in a family, and this includes talking about money. If nothing else, planning/having a budget will force you to do this (which is a good thing).

8. Your career is your most valuable asset and by managing it correctly you can add millions to your earning potential. But you also need to enjoy what you're doing. If you don't, maybe a career change is called for.

The Richest Man in Babylon: Seven Cures for a Lean Purse Part 6, Insure a Future Income

In the third chapter of The Richest Man in Babylon the book lists and details "seven cures for a lean purse." Today, we'll cover cure #6 which is:

Insure a future income.

Here's what the book has to say about saving for retirement:

Therefore do I say that it behooves a man to make preparation for a suitable income in the days to come, when he is no longer young, and to make preparations for his family should he be no longer with them to comfort and support them.

Later it gives this similar advice:

The man who, because of his understanding of the laws of wealth, acquireth a growing surplus, should give thought to those future days. He should plan certain investments or provisions that may endure safely for many years, yet will be available when the time arrives which he has so wisely anticipated.

And finally, it recognizes that everyone needs to plan for retirement:

No man can afford not to insure a treasure for his old age and the protection of his family, no matter how prosperous his business and investments may be.

So what are the practical applications today of what this cure is saying? I'd list the following:

1. Plan for retirement by setting your retirement number. Retirement is more expensive than most of us think it is, so take the time to figure out what you need to save for retirement. This will help you avoid major retirement mistakes and make sure your retirement savings outlasts you. A key part of this, of course, is figuring out your 401k -- deciding how much goes in your 401k and, at a minimum, contributing enough to at least get the full employer match. If that doesn't work, consider tricking yourself into saving. Doing this, you may even be able to retire early.

2. Don't forget about updating/writing your will. There are many benefits of having a will (including naming a guardian for your kids) and a simple, effective will is rather easy to draw up.

Click here to read cure #7.

One Year Ago: Invest in Appreciating Assets, The Value of Insurance and Estate Planning, and Free Money Finance Principles Summarized

One year ago this past week I finished my posts on "The Five Principles" I believe will help you grow your net worth (based on the fact that they've helped me). Here are the posts and a brief summary:

• Principle 4: Invest in Appreciating Assets - This includes things like a house, a small business, or rental property.  On the flip side, this principle also advises us to avoid those assets that decline quickly in value – like new cars.  As we explore this principle, we’ll discuss these issues and how to address them. 


• Principle 5: The Value of Insurance and Estate Planning - In order to be financially solid, you must protect your largest assets – your home (house insurance), your car (auto insurance), and your income (disability, medical, and life insurance).  In addition, you must protect them even beyond your life -- that's why we'll discuss wills in this section.


• Free Money Finance Principles Summarized - A quick review of all the Free Money Finance five principles.

Stop by these posts and see what Free Money Finance was like in the "early days."

Pre-Paid Funerals – Worth the Price?

Let's cut to the chase on this one:

• Question: Pre-paid funerals – worth the price?
• Answer: Not in most cases.

But this piece from Money does give some advice on times when a pre-paid funeral MAY be a good deal:

Despite the drawbacks, there some instances in which paying up front is a smart move.

If a person will require long-term medical care, but his assets are just above the Medicaid cutoff point, prepaying for a funeral could help him meet that requirement, according to the National Funeral Directors Association.

A more important step in estate planning is making sure you have a good will.

Comments: How to Choose a Guardian for Your Children

I've been writing a lot about wills lately because we're in the process of updating our will. My posts on the subject include these:

• How to Write a Good Will
• Protect Your Most Precious Assets
• Proof that You Need a Will (And What to Do About It)
• Wills that Work
• Benefits of a Will

Another one of my motivations for writing on this topic is to encourage you to get a will so that your children will be taken care of should anything happen to you. The importance of this was driven home to me once again by a comment I received on my post titled How to Choose a Guardian for Your Children. Here it is:

We had a family situation a few years ago where a guardian was NOT named for a seven-year-old child. His mother died and his father (M's uncle) became too ill to care for him. BAD BAD SITUATION. He bounced around for several months and then finally landed with some family thousands of miles away from his school and his friends.

This is so, so sad to me. Please, take the time to complete at least a simple will so the same fate doesn't happen to your children.

How to Write a Good Will

If it seems like I've been writing a lot about wills lately, it's because I have. The subject's on my mind because it's something we're working on right now -- updating our will. And it's something that a lot more people need to work on as it's estimated that 70% of all adults don't have a will. That's a sad state of things -- especially since without one, the state will decide where your kids and money go. And based on what I've seen, states aren't that great at making these sorts of decisions!!!!

This article from MSNBC tells us how to write a good will. Since I've already covered this subject, I thought I'd just highlight a few of their comments that seemed especially good. This first one seems to cover an often overlooked point of dying without a will:

[Without a will] blended families can face an assortment of unintended consequences, with some or all assets passing to first-marriage children and bypassing second spouses and stepchildren altogether. In some cases, family heirlooms may be put up for sale with family members having to buy them back from the state.

The piece is sure to tell us how easy it is to complete a will -- it's really pretty simple. Their summary:

Drafting a will does not have to be a big production. Basic, legally enforceable wills may be written rather quickly and economically using online software programs. They can later be fine-tuned, expanded or amended as personal situations and assets change. Web sites like Nolo.com, and LegalZoom.com are among those that can help get the deed done. With LegalZoom in particular, legal experts will actually review all documents before allowing them to be endorsed into legally binding existence.

The piece continues with this interesting finding:

“They say that siblings are five times more likely to fight about family items than about money,” says Arnold.  Such fights often lead to wounds and resentments that never heal.

Thankfully, there's a simple solution to this problem:

This is why Arnold advocates writing a "good" will. It addresses such "why’s" either through letters of explanation included within the will or through discussions with those named in the will ahead of time. It can head off potential feuds, ill feelings regarding misunderstood intentions and lead to the healing of old rivalries once and for all.

'Nuff said on this topic. At least for a day or two. ;-)

For more information on wills and estate planning, see these links:

• Proof that You Need a Will (And What to Do About It)
• Wills that Work
• Benefits of a Will

How to Choose a Guardian for Your Children

Previously I've covered a Money magazine piece on how to protect your family with a will and today I'd like to refer back to that article again. Except this time, I want to focus on what is probably the most important (and most difficult) part of drafting a will -- picking a guardian for your kids/deciding who will care for your children in case of your death. Here's what Money advises:

• Make a list. Jot down possible guardians and have your spouse do the same. Anyone you both name makes the short list.
• Score the candidates. Ask yourselves: Is this person healthy? Is the family okay financially? Do they share your values? Get along with your kids? Are they willing?
• Split roles. Still not sure? Consider appointing one person as the financial guardian to manage the kids' money and another as the personal guardian to care for them on a day-to-day basis.

I think this is a GREAT list of suggestions and one we will certainly use as we update our wills.

Protect Your Most Precious Assets

Since I'm in the process of updating my will, I guess articles about wills are really catching my attention. This one is from Kiplinger's starts off with the best reason to complete a will -- to protect your kids:

Many parents put off writing a will because they see it as a downer -- a way to dispose of your assets after death. Think of it instead as a way to protect your most precious assets -- your children -- if something should happen to you and your spouse while the kids are minors.

The article then gives some tips on how to select a guardian for your kids -- probably the hardest decision you'll make regarding your will. Their thoughts:

• Look to your generation. Many older people lack the stamina or the desire to start child-rearing all over again.
• Name one guardian, not two. Choosing a couple might seem natural, but things could get complicated if the couple splits up.
• Consult the prospective guardian. Don't assume the person you have in mind is prepared to accept the job. If your children are old enough to understand, tell them your plans.
• And don't be shy about leaving a letter or recording in which you give detailed instructions about how you want your children to be brought up.
• You may even want to name two separate guardians: a guardian of the person to take care of your child, and a guardian of the property to manage your child's finances.

This is good advice -- and we'll consider it as we have our will updated. Currently, we have named a couple in our generation and have talked to them about the issue (of course). We've also separated the guardians from the inheritance dollars by naming a trustee who will make sure the kids are well-provided for (and reasonably provided for).

For other posts on this issue, see these links:

• Proof that You Need a Will (And What to Do About It)
• Wills that Work
• Benefits of a Will

Proof that You Need a Will (And What to Do About It)

When I heard of the death of Dana Reeve (wife of Christopher Reeve -- who played Superman in the movies) recently, I was heartbroken most of all for her 13-year-old son. His dad had died just 17 months earlier and now his mom -- and he was all alone in the world. How can someone not be moved by that situation?

I thought about what plans were (or weren't) made for this young man's care and I hoped he would be ok. Then I thought about my own kids and what would happen to them if my wife and I were to die. It made me even more resolved to update my will asap.

And that's why I wanted to share this article with you. It's from Kiplinger's and highlights five issues to consider when deciding how to protect your family after you are gone. It first starts with a warning:

Don't be fooled into thinking you are too young to worry about estate planning or that you don't have enough assets to warrant legal advice, warns Tracy Craig, an estate planning attorney from Worchester, Mass., whose practice includes many families with young children. She highlights the importance of planning for the unthinkable.

Without your instructions, a court will make crucial decisions about who will care for your children and what will happen to your assets, including turning everything over to your kids when they turn 18, regardless of whether they are capable of handling major financial decisions.

This is probably the main reason I want to update our will -- to determine what will happen to our kids. If it was just money, we probably wouldn't need an update, but I want to make 100% sure our kids are taken care of the way we want them to be.

The piece then offers the issues to consider including:

• Setting up a trust
• Naming a guardian
• Think about checks and balances
• Be proactive
• Don't forget safekeeping

I suggest you click through and read the piece. In addition, here are a couple posts from me that might help as well:

• Wills that Work
• Benefits of a Will

I pray that no one reading this will ever be in a situation similar to the one noted above, yet I strongly encourage all of you to get your will drawn up/updated just in case.

Wills that Work

I've posted before that there are several benefits of having a will. And those of you folloing my New Year's resolutions, you know that one of my goals this year is to update our wills. Having an up-to-date will that clearly describes your wishes in the event of your death is one of the most important parts of any financial plan.

This article from Market Watch gives several tips on making a will that works for you. Here are their suggestions:

• Do hire a lawyer to draft your will -- and your spouse's.
• Do get witnesses.
• Don't put your will in a safe-deposit box.
• Do use percentages rather than dollar amounts when making bequests.
• Do review your will once every three years -- and more often if there is major new tax legislation or a significant change in your family status.
• Do revise your will if you move, particularly from a common-law state to a community-property state, or vice-versa.

These seem like good tips to me and they reinforce our need for a new will. We haven't updated ours for seven years and our last on was in another state. It's time for an update.

Why Treasures in Safe Deposit Boxes Get 'Lost'

Here's a piece from Money Central that talks about how thousands of safe deposit boxes are declared 'abandoned' every year, how their contents are turned over to the state, and how you can keep it from happening to you.  Here's the situation:

Every year, untold numbers of safe deposit boxes are declared "abandoned," drilled open and their contents turned over to state unclaimed-property offices. Whatever's inside that can be auctioned -- jewelry, stamp collections, coins, watches -- eventually is sold to the highest bidder.

The proceeds from these sales join the estimated $23 billion sitting in states' escheat coffers, waiting for the rightful owners to appear. But the stuff that's sold, much of it irreplaceable memorabilia and heirlooms, can never be retrieved.

Here's their advice for making sure this doesn't happen to you:

• Call your bank.
• Visit your box. (at least once a year).
• Tell your heirs.

Of the three tips, the last is probably the most important. I would suggest that as you put together your will you include written instructions on how your heirs should get into your safe deposit box and how the contents are to be divided.

I don't have a safe deposit box (I use a fire retardant safe at home), but I am planning on mentioning my safe in the update I'm doing to my will this year.

10 New Years Money Resolutions, Part 6

Here's part 6 of a series from Money magazine that lists their 10 New Years Money Resolutions:

Resolution 6: Protect your family

There's a simple reason that 55% of Americans don't have a will: "It's difficult to talk about death and money," says Colleen Barney, author of Best Intentions: Ensuring That Your Estate Plan Delivers Both Wealth and Wisdom. And it's even harder to make emotional choices about, say, who will raise your kids. But ignoring the topic could one day leave those tough decisions in the hands of a probate court judge. Try reducing the tension in the situation with a highly pragmatic approach.

1. Start the conversation.

2. Choose a guardian.

3. Make it public.

4. Write the will.

My thoughts:

1. As I've posted previously, updating my will is one of my resolutions for 2006.

2. Also see Benefits of a Will from Free Money Finance.

Click here to read part 7 of this series.

Back-Stabbing from the Grave

Here's an interesting article from Money Magazine. Not only was the question a surprise to me, but the answer was as well. Here's the question:

When my mother, an elderly widow, died recently, she left nothing to my sister Susan. Instead, shocking us all, Mom divided her estate evenly between my brother and me. I'm sure she had her reasons for excluding Sue, with whom she had often locked horns.

But I also feel Mom exploited my sister, relying on Sue -- not my brother or me -- for considerable care, while never revealing she'd left Sue out of her will. I want to respect my mother's wishes, and I'd prefer to keep my entire inheritance. But doesn't my sister deserve something?

I expected an answer like "Your mother wanted the inheritance to go to you. You should respect her wishes and leave it at that." Instead, Money heads in a different direction:

Your mother's final wishes have been respected: Her estate went to you and your brother. Now it's up to you to remedy the injustice created as a result.

Your letter implies that you and your brother left the responsibility of caring for your mother to your sister, assuming, as Sue did, that she was included in the will. If you and he now fail to share your inheritance with your sister, you'll be stiffing her, just as your mother did.

This is not to say that every child is automatically entitled to an equal portion of a parent's estate. Far from it. But equality is not the issue here; fairness is.

While it no doubt was love, not money, that prompted Susan to care for your mom, surely more of the heavy lifting would have fallen to you and your brother had Susan understood that your mother planned to return her devotion with a stab in the back from the grave.

I think the reader was writing in hoping to have justification for keeping all the inheritance, but it backfired on her. Still, I'm not sure Money's answer is right.

Plus, it's vague: "But equality is not the issue here; fairness is." What does that mean? The inheritance shouldn't be split equally but fairly? What's the difference? What do the exact amounts (percentages)look like in a "fair" division?

What do you think about this?

Benefits of a Will

Here's a post on probably the most unpopular issue in money management (other than budgeting and maybe insurance), but it's an issue you must take very seriously.

Much of our lives are spent working to provide for ourselves and our family. But what about after we’re gone? If you don’t have a will, others will decide how your estate is divided when you die.  Follow these three simple steps to make a will that expresses your provision for your loved ones:

Step 1 – Find a good lawyer to do your will. Hand-written or fill-in-the-blank kits are often out-of-date and may not conform to state laws. Though a professionally prepared will may cost a few hundred dollars, it could save thousands of dollars for your estate. Ask friends and relatives for references as a starting place.

Step 2 – Complete the will. Be sure it includes the following:

• Who inherits your property. Make a list of all your assets and their approximate value. Then decide who gets your property, when they get it, and in what form. If you die without a will, the state decides what happens to your assets.
• Who will care for your minor children. Name a guardian (caretaker) for your children and a trustee (who distributes assets for children until they are mature and capable of making their own financial choices). Without your written instructions, the court will select a guardian who may not be the best choice.
• What happens if you’re incapacitated. A power of attorney gives someone legal authority to make health care and financial decisions for you if you cannot make these decisions yourself. A living will gives your doctor your desires regarding life sustaining procedures, artificial nourishment and organ donation. You’ll need both.
• How you minimize estate taxes. Many people have estates much larger than they realize when life insurance, retirement benefits, home, farm or other real estate, savings and securities are taken into account. Structure your will to avoid the unusually high estate taxes.
• Who administers your will. Choose an executor or a trustee. This person carries out the terms of your will.
• What gets donated to charity. Federal and state tax laws allow your estate to receive a charitable deduction for the full fair market value of a gift. Your will can remember the work of your favorite charity by donating a specific dollar amount or a percentage of your estate.

Step 3 – Update your will as needed. Review your will every three years to be sure it fits your present situation and conforms to current state laws.

Make it a priority to have your will drafted soon. It will not only allow you to express your desires regarding your health and resources, but will also give the maximum provision to those you love and wish to benefit.