We’re heading to the end of the year and the inevitable list-making process called New Year’s resolutions. If writing, or updating, a will has been one of those tasks that you’ve been keeping on the back burner, it might be time to take actions.
Of course, if you tell your family one thing, and your properly executed will says another, the document will have the final word. For example, you might tell your children you want them to share equally in your estate. But if your will gives one an IRA and the other a cash account of equal value, without taking into account what each beneficiary will net after both income and estate taxes, those children may still be squabbling over whom Mom loved best decades after you are gone. So make sure your conversations are consistent with the legal language. If you don’t quite understand how that legal language works, make sure an attorney verifies that your simply stated wants are completely honoured in all that tangle of legal speak.
Here’s where talking can keep you resting in peace. You may have lots of household stuff – family heirlooms, treasures, even a family pet. These items are usually lumped together as personal effects in a standard will, and it may be left to your executor to parcel them out. Estate planners usually recommend you leave a personal letter with your chosen executor itemizing these effects and stating who gets want. This note is not a legal document, but if you have selected your executor wisely, he or she will respect your wishes. However, you can give these wishes added authority by talking to your beneficiaries, perhaps all at the same time, and telling them whom you want to get what, and why. When my mom told us that she wanted my oldest sister to get her mother’s gorgeous diamond ring, most of my lifetime lust after that jewel dissipated in the knowledge, “OK, this is what Mom wants.” When she then told us what she had designated for me, and why, the last bit of envy completely disappeared. More than rings and other things, my mother wanted to leave behind a strong and loving family.
The conversation about wills – not just written documents, but personal wants and intentions – should go up as well as down, generationally speaking. Many of my baby boomer clients are completely in the dark about their parents’ finances and wishes for the disposition of their estates. I advise these clients to open up the conversation by telling their parents that they are now doing their own estate plans, and they therefore need to know how the parents’ assets will be transferred in order to make the best choices in their own plans. If the grandparents are setting up an educational trust for your children, you may wish to modify your own trust provisions. But I also advise these clients to think of every single question that they would wish to ask their still-living parents, and use these questions to shape their own communications to their beneficiaries. Where do you wish to be buried? Would you prefer cremation? What are the charities you are most passionate about? What do you want to be remembered for? Under what circumstances would you be okay with the kids selling the family home? Thinking this way gets you out of the tongue-tied reluctance to talk. You find there is plenty to discuss.
A final word for young parents who may think that because they have so little, or because everything is jointly owned, there is nothing to talk or write about. Not so. The only way to appoint guardians for your children in the event you die is by executing a will. But while your will names these individuals, there is still a lot that needs to be said. You should, for example, ask your chosen guardians if they are willing to serve before you make the appointment. (Leaving babies in baskets on doorsteps works out well only in the movies.) You might also want to talk about your hopes for how your children might be raised, and your intentions or abilities to provide a financial bequest to support them.
At the end of the day when we do our estate planning, it’s not just death that we need to talk about, but our lives and what we are living for.
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CFP® Professionals Connect with Young Adults on AARP’s LifeTuner.org
CFP Board has teamed up with AARP to provide CFP
® professionals for a financial planning Web site and online community designed for 18-to-34-year-olds.
The new personal finance website created by AARP, is called
LifeTuner.org, and provides an avenue for young adults to ask questions, find advice from financial experts, and use tools to manage their finances, including credit-card debt or planning for retirement.
The LifeTuner community offers an impressive lineup of renowned financial experts, including CFP
® professionals, answering questions and offering tips to help young adults tackle key financial issues and make progress towards achieving their financial goals. Experts are volunteers and are not compensated for their time and service. Each expert has a profile page with a bio, a photo and a list of financial areas of expertise. Aside from answering financial questions in a blog-type format, experts also host free webinars addressing specific financial topics.
Among the CFP
® professionals volunteering on LifeTuner is Eleanor Blayney, CFP Board’s Consumer Advocate. With more than 20 years of experience as a financial planner, Eleanor is helping LifeTuner users with questions on investing, retirement, budgeting and saving, among others.
LifeTuner boasts another useful feature – a series of interactive and intuitive calculators and tools designed to help users create budgets, find ways to reduce debt and compare their financial situation against their peers. All of these features are free to use and the website does not contain any advertising or commercial messages.
Although AARP is primarily known as an organization for 50-and-older Americans, the group said a recent survey of young adults indicated that that the majority (57%) consider finances and money to be the biggest concern in their lives. Another 65% of respondents rated their own financial situation as fair to poor, and nearly eight out of ten are in debt of some kind.
While social media websites, such as Facebook, have lowered the boundaries around certain topics, finances remain a taboo subject, the survey finds. Among those who have sought advice online, 85% report being more confident about their ability to manage their finances. LifeTuner’s own social networking features are designed to encourage young adults to improve their finances through sharing of struggles and success stories with other users.
Top News Stories
Few Get Major Debt Relief From Settlement Firms
Wall Street Journal (11/09/09) Coombes, Andrea
The number of complaints against debt-settlement companies is on the rise, according to the Federal Trade Commission (FTC), having more than doubled since 2007, and the commission is planning to revise regulation of the industry. The idea of debt settlement, or negotiating with creditors to pay only a portion of what is owed, sounds attractive but actually only works for a small number of people. Consumers may not be aware that the process can involve months of angry calls from creditors and a larger debt load as fees pile up on the original balance, in addition to the risk of litigation. Currently debt-settlement firms are regulated by a patchwork of state laws, and the FTC wants to require more disclosures and limit their up-front fees, which can amount to as much as 40 percent of the entire fee despite the fact that settlement may not happen for months, years, and often not at all. One company which was sued by the New York State attorney’s office promised consumers they would only have to pay 60 percent of their debt, but just 1 percent of its customers actually reached that result.
A Free Credit Score Followed by a Monthly Bill
New York Times (11/03/09) Lieber, Ron
The Federal Trade Commission (FTC) believes Experian is using the popular freecreditreport.com ads to deliberately divert people from using a government Web site, which offers credit reports for free. By law, the three major credit bureaus are to provide one free report annually to consumers, and critics say people only need to check their credit report several times a year if they pay close attention to their bills. However, Experian offers the freecreditreport.com service to provide consumers with real-time updates of changes to their credit files. The FTC believes consumers have been misled to sign up for the $14.95 monthly service, when they were instead likely seeking a free credit report at the government's AnnualCreditReport.com Web site. Experian has paid $1.25 million to settle the FTC's charges over the past five years. The recently passed credit card reform law includes a measure that directs the FTC to push for more prominent disclosure from credit monitoring sites like freecreditreport.com. And the agency has proposed that the companies use a separate Web page to inform consumers about AnnualCreditReport.com before they sign up for the credit monitoring service.
Personal Finance News
Drowning in Debt? Manage What You Owe Before You Need Saving
Ayala Land News Release (11/17/09) Bunge, Kayla
Even during difficult financial times it is still possible to analyze debt and focus on paying it off, according to Ron Benstead, director of Consumer Credit Counseling Service of Beloit and Janesville, Wis. "You have to take a hard, honest look at it," says Benstead. "If you attack that debt, you can get it out of your life—and once you do that, it really brings things back to center." Benstead says debt can be divided into three categories, toxic, neutral, and good. Toxic debt, like credit card and short-term, high-interest loans--like payday loans--carries a significant financial burden, and can create unnecessary stress. Neutral debt, like car loans, does not improve financial situations, but does not necessarily carry any negative implications. Good debt, like mortgages, student loans, or business loans, can improve a person's net worth over time. Benstead says the first step to managing debt is to understand how debt was accumulated, and how to eliminate those sources of debt. Second, list all debt and prioritize debt repayment, focusing on toxic debt first, followed by neutral debt and good debt. Make a budget that includes all income and expenses, including payments to creditors. Stop using credit cards or taking out loans to avoid any new debt. Consider working with a credit counselor, who can help create a debt management plan, and identify other resources. Benstead says people should avoid using debt settlement agencies, which tell customers to stop paying monthly minimums so they can negotiate a settlement when customers have saved enough money. These services collect heavy monthly fees, and can cause customers' credit ratings to plummet.
Consumer Advocate's Tips on Managing Debt
CFP Board's Consumer Advocate, Eleanor Blayney, CFP®, offers more insights into managing your debt - and other personal finance topics - at http://www.cfp.net/learn/advocate.asp.
How to Tell If You're Saving Enough
U.S. News & World Report (11/09) Newman, Rick
As consumers look to rebuild their portfolios and rainy-day funds over the next few years they will be faced with the challenge of determining how much to save. Many Americans undoubtedly spent far too much and saved far too little in recent years. For 40 years after World War II, Americans generally saved somewhere between 6 and 10 percent of their after-tax income. In 1985, the savings rate started to drop, and over the past five years it has been below 3 percent, and actually dropped below zero in 2005. Now, with consumers clinging to any cash they may have, the savings rate has climbed back to about 4 percent, but many economists feel that is not high enough. In general, debt has gone up and net worth has fallen, leading many economists to assume that Americans will revert to historical norms by saving more and paying off debt, raising their net worth. However, there is a downside to this potential trend, because the U.S. economy depends on spending, and prolonged savings would depress the consumer spending needed to return to healthy economic growth. Statistics from the Federal Reserve and economists at Bank of America Merrill Lynch show that the average household net worth to disposable income, or wealth-to-income ratio, is 487 percent, which is lower than the average since 1993 of about 550 percent. Federal Reserve economists Reuven Glick and Kevin Lansing suggest that the savings rate would have to reach about 10 percent by 2010 for American households to lower their debt to reasonable levels. However, if that were to occur, the reduced spending could cut 0.75 percentage points off economic growth every year. However, in a scenario proposed by Bank of America economists, households could get back to a wealth-to-income ration of 550 by saving only about 5 percent of their income over the next decade, while making investments that increase their assets and boost their net worth.
Lesson for Grandma--529s Trump Savings Bonds
Registered Rep. (11/18/09) McKinley, Kevin
Kevin McKinley, CFP
®, and principal/owner of McKinley Money LLC, explains why savings bonds, a traditional gift from a grandparent to a grandchild, are actually not the best way to help save for college. The reality is that savings bonds really only give a family an investment that offers a low rate of return and a fair amount of hassle. A far more beneficial gift would be a 529 college savings plan. The EE and I bonds issued by the government certainly have their uses, particularly because the principal and interest are backed by the full faith and credit of the United States Treasury. Unfortunately, the yields on savings bonds are currently near all-time lows, with EE bonds only paying 1.7 percent interest and I bonds having a fixed rate of 0.3 percent over its inflation-adjusted rate of 3.06 percent. Meanwhile, the cost of college has increased at a yearly rate of about 7.2 percent, versus the 4.4 percent annual general inflation rate over the same period. While 529 accounts do have an amount of risk that savings bonds do not, the variable college savings plan investment choices give families a fighting chance of meeting or beating the rising costs of attending college. There are also safe areas within 529s, as several plans offer federally insured certificates of deposit on the investment option roster. It is possible for families to cash in savings bonds and avoid paying taxes on accrued interest when proceeds are used to pay for college, but the restrictions are quite difficult to navigate. First, the bonds must be owned by the parent, not the student or grandparent, and proceeds can only be used for tuition, not room and board. The parents' income must also be below certain limits that are adjusted yearly. Meanwhile, 529 plans have no income or wealth restrictions on depositors, and withdrawals from 529 plans are tax-free for all qualified higher education expenses. Both 529 plans and savings bonds allow for small initial investments and ongoing deposits, but current savings bonds rules only allow purchases of up to $10,000 per Social Security number per calendar year. The ceiling is far higher for 529 plans, with each grandparent being allowed to contribute up to $13,000 each year. A five year exemption available only to 529 grandparents also allows for five years worth of maximum deposits all at once, a total of $65,000 currently.
Few Take Advantage of Chance to Adjust Their College Savings Plans
Detroit Free Press (MI) (11/12/09) Tompor, Susan
Following the collapse of the market, the Internal Revenue Service (IRS) issued a special rule for 2009 that allows investments in 529 plans to be changed twice a year. Previously, 529 plans could only be changed once a calendar year and in certain other circumstances like a change of beneficiary or rollover from one state plan to another, according to Mark Kantrowitz, publisher of FinAid.org and FastWeb.com. Many people either do not know about the new rules, or are not interested in making any changes. Michigan Department of Treasury spokesperson Terry Stanton says only 217 account holders with money invested in the Michigan Education Savings Program took advantage of the twice-a-year rebalanced option, out of a total of 200,000 accounts. Making changes to a 529 may be a good move right now, particularly if the manager panicked in the spring and shifted all of the money to a low-rate guaranteed choice. "If someone changed their asset allocation earlier this year because they were worried about the stock market dropping, they might want to take a fresh look at their investment strategy and risk tolerance," says Kantrowitz, who adds that the IRS is unlikely to extend the two-changes-a-year rule into 2010. Jason Zweig, author of "The Little Book of Safe Money," says students close to attending college should have no more than 20 percent of money in stocks. However, some plans have left students already in college with 65 percent in stocks. Investors need to research and understand how their plan invests money. Kantrowitz says it is important to continue to save at all times, because it is difficult to tell when the market has hit bottom except in hindsight.
Personal Finance: Keep Holiday Spending Under Control This Season
Reno Gazette-Journal (11/16/09) DiCenso, Kathy
It is easy to let go of financial prudence during the holiday season, so investors should make a strategy now to reduce debt while putting money toward necessary expenditures and investments. A first step can be setting up an appointment with a CERTIFIED FINANCIAL PLANNER™ professional. This meeting should go beyond holiday spending to establishing saving, investing, and debt-reduction goals, and setting future financial goals. Set a holiday budget by determining how much money can reasonably be set aside for gifts and sticking as closely to that figure as possible. Along with setting a financial budget, consider limiting the gift list to those under the age of 21, or finding an alternative way to treat adult loved ones such as taking each other out for dinner. For stores that are frequently patronized, get on their email lists to take advantage of coupons and special deals. Online print frequently includes "parts not included" or hidden shipping costs, so read the product information thoroughly before making the final purchase. And finally, decide on charitable giving amounts before the end of the year to ensure that money is still set aside once the time comes to donate it.
Personal Finance: Don't Cut 401(k) Contributions to Get Cash
Times Herald-Record (NY) (11/15/09) Medigovich, Laura
People often consider reducing or eliminating their 401(k) contributions when their finances become tight, but this is a bad idea that can have long-term consequences, writes M&T Bank financial planner Laura Medigovich. Every dollar contributed lowers a person’s taxable income by a dollar, so cutting back on contributions means increasing the tax burden, essentially eliminating the short-term cash flow boost that comes from cutting contributions. Further, if a contribution is reduced by too much, the employee will lose the employer’s matching contribution, and Medigovich says that not contributing enough to get the company match, which is essentially free money, is foolish. And finally, reducing contributions means losing the benefit of compounding and time. Cutting $1,000 a year means a loss of more than $13,000 in interest over two decades.
How to Size Up College Health Coverage
Wall Street Journal (11/05/09) Chaker, Anne Marie
More college students are obtaining healthcare through campus clinics and college-sponsored insurance plans, because unemployed parents have left many students without the usual coverage. College-sponsored insurance is intended to cover things that the campus health center may not be able to provide, such as specialist visits, mental-health providers, and prescription drugs. Premiums for these plans average $1,631 per year for public university students, and $1,881 for private schools. Some employer plans may cover dependent children until the age of 23, though the plans may involve certain restrictions. Students may also buy individual policies, but these often carry high out-of-pocket costs, and only half the value of a good college-sponsored plan. Consultants warn that students should avoid plans that do not have prescription-drug coverage, mental-health benefits, or catastrophic coverage. Students may not be able to obtain insurance if they have a preexisting condition such as diabetes or asthma, but many states provide access with special "uninsurable risk" pools. More information about these programs is available from state insurance departments.
Credit Cards: Break Up, or Make Up?
Wall Street Journal (11/04/09) Blumenthal, Karen
Credit card lenders are imposing new fees, hiking interest rates, and cutting credit limits, and this turbulence makes a good case for cardholders to look at which credit cards are worth holding onto, writes Karen Blumenthal. There are a number of tips cardholders should heed before they close their accounts. A cardholder should call the card company prior to cancellation, ask why the changes were made, and what has to be done to reverse them. Failure to arrive at a resolution is not necessarily the end, as the Credit Card Act of 2009 permits cardholders to "opt out" of a higher rate or a yearly fee. Cardholders that wish to use their card sparingly while receiving fair rates and low fees should consider cards from a regional bank or a major credit union, Blumenthal suggests. Reward cards can offer solid perks for consumers who prefer the convenience of charging groceries, contributions, and many of their buys, although they should carefully compare plans as well as consider what venues they shop at. "Three or four cards per household should give you plenty of credit as well as the kind of mix that may help your credit score," according to Blumenthal. "You want to have enough of a credit cushion to give your household flexibility while keeping your use to less than 50 percent of your available credit line."
Finding a Financial Planner Who's Right for You
Kiplinger.com (10/09) Kosnett, Jeffrey R.
Investors today want to be more in control of their financial plans, and hiring an adviser is a crucial decision. The best financial planner will be experienced and have a strong track record and not be a mere yes man. In the past planners did most of the talking and recommended an array of products and investments, but after the financial crisis, which few planners had prepared their clients for, investors have lost a lot of trust and want to be more active clients. Advisers now expect this, and the best advisors will disagree, speak frankly, restrain overly cocky clients, and encourage very explicit goals. One good way to determine whether an advisor is the right fit, according to Phil Dyer, CFP
®, of Dyer Financial Advisory, is to “ask yourself whether you’re the client or your money is the client.” If the answer is money, a brokerage or bank would be fine for guidance. But if the focus is on oneself and one’s family, a planner who has the same focus is a better match. Dyer, for example, is a registered life planner and coach in addition to being a CERTIFIED FINANCIAL PLANNER™ professional. To find a planner one should first check the reputable directories of planners that are available (such as
www.CFP.net), then visit firms’ Web sites to determine their philosophy and experience. One should also review a planner’s Form ADV, which can be obtained from the Securities and Exchange Commission, which offers a wealth of detail about the planner’s clients, funds under management, and biographical information.
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