Estate Planning Terms You Should Know

As I discussed in the last post, individuals tend to delay estate planning for many reasons; no doubt one of those is the daunting lingo and complicated jargon.  Truthfully, it is confusing the first time you hear these words and concepts explained. While it’s not quite a foreign language, it sure feels like it. 

But don’t be intimidated; don’t be deterred.  A basic understanding of a few estate planning concepts and terms will help you feel less reluctant to move forward and complete an important aspect of financial planning.

1. Will.  A will directs where and how you want your estate property distributed when you die, and appoints the individual(s) who will take care of your children.  Without a will, the state will decide, according to statute. A will does not control those properties with specific beneficiary designations such as life insurance benefits, retirement accounts, and trust assets.

2. Probate.  The court process that ensures that the portion of an estate passed by a will is properly settled. The court establishes the authenticity of the will (if any), appoints a personal representative or administrator, identifies heirs and creditors, directs payment of debts and taxes, and oversees distributions of the assets according to the will, or according to state law in the absence of a will.

3. Executor/ Executrix.  The person (male or female) who administers your final estate, as appointed by you in your will.  The politically correct, modern terminology is a “personal representative,” which removes any reference to the sex of the person.

4. Guardian.  A person designated by court appointment and given the responsibility of managing the personal affairs of a minor child or a person who is legally incompetent to manage his or her own affairs.

5. Advanced directives.  The two key advanced directives are a living will and a medical power of attorney.  In the event you become permanently incapacitated and unable to communicate, a living will is your expression of what life-sustaining medical treatment you want or don’t want employed on your behalf.  Though not always honored, with a medical power of attorney you give a third party, such as a spouse or an adult child, the power to make medical decisions on your behalf in the event you are incapacitated and unable to communicate them.

6. Power of attorney.  This gives another person, such as your spouse or an adult child, the legal power to act financially on your behalf should you become incapacitated.  This can be as restrictive (bill paying only, for example) or as comprehensive (able to sell property, file tax return) as you wish to make it.  It can be amended or rescinded at any time.

7. Title.  Document proving ownership of property.  Improperly titled assets could mean property being transferred contrary to your wishes or could result in higher estate taxes or probate costs.

8. Trust.  A legal entity created for holding property for the benefit of the creator of the trust or other beneficiaries.  Trusts are used for everything from avoiding probate and helping heirs manage assets, to saving estate taxes and ensuring that certain assets go to certain heirs.

9. Trustee.  The person or institution appointed that manages the trust property under the terms of the trust agreement.

10. Revocable and irrevocable trusts.  A revocable trust means the creator of the trust can change fundamental aspects of the trust or even dissolve it.  An irrevocable trust severely limits what changes the creator can make in the trust document.  Irrevocable trusts typically are used to reduce estate taxes.

11. Testamentary trust.  A trust created by a will.  A testamentary trust is established upon the creator’s death and an inter vivos trust is established during the creator’s lifetime.

12. Estate tax and gift exemption amounts.  The amount of an estate’s value passed on to heirs and subject to estate tax depends on the size of the estate.  By federal law, in 2009, the maximum amount of estate that is exempt from taxation is $3.5 million.  The law is repealed completely in 2010, but in 2011 it returns with a $1 million exemption cap or limit.  These exempt estate tax amounts are reduced by any gift-tax exemption amounts taken during lifetime.  The maximum in gifts you can exempt from gift taxes during a lifetime is $1 million.

13. Annual gift exclusion.  Each person can donate tax free up to $13,000 (indexed for inflation) a year to as many people as he or she chooses.  For example, you could give away a total of $39,000 a year to your three children or three friends ($78,000 a year if your spouse joins you).  The annual exclusion does not count against the lifetime gift-tax exemption amount.

14. Codicil.  A written change or amendment to a will.

15. Disclaimer.  The refusal of a beneficiary to accept property willed to him.  When a disclaimer is made, the property is generally transferred to the person next in line under the will.

Read the next post.

Estate Planning for Procrastinators, Part 1

“Procrastination is the chronic postponement of necessary tasks – generally those considered difficult or unpleasant.  We waste so much time trying to avoid these tasks that our failure in doing them is assured.” – Eric G. Matlin.

Most sensible people understand that it’s important to have an estate plan to protect their family. Yet, it is estimated that 7 out of every 10 Americans die without a will.  What is going on?

My guess is that most people just don’t want to face the issue of their own mortality.  (And really, who does?)  They also don’t want to deal with the legal complications and the decisions to be made.  And then there is the legal terminology that can be off-putting: Probate, executor, irrevocable trusts, etc.  If ever there was a task that engendered procrastination, estate planning is certainly right up there.

And if all of that isn’t enough to give you pause, were you aware that estate tax laws will be changing in the near future?  Why do anything at all now, when better information will be available next year?

Now, I am not a lawyer, so I cannot in any way provide legal advice or documentation for estate planning.  However, as a Financial Advisor, I can help alleviate the anxiety, frustration, fear and loathing that may be causing you to avoid the estate planning that you know you should do.  It is said that a little knowledge is a dangerous thing, but not if it leads to further questions of an estate planning expert.

Let’s start with the realization that even if you have never actually signed a written last will and testament, you still have one.  How is this possible?  Simply put, if you don’t have a will, your state will provide one for you.  And most certainly, you (and your heirs) will not like the results imposed on you.

Without a will, there will be unnecessary delays in settling your estate, not to mention increased costs, all of which will come out of the money you’d have otherwise left to your family.  Court costs will be increased, as will family aggravation.  Without a will, your estate can be decimated by legal fees and/or additional taxes.

That is a summary of Chapter 1 of The Procrastinator’s Guide to Wills and Estate Planning by Eric G. Matlin.  I highly recommend you read this book, because not only does it explain complex matters in plain English, but it also deals head-on with the issue of procrastination.  The top 12 list of the most common reasons that people delay estate planning makes for interesting reading.  Counting down, the author tops the list with “Most people don’t like to think about death or money” and ends with “Guilt feeds upon itself.” 

Procrastinators of the world, “You are not alone.”

According to Matlin, many people avoid using attorneys, but “hiring an estate planning attorney isn’t like hiring most lawyers.  Usually an attorney is hired when it’s necessary to go to court.  Estate planning attorneys are hired, at least in part, to keep your family out of court.  And while any dealing with an attorney is likely to cost you money, the odds are good that in estate planning attorney will, in the end, save you more in taxes and probate costs then she charged as a fee – possibly much more.”

Matlin’s use of questionnaires, tables and forms help you get organized enough to prepare for a visit to an attorney.  And it encourages you to create an action plan by giving you the confidence that you can make good decisions.

Understand, though, that nothing you read in a book will replace the knowledge and expertise of an experienced attorney who specializes in estate planning.

Nevertheless, you have to start someplace, and understanding the lingo will make your journey much easier.  Accordingly, Part 2 will cover estate planning terminology.

Emotions and Investing

To be a successful investor requires not only a plan, but the discipline to follow it.  There are many pitfalls and stumbling blocks on the journey to “investments success” including our own brains, which, unfortunately, occasionally play tricks on us.  Our decisions may cause results that are ultimately contrary to our own best interests.

In a previous post, When Our Brains Short-Circuit, I wrote how our brain can affect our long-term investing performance, because we can be afraid of the wrong things.  There is actually much more to be said on the the discipline known as Behavioral Finance.  And given the extremely difficult year we (investors and advisors, both) have all suffered through, now would be a good time to reassess our actual risk tolerance and try to understand how our emotions affect our investment results.

For an excellent summary of the practical implications of Behavioral Finance, I recommend a video presentation by Scott Bosworth of Dimensional Fund Advisors.  His 20 minute talk, with slides, is called Behavioral Biases and Investment Implications. It combines theory, research and experience, but rest assured it’s not so technical that you’ll need a PhD to sit through it.

Bosworth discusses common biases, how they affect decision-making, and how investor behavior impacts investment results.

Here is my take on his presentation.

Overconfidence and Extrapolation

Overconfidence and over-optimism can cause investors to make irrational investment decisions; for example they may buy stocks that have gone up in price, simply because they have gone up in price.  And many people believe they are smart enough to forecast the future, even though the future is unpredictable.

Hindsight Bias

Selective recall leads us to believe that past events should have been easy to predict.  Consequently, we believe that future events should also be easy to predict.  They are not.

Fear and Panic

When stock prices go down, investors feel the pain and fear more is on the way.  The media feed on this fear.  They are interested only in getting more advertisers, not your investment success.  TV pundits, with their incessant and contradictory predictions, only serve to confuse you further.

After a steep decline, many investors just want to unload their stocks – they’ll sell at any price.  The problem is that this common behavior merely locks in losses.

Moreover, getting out of the market can create more stress (not less) in your life, because at some point you have to decide when to go back into the market.  Just when is that?  After you are no longer afraid?  After the market has gone up by 20%, 30% or more?  After you’ve missed the rebound entirely?

Conclusion

The natural inclination of investors is to buy high and sell low.  That is more than unfortunate. It is also why the research shows that investors typically under-perform the stock market, all of the time.  Buy-and-hold investors, on the other hand, typically earn higher returns than those investors who try to time the market.

Unless you have a trusted advisor with a strong long-term philosophy, you may not survive the stock market’s turmoil.  And make no mistake, the emotional responses of investors is a challenge that financial advisors have had to confront this last year.

Educating clients, instilling discipline and maintaining the right strategy are what good advisors provide.

Save on Restaurants

Many clients are taking a second look at their budgets and finding ways to cut back on expenses.  Even if everything is under control, it’s always nice to save money. If going out to a restaurant is something you do anyway, coupons are a way to reduce your expenses.

Restaurant.com is a website I have used before.  It offers $25 coupons for dinner and $10 coupons for lunch.  The list price for these is usually $10 for the dinner coupons and $4 for the lunch coupons.  That’s a bit of savings, but truth be told, the coupons are almost always on sale if you know the right Discount Code.

Sometimes the discount is 50%, sometimes as much as 80%.  But for the next couple of days Restaurant.com is offering a 90% off sale.  In other words, you can get a $25 gift certificate for just $1. Why not give it a try?

Note that this is a limited offer, ending on September 13th at 3 a.m. PST.

Go to Restaurant.com, enter a zip code or city where you would like to find a restaurant to try (or one you already know that you like). Order the Discount Coupons and enter the Discount Code NINETY. Then hit Apply.

You should see the reduced prices.

Keep in mind, that there are some restrictions, such as spending a minimum amount, and not being able to use the coupons on Saturday night.  And when you go, remember to leave a nice tip, based on the usual price of your dinner.

As Julia Child said, “Bon Appetit!”

P.S.  I just saw the movie Julie and Julia and enjoyed it.

Advice for the Newly Unemployed, Part 3

The first article in this series covered my recommendations on financial planning issues related to becoming unemployed.  The second article, by Belinda Plutz, discussed things you must do before beginning your job search.  This article offers practical and insightful tips on how to maintain a positive attitude while seeking new employment opportunities.

MANAGING YOUR JOB SEARCH
by Belinda Plutz of Career Mentors

Job hunting can be a very frustrating process.  People either don’t return your phone calls as quickly as you hoped they would, or they ignore your call completely, and more often than not email and letters go unanswered. Opportunities seem hidden from view. Time is limited, the clock is ticking and you want results NOW.  So how do you keep up your spirit, energy and commitment for as long as it takes?

MONITOR YOUR INNER MONOLOGUE (you know… those words that run around in your head automatically and are usually uncensored)

If you continue to say negative things to yourself  (I’m never… I can’t… I won’t…) your actions will reflect this negativity.  If you insist on telling yourself that the process is futile, and won’t yield a job that will satisfy your needs, you could very well wind up with just this result.  One way to fix this is to actively listen to what you say internally and consciously work at replacing that negative self-talk with positive (or, at the very least, more neutral) words.

LIMIT YOUR EXPOSURE TO NEGATIVE PEOPLE

We all know people who, for whatever reason, are always negative or overly critical or who couldn’t offer an encouraging word even if they were paid for it; real “downers” to put it succinctly.  What you need to do is to associate with people who feel good about themselves and about you.  They can help bolster your spirits and energy.  Being with people who radiate good feelings and enjoy whatever activity they are doing is essential.

COMMIT (IN WRITING) TO GOALS AND WEEKLY TARGET ACTIVITIES

Plan what needs to be done each week and break the projects into do-able time frames.  Make sure that you set realistic goals so you can meet them and keep things moving along.

GIVE YOURSELF CREDIT FOR YOUR ACCOMPLISHMENTS – BIG AND SMALL

When larger goals take time to realize, it is essential to give yourself credit for the intermediate steps that you’ve taken along the way.  For example, if you have two good weeks and then a not-so-good week, you can neutralize or mitigate the negatives by looking back at the positives and focusing on them.

WORK AT MANY JOB HUNTING ACTIVITIES SIMULTANEOUSLY — NOT SEQUENTIALLY

If you only focus on one thing at a time, you will not maximize your effectiveness.  Put more of your time and energy into the activities that have the greatest potential for generating positive results.  Keep moving the process along.  For example, if you have an interview that looks promising, keep working to get others lined up behind it.  If the first interview doesn’t result in a job offer, there will be other things happening and you won’t have to keep “restarting.”  Work methodically, and try not to let the lows (or the highs, for that matter) of job hunting affect your productivity.

ACCEPT THE FACT THAT YOU CAN CONTROL ONLY WHAT YOU DO

Unfortunately, you cannot control what others do or think or say.  But, even controlling only what you do, means that you have a lot to control. Make sure that you take care of all necessary tasks, not just the ones that are easy.  Follow-up is critical when you are job hunting. And you must do what you say you will do — always.

FIND A WAY TO ENJOY SOME PART OF THE PROCESS

Everyone is unique.  Everyone is better at some things than others.  If you can find pleasure in some (or even one) of the things that you have to do anyway, the process will go by much quicker and be less painful.

KEEP A BALANCED PERSPECTIVE

You’re not working, but that’s not all bad.  Spend some time with family and friends, take a course, renew a hobby, do some volunteer work.  Job hunting should be a part-time job if you are working or a “light” full-time job if you are not.  Spending too much time on the hunt can be counter-productive.  The goal is to work smart and hard, not just hard.

Belinda Plutz can be reached by telephone at (212) 947-3180 or by email at careermentors@comcast.net.

© Career Mentors, Inc. 2009