Estate Planning for Procrastinators, Part 2

“The most common excuse parents give for putting off writing a will is trying to decide who will raise the children.” – Ric Edelman.

An earlier post discussed some of the psychological and practical reasons why people put off writing a will.  For young parents, the biggest challenge, and the main reason for procrastinating and not writing a will, may be the task of choosing a guardian or guardians for their children.

Since it is such a prevalent challenge, you can find many articles on the Internet addressing the issue of choosing a guardian.  Actually if you enter “choosing a guardian” in Google, your search will yield 4.7 million hits.  One article I found particularly useful is Why Parents Procrastinate in Writing Their Will . . . and Nine Questions to Help You Overcome It  from Ric Edelman’s newsletter Inside Personal Finance.

The bottom line is that since “deciding on a guardian and how to provide for their kids’ financial needs is difficult …a lot of parents do the worst thing of all: nothing. This means the decision, if one becomes necessary, will be made by a judge or county official.”

To avoid this outcome, that article sets out a procedure for young parents to follow.

“Sit down with pen and paper and answer the following questions, providing as much detail as possible.   If you’re deciding as a couple, answer the questions separately and then compare your answers.  Some of the questions will take some thought, so you might not be able to answer them right away.  That’s okay.  Answer what you can at the first sitting and set a deadline to finish the rest.”

There is not space to repeat the 9 questions, which are quite good, so please read the entire article.  I hope that mulling over this issue will empower you to move forward.  Consulting an experienced estate planning attorney should be high on your agenda of things to do before the end of the year, if not sooner.

Although the article is recommended as a good place to start, here are some additional thoughts from two other articles.

From Guardianship for Your Children 

If you’re having a hard time choosing someone, take some time to talk with the person you’re considering. One or more of your candidates may not be willing or able to accept the responsibility, or their feelings about acting as guardian may help you decide.

If You and the Other Parent Can’t Agree

When you and your child’s other parent make your wills, you should name the same person as personal guardian. If you don’t agree on whom to name, there could be a court fight if both of you die while the child is still a minor. Faced with conflicting wishes, a judge would have to make a choice based on the evidence of what’s in the best interests of your child.

Writing a Letter of Explanation

Leaving a written explanation may be important if you think that a judge could have reason to question your choice for personal guardian.

Judges are required to act in the child’s best interests, so in your letter explain why your choice is best for your child.

If Your Child’s Other Parent Is Your Same-Sex Partner

If you coparent your children with a same-sex partner, you will probably want to name your partner as the personal guardian of your children.  Because some courts will be unfamiliar with your family structure, consider writing a letter to fully explain to the court why it’s important for your partner to be your children’s personal guardian.

From The Importance of Writing a Will

After you’ve made the decision, choose an alternate guardian to include in your will.  He or she will take care of your child in the event that your primary choice is unable to do the job.

If you have a life insurance policy, 401k, or IRA account, be aware that … the beneficiary forms accompanying these documents overrule wills.  The funds in these accounts will be distributed to whomever you name—regardless of whom you specify in your will.  You’ll need to double check the names on these accounts and make changes to match the names with those you dictate in your will.

Conclusion

Why Parents Procrastinate in Writing Their Will . . . and Nine Questions to Help You Overcome It concludes with

“Above all, remember: If you fail to make a choice, you are leaving the decision up to the probate court, where all of the people you considered above (and possibly others) will fight over the decision, with the judge acting as referee.  It’s a difficult task for a judge, since he or she has never met you and will have no idea what you would have wanted.

If the thought of making a choice sends you into a panic, remember that you can always change your mind.  I’ve seen clients change their minds every other year, as their family circumstances change.  If your parents seem the best option today, pick them.  In a few years, when they’re older or have become ill, you can change your mind. Or maybe your choice marries someone you don’t like, or suffers a setback of some kind.  No problem.  Just base your decision on the facts as they are today, and rest assured that as times change and people change, your mind can change, as well.”

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.

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

Advice for the Newly Unemployed, Part 2

It’s my pleasure to introduce Belinda Plutz as the Passionate Planner’s first guest blogger.  I’ve known Belinda for more than two decades, and over the years have come to realize that she possesses such an amazing combination of characteristics – she’s insightful and direct yet diplomatic, business-like but empathetic – that there can be no better individual to speak to the often highly stressful and emotional task of effective job hunting in a slow-to-recover economy.  Belinda is the person behind the company, Career Mentors of New York City.  If you need individualized help you can reach her by telephone at (212) 947-3180 or by email at careermentors@comcast.net.
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FIRST STEPS
by Belinda Plutz of Career Mentors.

So, you’ve lost your job.  While you’re probably very eager to “get out there” and “hit the street” there are quite a few practical, yet very important things that you need to do before you begin a job search. Working on these concrete actions can help you start moving; it is a way to “get your act together,” especially when you feel paralyzed by the lay-off.  Once these things are accomplished you can more readily, and effectively, focus on your job search.

TEST YOUR EQUIPMENT

Make sure your computer (both hardware and software), printer, internet and email access, telephones and answering devices (landline and/or cell) are all up-to-date and in excellent working order.  Purchase a back-up printer cartridge to avoid running out of ink at a critical moment, i.e. printing up your resume.  If you don’t know how to use any of your equipment – now is the time to figure it out.

VOICEMAIL

Record a clear, easy to understand landline and/or cell phone voicemail message with no kids, no pets and no comedic routines.  The message should be as professional as possible.  Give your name and/or your complete telephone number (including the area code) to make it easy for callers to be sure that they have reached the correct party.  Not changing the computerized phone message (typically the default program on your answering machine or service) may give callers the impression that you either are not technologically savvy enough to change it or simply too lazy to do it; definitely not a good first impression.

EMAIL

Establish a professional email address that projects the right image. No nicknames, birthdates or cutesy personal references.  For example, using “hotplanner@hotmail.com” clearly gives the wrong message.  Because email is a primary method of communicating with potential employers, it is very important to get this right.

RÈSUMÈ

To update your résumé begin by doing an analysis of your recent and previous positions.  Make sure that you acknowledge your accomplishments and functions, especially those that are relevant to your future job focus and those that you like or enjoy.  Highlighting experiences or activities that you hated doing will not get the results you want.  Do not lie, or even stretch the truth just a little bit – dates of employment and job titles are easily checked.

Create an easy to visually scan and read document.  Bullets are better than paragraphs.  Your résumé needs to be accomplishment focused, as well as “keyword rich” and “number rich” (e.g. sales results, staff supervised, budget figures).  It must be perfectly written with no typos, grammatical errors or mistakes; have someone (or a couple of someones) proofread it for you.  Test how it prints and also how it transmits electronically before you begin using it.

PERSONAL BUSINESS CARDS

Have personal cards made with all your contact information so that you can offer it to people or respond when someone offers you their card.  You will want them for casual connections as well as formal networking events. Carry a few with you at all times. If you run into someone while out walking, you will make a positive impression if you can hand them your card (as opposed to having to write your contact information on the back of a store receipt).  The image that you want to present is that you are professional and always prepared. And don’t even consider “freebie” business cards with the name of the printer on the reverse of it; remember, first impressions…

SELF INTRODUCTION

Carefully script the self introduction you use to answer the standard American social question, “So what do you do?”  Your response needs to be positive, because what you say first is what people will remember about you. Do not start with the news that you were recently laid off — that should be the third or fourth thing that people hear.  Beginning your response with, “I just lost my job…” focuses on your current non-work situation, not you.

Your message needs to be consistent and clear with virtually everyone getting the same message.  And if you can frame yourself without clichés, in a “features and benefits” kind of way, not just “title” and “function,” it will be far more interesting (and memorable).  This self introduction is one that you will use verbally, but you will also need to create a written paragraph that you can drop into emails.

This is worth repeating: What you say first is what people will remember about you.  You are helping to craft their impression of who you are and what you do, and it is up to you to present yourself in the most professional and appealing way.

NETWORK LIST

You may not realize this, but you already have a “network.”  Your network is all the people you know, and have ever known, and all the people you have ever worked with in any capacity.  Begin putting your list together – who should you be reaching out to and connecting with.  You can network for information, connections, insight and advice or any combination of those.

People will want to help, but you have to have realistic expectations; no one is going to hand you a job just because you need or deserve one.  In tough times (like now), it is very difficult to network directly “for a job.”  But, since companies do not hire people – people hire people – it is critical that you make connecting with people a major priority.

ONLINE PRESENCE

Having a professional social networking presence can be a good way for people to find you and for you to reach out to people.  If you are on one or more social networking websites, make sure that the message and image you project are the ones that you want potential employers to see… because they are definitely looking.

REFERENCES

Even though many companies have a “policy” of only releasing titles and dates of employment when called for a reference, you should be prepared to give a prospective employer the names, titles and telephone numbers of three or four pre-screened people who are connected with your most recent and previous jobs who can speak about your performance.

It is both flattering and courteous to let people know in advance that you want to list them as a reference.  It is also a great way to network.  Give each person a copy of your current résumé and review the pertinent information with them. Reach an agreement with them regarding dates, titles, responsibilities, achievements, etc., that you would like them to address.

Once you have all of these things in place, give yourself credit for accomplishing them. You are now in a great position to put all your energy and attention into a successful job search.

© Career Mentors, Inc. 2009

To be continued.

Advice for the Newly Unemployed, Part 1

Losing your job and becoming one of the growing number of unemployed can be a shock to anyone.  Even if you weren’t all that happy with your position, at least you had one.  But once the shock of losing a job wears off, there are several things that you need to attend to.  Some are obvious, and some require a bit of analysis.

File for unemployment benefits

First, you will want to file for unemployment benefits.  Each state sets its own benefit amounts, eligibility requirements, and benefit length.  Benefit amounts are based on a percentage of what you made during your last year of employment, up to the maximum in your state.  Remember that unemployment benefits, like regular income, are taxable.

To determine your benefits, inquire at your state unemployment agency or, if the option is available to you, file for benefits online.  Still, understand that it can take up to a full month before you will receive your first unemployment check.

Verify your termination benefits

The second thing you need to do is to verify what termination benefits your employer will provide.  You may be entitled to severance pay, continuation of medical benefits, and possibly support in finding your next job.  Take advantage of anything and everything your former employer offers in the way of help.

Obtain health coverage

Speaking of health insurance, you need to maintain your existing coverage or find a replacement insurance policy.  If you worked for a company that had 20 or more employees, you’re eligible for COBRA.  This federal law ensures that you can continue coverage for an additional 18 months, but you must pay the premiums for it yourself.  With no employer contribution you may be quite surprised at how much money your continued coverage will cost you. 

It’s important, especially if you have a pre-existing health condition, that you not let your health insurance lapse or you may find that pre-existing condition will not be covered under a new plan.

The recent federal stimulus program may cover 65% of the COBRA premiums for up to nine months, and that is certainly worth looking into.

Decide if you need life insurance

Your employer might allow you to continue to participate in the company’s group life insurance provided that you pay your own premiums.  But life insurance might not be worth the expense if you have no dependents or your children are grown up and self-sufficient.

If you do want to keep your coverage through your former employer, you may be able to find less-expensive term plans on your own, though it will take a little homework.

Review your budget

After taking care of the necessities of health and life insurance coverage you may want to evaluate your budget to see where you can cut expenses. Depending on your field, your flexibility, how well you network and a host of other things – including a little bit of luck – your job search could take a year, or even more.  That should be motivation enough to look for ways to save money.

Analyze your retirement plan options

What you should do with your retirement savings accounts is one item that requires extra care and analysis.  If you withdraw funds from your 401(k) or 403(b) employer-sponsored savings plan, you will pay ordinary income taxes on that amount, and if you’re less than 59½ years of age, incur an additional 10% penalty.

If you transfer your employer’s retirement plan to an individual IRA by “rolling it over,” you will not have to pay any income taxes.  Moreover, you can likely build a better portfolio, since you will have more investment choices in your IRA.  Do this with care, by doing a trustee-to-trustee transfer.  And by all means, consult a fee-only advisor to avoid high up-front commissions.

Once your money is safely ensconced in an IRA, you may be able to tap it without penalty, if you need it to cover large medical expenses or pay medical-insurance costs.  For additional details, read this article.

How best to approach your job search and other tips on how to survive your unexpected unemployment will be continued in Part 2.

Investors Seek Objective Advice

“In the aftermath of the financial-market crisis, investors are leaving Wall Street to sign on with independent investment advisers.” – Wall Street Journal.

A perennial topic for articles in the mainstream press (and, subsequently, in this blog) is how individuals do, and also, should, choose a financial advisor.

Wary Investors Are Seeking Out Objective Voices in Wednesday’s Wall Street Journal is the latest installment on that subject.  They report that “registered investment advisers brought in more than $108 billion of net new assets into the three largest custodians” while “the four major Wall Street brokerage firms saw an outflow of $8 billion in 2008.”

While an individual investor may find it difficult to identify with billions and billions of dollars, that’s still good news; it means (in my opinion) that the good guys are winning.  Recall as I said in previous posts that registered investment advisors must act in the best interests of their clients, while brokers follow a less stringent rule.

More and more prospective and actual clients are getting that message, as the article reports that “investors seeking to repair their damaged nest eggs say the chief lure of independent advisers is more-objective guidance.”

The subhead of the article is a somewhat wordy, “Independent Advisers Are In Demand, but Picking One Means Homework.”  If not for that, the article would have been suitable for a Twitter post!  Nevertheless, the writers offer some good advice, which I summarize below.

…while most independents call themselves “advisers,” they aren’t all required to adhere to the same fiduciary standards.  As a result, the degree to which each must put a client’s interests before his or her own can vary.  The upshot, says Marilyn Dimitroff, chairwoman of the board of directors of Certified Financial Planner Board of Standards Inc., is that “the public is so confused.”

“To hire an independent who suits your needs, you should consider how much you have to invest, how much you can afford to pay and whether you want someone to oversee your entire financial life, or just pieces of it. It’s also important to probe the potential conflicts of interest your adviser may face.

Here are some questions to consider:

What type of adviser do you need?  As with their counterparts on Wall Street, independent advisers come in two basic flavors: brokers, who typically focus on investment advice, and registered investment advisers, or RIAs, who may help you with everything from saving for college and retirement to tax and estate planning.

What are the potential conflicts of interest?  Brokers’ income depends on commissions from client trading. As a result, they have a financial incentive to steer clients to products that pay them the most, such as variable annuities or mutual funds with high sales “loads.”

Still, many independent brokerage firms receive so-called revenue-sharing payments from mutual-fund and other financial-services companies.  In return for making such payments, fund companies may be given opportunities to promote their products to a firm’s advisers.

Investors wary of such potential conflicts may want to consider an RIA.  RIAs not only generally refrain from accepting commissions but are held to a higher “fiduciary” standard—a legal requirement that they act in clients’ best interests.  Brokers follow looser “suitability” guidelines, which means they can’t put clients in inappropriate investments. (A recent Obama administration proposal would require brokers to operate under the higher fiduciary standard.)

What are the adviser’s credentials?  To find an adviser with specific skills, look for certain credentials.  A Certified Financial Planner must complete courses in investments, taxation, estate planning and insurance.  They also must pass a two-day exam, have at least three years of experience, and comply with ethical standards that require them to put a client’s interests ahead of their own.

To be continued… (as always)

Brokers May Have to Change

“A report by Rand Corp. last year found that 63% of investors think brokers are legally required to act in the best interest of the client; 70% believe that brokers must disclose any conflicts of interest.  Advisers always have those duties, but brokers often don’t.  The confusion is understandable, because a lot of stock brokers these days call themselves financial planners.” – Jason Zweig.

If you are confused by the difference among these titles: Financial Planner, Stockbroker, and Registered Investment Advisor, you are not alone.  The “Name Game” in the financial services industry is downright confusing.  How does your financial advisor operate?  How does she get paid?  What are the advantages and disadvantages of each arrangement?

Many people believe that they are getting financial planning from a stockbroker, when in fact financial planning is usually only an incidental part of what a stockbroker does.  Similarly, many people are not aware that a stockbroker does not have to act in the client’s best interests.

A June 19th Wall Street Journal article Big Change in Store for Brokers in Obama’s Oversight Overhaul brings home this point.

According to the article, stockbrokers might have to change the way they do business; they might have to act in their client’s best interests, the way a Registered Investment Advisor already does.

Wow!  What a concept.

Here are the relevant quotes:

Buried in President Obama’s proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher “fiduciary” standard that would compel them to place their client’s interests ahead of their own.

Currently, brokers are only required to offer investments that are “suitable,” which means they can’t put clients in inappropriate investments, such as a highly risky stock for an 80-year-old grandmother. The move could change the way products are sold and marketed and even how brokers are compensated.

Many investors don’t even know the difference between the two standards, believing their brokers already are acting in their best interests.

But requiring brokers to operate under a fiduciary standard could force them to offer products that are less costly and more tax-efficient.  They will have to disclose any potential conflicts of interest, such as any fees they may get for favoring one product over another. That could mean clients will be offered fewer proprietary products if the broker can find a lower-cost option elsewhere.

For example, a broker couldn’t put you in a mutual fund with higher fees — or one he gets a bigger commission for selling — if he could get a comparable fund with lower fees elsewhere, says Tamar Frankel, an expert on fiduciary law at Boston University School of Law. (Emphasis added.)

The article implies that some stockbrokers sometimes put their interests above yours.  Hmm.   This might just be worth investigating.

Luckily, I’ve discussed this topic many times, and in fact I have a series called The Dark Side of Wall Street, which lists all of the relevant posts.  If you start with Choosing a Financial Advisor, Part 1 at the bottom of the page, you can read them in order by following the “To be continued” link at the end of each post.

Roth IRA Basics

Roth, Roth, Roth.  Everyone, it seems is talking about Roth, and if you haven’t, rest assured – you will.  Over the next few months, you will probably hear a lot about Roth IRAs because of a change in the rules that will take effect in 2010 regarding converting a traditional IRA into a Roth IRA.  That subject is just a little too complicated for most people, so let’s take a quick look at some of the fundamentals.

Roth Basics

If saving for your retirement is one of your financial goals (and it should be), you might want to consider investing in a Roth IRA.  You should know that some people earn too much to qualify; here are the limitations:

In general, if you file as a single, you can make the full contribution provided that you earn no more than $105,000; if you’re married and file a joint return, that maximum is $166,000.  It’s actually a bit more complicated than that, but if you’re interested in learning the nitty gritty, here is a link explaining how to calculate the amount you can earn and still contribute to a Roth IRA.

Investment Choices

As with a traditional IRA, you can invest in a number of things: Certificates of Deposit, stocks, bonds, mutual funds, etc.

Advantages

With a Roth, all earnings on your investments escape taxation completely. This is unique.  All other investment vehicles are either taxed currently or tax-deferred.  By tax-deferred, I mean that you don’t pay any taxes until you take the money out.  Examples of tax-deferred investments are 401(k)s and 403(b)s, as well as traditional IRAs.

Other benefits of a Roth IRA include avoiding the early distribution penalty on certain withdrawals and eliminating the requirement to take minimum distributions after age 70½.

Disadvantages

So what’s the catch?  The primary disadvantage of a Roth IRA is that you don’t get a tax deduction when you contribute to it, as you do with other retirement options.  Your personal situation will drive what is more important, tax-free growth or a current tax deduction.  But that decision to go with a Roth will also depend on the assumptions you make about what your tax bracket may be when you retire.

Another disadvantage of a Roth, albeit a minor one, is that you have to go out of your way to use it.  What I mean by that is you have to actually open an account with a bank, brokerage firm or mutual fund.  With a 401(k) or 403(b), you just pen your John Hancock to some forms at work and you’re good to go.

Aside from the (in)convenience aspect, psychologically it is easier to save though an employer sponsored plan, simply because you never see the money; it comes right out of your paycheck.  And, of course, many employers match your contribution either in full or in part, which you ordinarily wouldn’t want to miss out on.  That is, after all, found money.

Limits

What’s the maximum you can contribute to a Roth IRA?  The same amount as the traditional IRA.  For 2009, it’s $5,000 if you’re younger than 50 years old; otherwise, it’s $6,000, and both spouses can make contributions to a Roth.  You should be aware that contributions are a “use it or lose it” proposition; in other words, if you fail to take advantage of this year’s contribution, you can’t do it retroactively.

Summary

For a quick summary of your choices, Understanding the Roth IRA has a useful table comparing the various options.

Conclusion

In general, a Roth IRA is a very smart choice in saving for retirement for many people.  To make the right decision for you, discuss the question with your financial planner or accountant.

Beyond a Simple Will

Most people understand that it is important to have a will which spells out the way they would like their property to be distributed after they die.  Nevertheless, many people are uncomfortable (to say the least) contemplating their own mortality, so they put off taking care of even writing a basic will.  That’s quite understandable, but in most cases, it’s a mistake.

I think it is imperative that you confront your fears and put something in writing, especially if you have minor children.  Having a will and naming a guardian is nothing short of mandatory.  My experience is that many people, who definitely know better, have not taken care of this responsibility.  That’s quite sad.  Parents spend so much time and energy in ensuring the successful viability of their children’s (long term) future in terms of education and comfort, but fairly little in considering who will care for them (in the short term) if the worst thing that could ever happen happens.

Whether you should take a step beyond just a simple last will and testament and also use a trust is the subject of a June 3rd article in The Wall Street Journal, Deciding if Your Kid Is Trust-Worthy, by Stacey L. Bradford. She raises several pertinent considerations in estate planning.

The subject of trusts can be intimidating, but it is well worth your time to become acquainted with the issues. Fortunately, Bradford explains in plain English “why parents may want to consider estate-planning tools beyond a will.” Here are some relevant quotes.

Even middle-class folks can benefit from trusts when it comes to estate planning. That’s because children under the age of 18 can’t directly inherit more than a small amount of money. If you have more than that to leave to your minor child and make no provisions in your will, a court will appoint a property guardian to manage your child’s assets until he reaches 18 or 21, depending on the state.

That property guardian may be a complete stranger who won’t understand your values. Perhaps more important, the guardian could add one more layer of bureaucracy to an already complicated situation. When your child needs money, the guardian may have to make a formal request that then goes through the court system. It can be a real headache for your kids to get funds when they need it, and it’s not an arrangement that’s always in their best interests.

One way around the court system is to set up a custodial account for your kids through your will. In that case, you get to name the custodian, and he decides how the money is spent. Once your son or daughter is legally considered an adult, he or she inherits the money outright. The problem with this setup is that your kid might blow through the money and have nothing left over for college or grad school.

For many parents, setting up a trust is a better alternative that allows them more control over how their money is spent once they’re gone. If you have the means and want your child to go to private school, for example, include that in the trust document. A trust can also delay the age at which your kids get their hands on the money.

While setting up a trust is a bit more complicated than a custodial account — it requires a lawyer’s assistance, for one thing — it also provides more financial security for your children and is therefore worth considering. Ideally, you should set up a trust when you draft your will. But you can always add a trust later as your estate gets more complicated or your assets grow.

Here are a few questions to ask yourself to determine if a trust is right for your family:

Do you anticipate leaving your children more than a modest sum of money?

Do you want to have some say in how your children’s money is spent?

Would you prefer that your children not inherit the money when they turn 18 or 21?

Do you want the money to be used for a college education?

Bradford also discusses choosing a trustee and how your guardian and trustee will work together.

Even after reading just these excerpts that I posted here, you will know enough to ask the right questions of your attorney. Reading the article in its entirety or the book on which the article is based, The Wall Street Journal Financial Guidebook for New Parents, couldn’t hurt either. By the way, in my opinion this book will be valuable for parents who are not so new and even grandparents.

And, of course, it is absolutely imperative to work with a knowledgeable lawyer who specializes in estate planning issues. Trusts are highly complicated and simply not a do-it-yourself project.

What you spend upfront on the lawyer fees will be saved many times over, if the need ever arises.

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