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.”

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.

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.

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.

“An idiot with a plan is better than a genius with no plan.” - T. Boone Pickens.     

The stock market has been volatile, and the headlines have been scary. And that description has become common over the last year or more.

Given the state of the U.S. economy and the U.S. stock market, and indeed, all financial markets worldwide, how confident are you that your financial plan is on track?  While books and computer programs may help you plan your future, there are several reasons why you should seriously consider seeking the advice of a qualified financial planner.

Planners know that it’s about more than just money.

At its core, financial planning is about effectively managing financial resources so that you can lead a happier, more fulfilling life today and tomorrow. One of the very first steps in a financial planning relationship is to help clients define their life goals. Do you want to start your own company, buy a second home, retire early? How do you balance competing goals, such as saving for retirement, while simultaneously putting your children through college and helping out your elderly parents?

In our financial planning, I meet with clients periodically to reassess their goals and the strategies that will help them to achieve those goals, especially as life circumstances change. No financial planning or investment software program can effectively come up with those kinds of questions — let alone provide the right answers.

Planners see the whole, not just the parts.

Many financial specialists provide valuable services to people for a specific financial need, such as buying property and casualty insurance or drafting a will. However, a comprehensive financial planner provides the overview, in order to make sure that the various parts are working in harmony. That’s why I call myself a Personal Chief Financial Officer. A company has a CFO, so should a wealthy or moderately wealthy individual, or anyone with similar desires.

As a Financial Planner, I can often see something that is missing but is needed, something which the client had never previously considered. One example was a client who had a sizeable life insurance policy in place, but should have had it owned by a Life Insurance Trust. This would save what amounted to a lot of money on estate taxes.

Another client thought she was contributing to her employer’s 401(k) plan, but she wasn’t. She had returned from a maternity leave, and somehow the paperwork never got completed. While a computer program might provide generic investment advice (not necessarily well tailored to your individual needs), a financial planner can spot the missing ingredients.

Planners motivate.

You probably know that you need a will, more insurance, a budget, a better handle on your investments and true assessment of a host of other financial issues. Perhaps you could do some of it adequately on your own. But, there’s nothing like going to a financial planner to motivate you to finally take the actions that you’ve been procrastinating about, all along.

From my experience, procrastination is a huge problem. As part of the financial planning process, I typically use an Action Plan for clients and for me, to make sure that recommendations and specific tasks are accomplished in a timely manner.

Planners provide checks and balances.

Beyond the financial expertise and the motivation to take action, the planner can provide a much-needed objective perspective. Numerous studies have shown that investors who work with financial advisors trade less often and, on the average, get better returns than those who invest on their own. Planners can filter out the financial “noise” that so often clouds financial judgment.

Planners understand that “hot” stocks become lukewarm pretty quickly.

Financial publications frequently have lists of hot financial ideas and stocks to watch. But those recommendations change all the time. Whose list should you believe? No one’s. I encourage my clients NOT to watch CNBC news, because it will just rile them up to do something that is a mere reaction to the news. Good planning is about having a road map that anticipates various events and gives you peace of mind. Turn off the TV, and enjoy your life!

Planners allay fear.

Some clients are just too fearful to invest in the stock market at all, and they have kept their money in safe investments for years. In the long run, risk and return are related. You know the saying: Nothing ventured, nothing gained. But you need to understand that you can take on risk intelligently. We are talking about investing your money, not gambling with it. A good financial planner should be able to explain risk and return to you, and to craft a strategy that is right for you. Something you will stay with in good times and bad.

Planners save time.

It takes time to develop a personalized financial program, monitor your investments, reduce risk and keep track of it all. Perhaps more time than your busy schedule may allow. Your Financial Planner offers a professional approach to your customized financial program that will not demand a lot of work on your part, and a level of knowledge and expertise that may be difficult for you to achieve on your own.

Planners know about taxes.

Like the weather, everyone complains about taxes. Planners can help you structure your investments to take advantage of legitimate tax-saving moves.

Where to find a planner?

Does everyone need a financial planner? No, certainly not. But if you have resources — savings and investments — you have choices to make. You may not have the time, inclination or even desire to do the hard work to come up with the best answer.

You can find a professional fee-only financial planner at The Garrett Planning Network (GPN) or the National Association of Personal Financial Advisors (NAPFA). If you have determined that what you are truly a Do-It-Yourselfer, or you only need a financial checkup or a second opinion, your search should probably start with GPN. If you want to delegate the work, look for a planner at NAPFA’s web site. Most NAPFA members require that you have a minimum amount of investable assets for them to manage. GPN members have no such minimum.

Disclosure: I am a member of both organizations.