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Volume 14, Issue 9

Volume 14, Issue 9

What Your Children Should Know About Your Finances

Many parents may find it un- comfortable, or may believe it is unnecessary, to inform their children about their personal matters. Yet, preparing your family helps everyone feel better about your financial and health care wishes, and it can ease the decision-making process in many important areas.

As you grow older, informing your children of financial, estate, and medical arrangements that could affect the entire family helps everyone prepare and plan for the future. This knowledge need not include exact facts and figures; however, the following information should be made available to, and understood by, your grown children:

Life Insurance. Life insurance is typically purchased to provide cash to help cover mortgages, liabilities, expenses, estate taxes, and lost income. Knowledge of the existence and whereabouts of life insurance policies can be of critical importance to children when settling their parents’ financial affairs. A policy locked in a safe-deposit box may not be found in a timely manner, if ever.

Other Insurance. Adult children should be aware of any other insurance policies that you may have—including health and disability income insurance. If you are age 65 or older, they should also have a basic understanding of Medicare coverage and be aware of any health insurance policies that go beyond coverage provided by Medicare. Older adults can greatly benefit when their children understand and follow appropriate procedures, as well as submit any forms in a timely manner.

Wills. It is important to prepare a will in order to avoid leaving the disposition of your estate up to your particular state and its laws. To help ensure assets are distributed according to your wishes, both you and your spouse should prepare wills, review them regularly, and make necessary updates as circumstances warrant.

Although the exact contents may be kept private, the existence and location of wills should be disclosed to all family members. Wills should not be kept in bank safe-deposit boxes, which may be sealed at death. The original will may be left with your attorney for safekeeping.

Trusts. Although wills accomplish many estate-related tasks, trusts may help protect your estate from unnecessary taxation or mismanagement by individuals who might lack the prudence to handle matters appropriately. Trust documents should be kept with wills for ease of access. You should discuss pertinent terms with those who will be involved. As children reach adulthood, some parents select a responsible son or daughter to act as a trustee in the event of the parents’ deaths.

Living Will. This document specifies your preferences regarding the administering or withholding of life-sustaining medical treatment. Under many state statutes, a patient must be considered “terminal,” “permanently unconscious,” or in a “persistent vegetative state” before life support can be withdrawn. Copies of living wills should be made available to anyone who would be involved with the care of you or your spouse, and the originals should be kept in a safe, readily accessible storage place.

Health Care Proxy. This legal instrument allows you to appoint a person to act as an agent on your behalf to make medical decisions if you should become incapacitated. A copy of the health care proxy should be filed with your primary doctor and your hospital, if possible. The individual appointed as your agent should also retain a copy, and you both should carry a copy with you at all times if you anticipate that medical care may be required.

Durable Power of Attorney. With a durable power of attorney, an individual or financial institution may act as an agent to oversee your legal and financial affairs in the event of incapacity. Grown children need to be informed of the steps that have been taken to ensure the competent direction of your affairs, should the need arise. However, their actual involvement in your affairs may be limited, according to your desires. A power of attorney automatically terminates upon the death of the principal.

Assets and Debts. It can be beneficial for your children to know that a list of your assets and debts exists, without necessarily seeing the list itself. An asset list, developed and updated regularly, may include information on your bank accounts, real estate holdings, pension holdings, annuities, business agreements, brokerage accounts, boats, cars, works of art, collectibles, other valuables, and insurance policies. A debt list should include information on your current mortgages, consumer indebtedness, personal loans, and business obligations. Both lists should identify where paperwork and associated files for each item can be found.

At first glance, preparing these lists and the associated documentation may appear burdensome. However, once completed, both parents and children can enjoy a sense of confidence that the thoughtful planning they have implemented will ultimately be properly fulfilled.

Should Retirement Be Hard Work?

Retirement should be a time to relax, free from financial worry. Many people dream of retirement as a time to travel or pursue special interests—a break from the 40-hour workweek. But without careful retirement planning, you may actually face the prospect of working harder and longer than you ever imagined during your so-called retirement years. With this in mind, it may be safe to say that the best-laid plans begin well before the age of 65.

Know Your Resources

How many times have you said, “I’ll do that when I retire,” expecting to have more time to pursue other interests when you no longer have to report to the office every day? But, have you considered what may be the costs of these interests? A general rule of thumb is that you may need 60%–80% of your pre-retirement income to maintain your lifestyle during retirement. Careful planning can help offer security and comfort in retirement, along with the resources to pursue these new interests.

For many, Social Security, employer-sponsored retirement plans, and personal savings are the primary sources of retirement income. Although Social Security may contribute a certain percentage, the Social Security Administration (SSA, 2007) estimates that, on average, benefits provide only 40% of income for the elderly. For many, an employer-sponsored retirement plan can also contribute substantially. However, both of these sources may need to be supplemented with personal savings to help provide enough income to maintain the lifestyle to which you may have become accustomed, and/or provide the extras you look forward to in your retirement years.

Put Time on Your Side

Early retirement planning puts time on your side. It is never too early to begin saving and never too late to start. In fact, one advantage of early retirement planning is that a longer period of time before retirement allows for a greater opportunity to increase your savings through potential growth.

An equally important consideration for retirement planning is the ever-present reality of inflation, which can quickly shrink even a substantial savings total. For example, a modest 4% inflation rate, maintained over 15 years, will reduce the purchasing power of $250,000 to $138,816. Starting early may help your savings outpace inflation.

Although it can be difficult to imagine a time when you will not have to be at the office or worksite in the morning, the day will be upon you sooner than you think. With this in mind, planning for retirement now—even if it seems premature—may help ensure a secure financial future for you and your family.

Property Ownership Issues Facing Unmarried Couples

Unlike marriage, which entails numerous legal obligations and rights, “living together” outside of marriage is particularly nebulous with regard to these matters. For some individuals, this may be the primary reason for avoiding marriage. However, what happens when property is purchased together (e.g., a home), or when one partner financially supports the other, and the couple subsequently goes their separate ways? What about assets accumulated while the couple lives together? Does a former partner have a right to such property? Suddenly, cohabitation becomes more than a mere living arrangement and is transformed into an issue of asset protection or lifestyle preservation.

Untying Obligational Knots

Perhaps the greatest potential problem facing unmarried partners is a claim to property, if and when the relationship terminates. The issue of property rights can sometimes create major disagreements that, in some states, have resulted in rather messy palimony lawsuits.

Interestingly, the term “palimony” does not have its origins in law. The popular media coined the term as a description for the division of property and/or the need for support payments as a direct result of the break-up of two unmarried individuals. Although palimony suits are generally seen in a limited number of states, the lessons learned from such cases offer some interesting planning insights for unmarried partners.

In states where palimony suits are prevalent (e.g., California), cohabitation agreements are an increasingly popular method for unmarried couples to spell out their expectations and obligations. The parties can determine how comprehensive the contracts should be. When properly drafted, these agreements maybe enforceable in a number of states.

A carefully written agreement may be an appropriate way to document the expectations of unmarried cohabitants. The agreement can outline everything from how jointly owned property will be distributed to what support will be provided by one partner to the other, in the event the relationship terminates. Besides laying some ground rules and potentially eliminating future legal headaches, such an agreement also serves to crystallize the expectations of both partners. Like any contract, a written cohabitation agreement should be prepared with the assistance of legal counsel.

Cutting Strings

For one reason or another, one partner (or even both partners) may not wish to enter into a formal agreement. If that individual is of substantial means, certainly creating legal entities may be an option worthy of further exploration. How-ever, there are other steps such an individual may wish to consider to avoid any potential, future problems.For instance, it may be unwise to purchase significant assets together, title assets in joint names, regularly give money to a partner (unless it is made as a “gift” using the annual gift tax exclusion), place money into a joint account, or use a partner’s last name.

Financial strategies and estate planning for unmarried partners are complex in today’s tax environment. However, although such planning can be a difficult challenge,it can be a little less difficult if both partners have a realistic understanding of the true breadth of their relationship.

Reward Yourself With Regular Personal Savings

For most people, saving money is about as much fun as being on a diet, filing taxes, or cutting the lawn. With the financial demands of the here and now, it can be tempting to procrastinate and put off creating a long-term savings plan. But time matters. It may be one of your greatest allies as you develop strategies to reach your financial goals. Starting today may make preparing for tomorrow a little easier.

Many people would like to change their saving habits. Let’s consider the hypothetical case of Tom and Pam Dickinson and their two children. In their mid to late 30s, they have a combined annual income of approximately $80,000 after taxes.

Tom and Pam know they need to save, so they’ve set a goal of saving 10% of their combined incomes—which means they will save approximately $8,000 per year.

The balance of their funds will be budgeted to cover living expenses, including their mortgage payments, transportation costs, food, clothing, and leisure activities.

The Dickinson family developed the following rules to become better savers. They resolve to do the following:

  1. Record all expenditures every month. Knowing where their money goes will allow them to budget better and identify the areas where they can cut back.
  2. Live within their current income and plan for short-term, intermediate, and long-range needs.
  3. Maintain one to three months’ salary as an emergency fund.
  4. Only borrow to pay for items that add to their asset base, such as home improvements or a better automobile. When they do borrow, they check for the lowest interest rates.
  5. Meet their tax obligations, and with the help of a tax professional/accountant, utilize all allowable deductions.

No matter your age, saving should become both a priority and a vital part of your budget. You should pay yourself first and never forget— the earlier you start saving, the better your chances of meeting your financial goals.

The information contained in this newsletter is not written or intended as tax, legal, or financial advice and may not be relied on for purposes of avoiding any Federal tax penalties. Entities or per-sons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

The information contained in this newsletter is for general use and it is not intended to cover all aspects of a particular matter. While we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and financial advice. The publisher is not engaged in rendering legal, accounting, or financial advice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any securities. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA, COPYRIGHT 2008.



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