The Truth About Personal Risk Management Part 2 - Using Trusts in Estate Planning

Paying insurance premiums to protect against potential losses frees us mentally to enjoy driving a car, leave our house empty while on vacation and receive medical treatment for an injury or illness. In the same way, the use of trusts acts like insurance and can shift anxiety to comfort, turmoil to peace, and complexity to understanding.

The Key Takeaways

• Trusts provide a protective cure for many of the financial anxieties, concerns, frustrations and hassles we fear for ourselves and loved ones.
• Trusts also provide similar assurances for business owners and for those with considerable assets.
• The benefit of planning is peace of mind for you and your family now.

What Are Risks Related to Estate Planning?

Proper estate planning can protect you against awful things that can happen to you, your family and your assets. These can include: a costly and public court guardianship/conservatorship if you or your spouse becomes incapacitated; being kept in a vegetative state; a potentially costly and time consuming probate process after you die; federal and state estate taxes; a will contest or heirs fighting over your assets; your surviving spouse not having enough money to live on; irresponsible spending by a beneficiary; an inheritance becoming part of a beneficiary’s divorce proceedings; an inheritance not making it to the intended beneficiary (i.e., left to an adult for the benefit of a minor); and an inheritance not being used according to your values and beliefs.

What You Need to Know: Not addressing these risks can cause you pain, worry, frustration, anxiety, fear and anguish. And, if any of these awful things should happen to you or a loved one, your quality of life can suffer.

Why Use Trusts for Your Broader Financial and Wealth Planning?

There are many different trusts that can be used to address a wide range of your circumstances, needs, anxieties, and aspirations. Take a simple but important example of trusts’ capabilities:  the living trust. Most people want to avoid court interference at incapacity (i.e., disability) and at death, and a living trust solves this worry. When you establish a living trust, you transfer your assets to it and select someone to step in and manage them for you when you are not able to do so. Because the assets are no longer in your name, the court has no reason to get involved at either incapacity or death; your successor can manage your assets according to your instructions for as long as necessary. 

More broadly, trusts can hold investments, property and insurance policies, with benefits of reducing various taxes and protecting your wealth from lawsuits and creditors. A trust can continue beyond your lifetime—assets can be kept in a trust until your beneficiaries reach the age(s) you want them to inherit, to provide for a loved one with special needs, or to protect an inheritance from beneficiaries’ creditors, spouses and future death taxes. A trust will also let you provide for your surviving spouse without disinheriting your children.

What You Need to Know: Trusts, in their various forms, offer you a robust package of dollar and quality-of-life benefits. And, trusts are fully compatible with your various investments and assets, from mutual funds to stocks (both public and private) to insurance policies to property.

Actions to Consider

• Become aware of the financial, wealth and estate planning risks you and your family face, and how they can be managed or completely avoided with the use of trusts. 
• An advisor and trust/estate planning attorney will be able to help you become an informed consumer.
• List the fears and anxieties you have for yourself and your loved ones concerning your wealth.
• Compare the costs associated with planning and implementation to the financial and emotional value you will receive. 
• Keep in mind that while trusts have set-up costs, overall costs can be less over time by avoiding court expenses and delays, saving on a variety of taxes, eliminating exposure to legal costs, and so forth.
• Life insurance inside a trust is an excellent way to provide a larger inheritance for your loved ones.
• If you are a business owner, investigate the many benefits that trusts can provide for your business wealth.
• Don’t procrastinate. Trusts have as much application for the living as for those who pass on. Put your plan into effect now based on your current circumstances, and then make changes as needed. Acting now will give you the peace of mind you desire.

The Truth about Personal Risk Management, Part 1 - Insurance

Personal risk management is being aware of the risks in your home and in your life, and then planning how to handle those risks. Insurance plays a big part in managing risk. Most people don’t like paying insurance premiums, but when something happens and the insurance pays for a covered expense, they are relieved they had it. 

The Key Takeaways

• Not recognizing and managing risk can set your family up for financial ruin.
• Recognizing and managing risk will give you and your family the freedom to live life, without worrying about how you would handle a catastrophic loss.

What kinds of risks should I be aware of?

Property and casualty risks include your car and other vehicles, home and furnishings, jewelry, cameras, and so forth. You would want to protect these from accidents, theft, fire, flood, and earthquake damage. Health and long-term care insurance help protect your finances if you become ill or injured. Disability income and life insurance help replace income in the event of a long-term illness or death. If you volunteer with children or youth, you may need personal liability insurance. An increase to your umbrella policy is warranted once you have teenage drivers. If you are a business owner, you may need insurance as part of a buy-sell agreement with a key employee or business partner in addition to business liability insurance. If you are in a high-risk profession (like health care, construction or real estate), you will probably need additional asset protection planning.

How much insurance do I need?

You need enough insurance to protect your assets in the worst-case scenario. At the same time, the premiums should be an amount you can comfortably afford in your budget. Decide what you need to insure, how much to insure it for, and how much you are able and willing to pay in deductibles and premiums.

What You Need to Know

Your family’s needs for insurance will change over time and will reflect your values at each stage in life. For example, you may need more life insurance when your children are young; you may want long-term care insurance as you near retirement (although it is less expensive when you are younger); you may not need as much personal liability insurance if you retire from volunteering or once your children become independent; and you may not need business insurance if you sell your business.

Actions to Consider

• Look at ways you can reduce premiums. For example, installing a home security alarm system or trimming shrubbery may save on your homeowner’s insurance. If you drive an older car, you may not need collision insurance. If you can handle higher deductibles, your premiums will likely be lower.
• Look for ways to reduce risk entirely. For example, you may want to sell a property that is high risk or even retire from a high-risk profession.
• Some risk may be perfectly acceptable to you. Consider what you might lose if the worst happens and see if you could live with the loss. This is called risk budgeting.
• Keep good records on personal property. Review the values and your insurance coverage annually. Values fluctuate, and you don’t want to over- or under-insure.
• Determine what you would lose if someone sued you with a liability claim. You worked hard to build your net worth and you do not want to lose wealth if someone files a claim against you. Even if it is a frivolous claim, you may have to spend a small fortune to defend yourself. Take action to protect your assets for yourself and your family.
• Health care and long-term care costs are increasing at an alarming pace, people are living longer, and many older Americans have seen their retirement savings decline in recent down markets. A professional can help you evaluate your health care risks and determine how to plan for them.

Contact Bobby Sawyer at (704) 266.0727 or rsawyer@sawyer-law.com with any questions or issues, or if you would like to discuss some strategies for managing risk.

Budgeting, Part 3 - Instilling Money Values in Children and Grandchildren

Money values can be a guiding light that is a component of your legacy. If communicated frequently and purposefully, these values can be an important reference for your loved ones as they learn to handle money.

The Key Takeaways

• Having regular family discussions about household finances, shared money goals and general money concepts will, over time, communicate your values to your children and help them learn to be financially responsible adults. These discussions can also bring family members closer.
• Even young children can learn about setting spending priorities, working within a budget, saving for a larger purchase, and giving to others.

Family Meetings About Money

Money discussions can start when children are as young as ten years old. While there is no need to go into detail about income and specific expenses, you can explain that there is only a certain amount of money and everyone needs to be careful with how it is spent. You can talk about your budget in general terms and let them know that some things, like housing and food, are at the top of your priority list. You could let the family decide how to spend the monthly entertainment budget or which charity (or even a friend) should benefit from your giving budget. You can discuss where to go on a family vacation and how everyone could help save money for it. And, by your example, you can illustrate the importance of saving.

As your children mature, you can start to teach them money management principles—how to balance a checkbook; how credit cards work; how companies make money; how simple and compound interest works; how to make and follow a budget.

What You Need to Know

Parents often don’t want their children to know how much or how little money they have. But kids spend time in other kids’ homes, and they are quick to pick up on the differences. How you earn your money—and how you prioritize spending, saving and giving—says a lot about your values. Talking about this with your children and including them in the process will help them learn your values and guide them as they mature.

Actions to Consider

• Create a plan to purchase an item for your family, like a new TV or camping equipment. Include your children as you shop and compare prices in stores or online. Figure out how much your family would need to save each month to reach your goal, and encourage everyone to find ways to save. This will show your children how to plan to make large purchases without going into debt.
• Give your children allowances so they can learn to handle their own money. Some families give each child a small allowance just for being part of the family, with opportunities to perform household chores to earn more. You could give teenagers their clothing allowance for each school semester and let them make their own purchases. However, resist the temptation to bail them out if they overspend and run short of funds—you want them to learn responsibility and make smarter purchases next time.
• Have monthly family meetings. The regular frequency lets everyone feel they are truly involved with the family finances, gives them opportunities to ask questions, and lets them see progress and make adjustments in spending.
• If you see your finances are going to suffer (for example, if you are laid off or incur unexpected medical expenses), let your family know right away so they will all understand the situation. They may even have some creative ways to help cut expenses or increase income. 

Find Part 1 in this series here, and part 2 here.

Contact Bobby Sawyer at (704) 266.0727 or rsawyer@sawyer-law.com with any questions or issues, or if you would like to discuss some strategies for budgeting.

Budgeting, Part 2 - A Fulfilling Method for Setting Spending Priorities

Setting spending priorities will allow you to process your income in a rational way, while giving you the satisfaction that your wealth objectives are on their way to fulfillment.

The Key Takeaways

How you spend your money shows what you value in life.

• Setting spending priorities will help you align your spending with your values, resulting in a much more fulfilling life—financially, emotionally and spiritually.

How to Set Spending Priorities

Determine what is most important to you. Envision how you would like to see yourself living life. What kind of example do you want to be for your children? You may want to have enough money for retirement so you won’t be a burden to your children. Paying for your kids’ college may be a priority for you. You may want to pay off your mortgage, or pay off credit cards and live debt-free. Tithing may be important to you. Maybe you want to travel.

Next, look at how you are currently spending your money. Look for areas you currently spend money on that are not as important as your desires. Could you stop eating out as much and pay an extra $100 a month on your mortgage? Could you drive your current car a few years longer and apply the amount of a new car payment toward paying off credit card debt?

Now you are ready to work on a budget. Reallocate your income in ways that meet your priorities and values. What may have seemed impossible may actually be within reach, once you have your priorities and spending in synch.

What You Need to Know

If your income is reduced or your expenses increase (due to loss of a job, illness or medical emergency), set new spending priorities right away. Discretionary spending will probably have to be reduced in order to meet necessary expenses. Some necessary expenses may even need to be reduced, for example by moving to less expensive housing or temporarily sharing a car. Cutting expenses to match your income instead of running up credit card debt will be much more rewarding in the long run. Being frank with your family will help them understand the situation and give them opportunities to help save money and/or increase income.

Actions to Consider

• If you don’t know what you are currently spending, go back through credit card statements and checkbook registers and tally your spending by category. Using a computer accounting program like Quicken will make it easier to track expenses.
• Separate necessary expenses (like rent or mortgage, insurance, groceries, utilities) from discretionary expenses (clothing, dining out, entertainment, personal care, etc.).
• Annual expenses (like insurance or property taxes) should be broken down into monthly amounts and those amounts set aside into a separate account so the money will be available when needed.
• Look around your home and in your closets. How much do you think you have spent on clothing and furnishings? How much of that was unnecessarily spent? Could you do better in the future?
• Spouses need to talk openly about spending priorities; some compromises may need to be made, but sharing the same values, priorities and goals will help alleviate tensions about finances. 

Find Part 1 in this series here.

Bobby Sawyer at (704) 266.0727 or rsawyer@sawyer-law.com with any questions or issues, or if you would like to discuss some strategies for budgeting.

Budgeting, Part 1 - Budgeting is a Friend, Not a Foe

Budgets do control spending behavior. However, budgets also allocate resources to the areas of highest impact or interest. When a budget is structured based on priorities and values, much of the controlling element is removed.

Using budgets at work is understood and expected. A company has a limited amount of money and so must allocate that money based on priorities—by budgeting. But often the discipline workers use at work does not carry over at home. The result is often overspending, debt, arguments between spouses/partners, loss of control, and unrealized dreams and goals.

The Key Takeaways

• Using a budget helps to allocate limited resources to the areas that matter the most.
• The same discipline used to follow budgets at work can be used for budgets at home.

Making a Budget Your Friend

Creating and staying on budget can empower you and help you feel in control of your earnings, your spending and your future. When you and your spouse/partner are in agreement about spending priorities and have shared goals, your relationship is likely to be more harmonious and less stressful.

What You Need to Know

You probably already have the skills needed to set and follow a budget. Use your common sense to create a budget that helps you. 

Actions to Consider

• Draw upon your work experience with budgets.
• Determine spending priorities with your spouse or partner.
• Include dreams or goals to save toward together.
• Include fun in your budget. Everyone needs some fun, even if your budget is tight. Having separate fun money for each spouse/partner (with no questions or accountability) provides a little freedom and independence for both of you.
• Look for ways to reign in impulse spending and unnecessary expenses to fund your spending priorities.
• Don’t spend more than you bring in. If you cannot cut your budget enough to live within your means, think of ways to earn extra money.
• Start saving. Even small amounts saved consistently will grow into larger amounts.
• Review your budget and finances periodically to see how you are doing. Seeing progress toward your goals will make  you proud of your accomplishment!
• Reward yourself for staying on or under budget. Think of inexpensive or free ways to celebrate.

Bobby Sawyer at (704) 266.0727 or rsawyer@sawyer-law.com with any questions or issues, or if you would like to discuss some strategies for budgeting.

The Clock is Ticking on Maxing Out Your 2014 Retirement Plan Contributions

With the end of 2014 fast approaching, now is the time to take a look at your year-to-date retirement plan contributions to see where yours stand when compared with the 2014 contribution limits.

Summary of 2014 Retirement Plan Contributions Limits

Depending on how much you’ve already contributed, you may be able to contribute more to your retirement plan for 2014.

To help you determine whether you need to make some additional contributions, here is a summary of the 2014 retirement plan contributions limits. Please remember that some types of accounts require contributions before December 31, whereas other types of accounts allow contributions up to the April deadline for filing your tax return. Contact us now so we can offer you specific guidance about your account.

• The contribution limit for employees under age 50 who participate in a deferred contribution plan (401(k), 403(b), most 457 plans, or the federal government's Thrift Savings Plan) is $17,500. These plans generally require contributions to be made on or before December 31

• The contribution limit for employees age 50 and over who participate in a deferred contribution plan (401(k), 403(b), most 457 plans, or the federal government's Thrift Savings Plan) is $23,000. These plans generally require contributions to be made on or before December 31.

• The contribution limit for employees under age 50 who participate in a Savings Incentive Match Plan for Employees of Small Employers (known as a SIMPLE plan) is $12,000.  These plans generally require “employee” contributions to be made on or before December 31 and permit “employer” contributions to be made up to the filing deadline of your tax return on April 15.

• The contribution limit for employees age 50 and over who participate in a Savings Incentive Match Plan for Employees of Small Employers (known as a SIMPLE plan) is $14,500. These plans generally require “employee” contributions to be made before December 31 and permit “employer” contributions to be made up to the filing deadline of your tax return on April 15.

• The contribution limit for a Simplified Employee Pension Individual Retirement Account (i.e., SEP IRA) or Solo 401(k) is the lesser of (a) $52,000, or (b) 25% of the employee’s salary, and the compensation limit used in the savings calculation is $260,000. These plans generally permit contributions up to the filing deadline of your tax return on April 15.

• The contribution limit for individuals under age 50 to a traditional or Roth Individual Retirement Account (IRA) is $5,500.  These plans generally permit contributions up to the filing deadline of your tax return on April 15.

• The contribution limit for individuals age 50 and over to a traditional or Roth Individual Retirement Account (IRA) is $6,500.  These plans generally permit contributions up to the filing deadline of your tax return on April 15.

• While contributions to IRAs that apply to the 2014 tax year can be made up until April 15, 2015, the time is now to make contributions so that you can maximize your earnings inside the account.

• Before you make any contributions to a Roth IRA, make sure you’re not subject to the adjusted gross income (AGI) phase-out. If your income is greater than AGI phase-out amount for your filing status, then you’re not eligible to make contributions to a Roth IRA. The AGI phase-out amounts for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married taxpayers filing jointly; $114,000 to $129,000 for single taxpayers and head of household taxpayers; and for a married taxpayer filing a separate return, the phase-out is not subject to an annual cost-of-living adjustment and is therefore $0 to $10,000. We can help you determine which phase-out, if any, applies to your situation. 

Bobby Sawyer at (704) 266.0727 or rsawyer@sawyer-law.com with any questions or issues, or if you would like to discuss some strategies for maximizing the tax benefits discussed here.

Learning from Your Mistakes Can Become Your Teaching Moment

Everyone makes financial mistakes. The key is to learn from them, try not to repeat them and then pass on this hard-earned wisdom to your loved ones as an element of your financial legacy.

The Key Takeaways

• We can learn not only from our own mistakes but also from those of others. 
• Sharing the wisdom gained from these errors can help others avoid them—and the pain and regret that usually accompany them.

One part of advancing ourselves is learning from our own mistakes; another part is learning from the mistakes of others. The latter is decidedly less painful to us than the former! As Eleanor Roosevelt said, “Learn from the mistakes of others. You can’t live long enough to make them all yourself.”

Even the savviest investors make mistakes or have regrets. Learning from others’ mistakes can help us to gain wisdom without the pain of having to go through the experience ourselves.

In many ways the key to long-term investing is learning our lessons well. For your loved ones, identify the top mistakes you’ve made in your financial life and explain why the lessons you’ve learned are important to pass along.

What You Need to Know

Imparting the wisdom you have gained over the years is part of your financial and family legacy. Being candid about your mistakes and regrets also can provide your loved ones a glimpse of the person you once were and have become because of these experiences. 

Actions to Consider

• Think about the things you've learned over the years related to money. Create a list of your lessons, principles and practices. Don’t worry about the wording or order at this point.
• Next, consider the items on the list based on the impact they had on you. Impact is not just financial loss but also anxiety, strife and confusion. One way to judge impact is to read the item and see what thoughts flood your mind or how much your stomach churns; you can be certain that these impact you measurably.
• Now, group your list by greatest impact to least impact.
• Set a schedule, say, each month or quarter, to write out your lessons and how you've applied them, and share this with your loved ones.

Feel free to contact Bobby Sawyer at (704) 266.0727 or rsawyer@sawyer-law.com with any questions or issues, or if you would like to discuss some strategies for preserving your legacy.