Have the Estate Planning Talk

In honor of National Estate Planning Awareness Week, I talked to two different professionals, each of whom offered specific advice about how to conduct difficult family conversations about money in general, and estate planning specifically. Why is this topic so hard? “Because feelings and money get tied up,” says psychologist Lisa Damour. Money can evoke feelings of control (or lack thereof), privacy, dignity, shame, fear and lack of confidence. And when we express our concrete views on financial matters in a way that minimizes the emotional aspects, things can get thorny. Just imagine an exchange like this:

Son (age 40): “Mom, have you and Dad updated your will recently?”

Mom (age 75): “Why—are you hoping that we will die soon, so you can finally pay off that big mortgage that we warned you not to take?”

You can see how these kinds of conversations can go downhill pretty fast, which is why each side needs to resist the urge to grab whatever bait is thrown out. After all, you are not going to litigate your entire relationship with your parents or your adult children during these interactions. Just like she tells parents of teenagers to “not take anything that they say so personally”, Damour’s advice applies to discussing financial and estate issues with your loved ones.

Instead, of jumping in full throttle, estate attorney Virginia Hammerle says that it is helpful “to focus on an isolated issue, like titling of a bank account or making a beneficiary designation,” which can lead to a broader discussion on family finances and estate planning.

Once you break the ice and start the process, it is helpful to ask what goals you are trying to accomplish. Do you want to ensure that your assets will be passed to the next generation and beyond? Are you worried that one of your heirs will squander any money that is left to him or her? Do you want to be charitable? Are you anxious that you will offend one of your heirs? The good news is that by discussing your concerns with a qualified estate attorney, you can build a plan that addresses the issues that currently exist. Remember not “to get stuck on the next fifty years,” says Hammerle. “Every estate plan can be changed and in fact should be revisited every few years. Here are the basic documents that you will likely draft:

• Will: Ensures that assets are passed to designated beneficiaries, in accordance with your wishes. In the drafting process, you name an executor, the person or institution that oversees the distribution of your assets. If you have minor children, you need to name a guardian for them.
• Letter of Instruction: This may contain appointment of someone who will ensure for the proper disposition of your remains, creepy, but important if you are choosing a method that is contrary to your family’s tradition.
• Power of Attorney: Appointment of someone to act as your agent in a variety of circumstances, like withdrawing money from a bank, responding to a tax inquiry or making a trade.
• Health Care Proxy: Appointment of someone to make health care decisions on your behalf if you lose the ability to do so
• Trusts: Revocable (changeable) or irrevocable (not-changeable) trusts may be useful, depending on family and tax situations. For 2016, the first $5.45 million of an estate is exempt from federal estate taxes. If an estate is above the threshold (or twice that for married couples), you may want to consider a trust.

How to Spend Your Tax Refund

The IRS says about 82 million taxpayers have received an average refund of about $2,800. Although many love the concept "found money," a refund is really just the return of a yearlong, interest-free loan that you extended to Uncle Sam. Before the financial crisis, Americans would use refunds to purchase a new toy, but according to Adobe Digital Index, taxpayers are likely to act more prudently these days, rather than splurging on discretionary expenses.

If you’re caught up on your bills, here are some ways to spend your tax refund.

Replenish emergency reserves:  For one reason or another, you may have dipped into your emergency reserve funds over the course of the year. Uncle Sam’s refund check can help replenish the account. Ideally, those who are working will have six to twelve months worth of expenses in reserve and those who are retired should have 12-24 months worth stashed away.

Save for a Future Expense: Will you need to replace a car this year? Is there a looming tuition payment? After you have replenished your emergency reserve fund, start saving cash to fund these future expenses.

Pay down credit card, auto and student debt: Your refund is an excellent way to put a dent in outstanding debt. The bonus is that when you pay down debt, you are essentially earning a guaranteed return that is likely much higher than any investment available.

Boost retirement contributions: If you are still working and have access to an employer-sponsored retirement plan, like a 401(k), a 403 (b) or a 457, increase your contribution amount for 2016. Because you have that 2015 refund in the bank, you can afford to absorb the extra money coming out of your paycheck. The 2016 pre-tax contribution limit for employer plans has increased to $18,000 and the limit for over 50 catch-up contributions is $6,000.

You can also use that extra money to get a jump on funding an IRA or a Roth IRA for tax year 2016 right now. The maximum you can contribute to a traditional and Roth IRAs is the smaller of: $5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year. Note: Even if you have an employer-sponsored plan, you may also qualify for the full annual IRA deduction. Check the IRS website for details.

Invest in a non-retirement account: If you have maxed out your retirement accounts and still have extra money, consider opening a non-retirement investment account with a no-load mutual fund company like Vanguard, T. Rowe Price, Fidelity or go to a discount brokerage firm like TD Ameritrade or Charles Schwab. Try to stick to low cost index funds -- a Morningstar study found that actively managed funds lagged their passive counterparts across nearly all asset classes, especially over a 10-year period from 2004 to 2014.

Fund 529 plans: Is someone in your family struggling to save for college? It’s not surprising since the cost of college tuition has spiked 300 percent since 1990. If you are interested in giving the gift of education, then consider funding a Section 529 college savings plan. The money you deposit in a 529 plan grows tax-free and withdrawals that are used to pay for qualified college expenses sidestep taxes, too. You can invest up to $14,000 in 2016 without incurring a federal gift tax.

Be Charitable: You need not wait until December to be philanthropic. If you itemize your deductions, Uncle Sam will reward you next year.

Of course, if your financial house is in order, it really is OK to blow the refund and have some fun too!