Royal baby: Good reminder to draft your will!

When a new baby arrives, parents are overwhelmed by the basics, like sleep patterns, feeding schedules and diaper changing. But. it's also a time when financial matters should come to the fore. In that spirit, I am going to be shameless and use the news of the Royal birth to remind you that a new baby is a perfect time to review the basics of estate planning! Here what you need to consider:

WILL: A legal document that ensures that your assets are passed to your designated beneficiaries, in accordance with your wishes. In the drafting of the will, you will name an executor, the person or institution that oversees the distribution of your assets.

Your will can itemize where every asset will go, or you can draft a Letter of Instruction, which details your wishes as an attachment to your will. A Letter of Instruction can make it easier to change your mind about distributions, without having to redraft the entire will.

For new parents,  a will is where you need to name a guardian for your minor children.  If you die intestate (without a will,) your state of residence will determine what happens to your estate and who should raise your kids. That potential alone should prod you to get going with the process.

PROBATE: The legal process by which a state court officially appoints the Executor and accounts for the deceased’s property and assets, as well as debts. Probate is a public process, which can be lengthy and costly, but usually goes fairly smoothly, as long as the estate is not contested by any heirs.

HEALTH CARE PROXY: The document that allows you to appoint someone to make health care decisions for you if you lose the ability to make decisions for yourself.

LIVING WILL: Similar to a health care proxy, though in many states, a living will is not a legal document and medical decisions may not be based on it alone. However, it is a way to communicate what types of medical treatments you would or would not want.

POWER OF ATTORNEY: The form that allows you to appoint someone to act as your agent in a variety of circumstances, like executing a trade, withdrawing money from a bank or responding to a tax inquiry.

TRUSTS: Like a will, a trust can be used to transfer assets and detail your wishes to your heirs. (Guardianship can only be addressed in a will.) There are various types of trusts, but the one that is often used to avoid estate taxation for married couples is called a “Credit Shelter Trust”. This type of trust is structured so that each spouse can utilize his or her basic exclusion amount, thereby allowing couples to pass up to $10.5 million federal tax-free to their heirs in 2013. While there aren’t too many people who are subject to federal estate taxes (the IRS said 15,000 estate tax returns were filed in 2010), a gross estate can add up quickly when life insurance proceeds and real estate assets are included. Also, estates may be subject to state taxes, so be sure to check with your attorney to determine whether a trust may be advisable.

Many people prefer to use trusts, even if their total estates are below the tax limit, because assets held within trusts avoid probate. A trust also allows a maximum amount of control over disposition of those assets.

Because these are legal documents, it may well be worth the money to hire an estate attorney to draft them. To keep your costs down, make sure you know how you want your assets distributed and who will be named guardian before you set foot inside the lawyer's office. The whole process often takes only 5 to 10 hours, a relatively small investment of time, considering the importance of the subject.

© 2013 TRIBUNE MEDIA SERVICES, INC.

Who’s the family CFO?

“I don’t know anything about my finances,” said a 76-year-old man in a recent email. It’s not that he’s neglecting them, but rather that his 75-year-old wife is the chief financial officer of the family. He now feels compelled to understand what’s going on with their rental properties, their investments and even the bill-paying. His wife has been reluctant to include him, fearing that he will make the process more complicated and, after all, hasn’t she been doing a good job? Every couple needs to allocate certain tasks, but you aren’t doing your partner any favors by withholding information. In fact, you are doing them a major disservice. Sharing financial information and responsibility can be empowering and, more importantly, it will help the uninvolved spouse understand what he or she would face if you were no longer able to act as the family’s CFO.

Start by going over your  household balance sheet – what you own and what you owe. This is an excellent opportunity to create the master list of documents necessary to organize your estate, so make sure to note in whose name the asset is held or whether it is jointly owned. Include your bank accounts (as well as user names and passwords for online banking), the contents of any safe deposit boxes (and where the key is located), 401(k) accounts, IRA’s, Roth IRAs, annuity contracts, brokerage account information (with the broker’s name and contact phone number) and a detailed list of savings bonds (or login information for treasurydirect.gov). Also list your house and vehicles (make sure you have deeds and titles) and any debts that are outstanding in your names.

When it comes to monthly expenses, explain your “system” to your spouse. Make sure that both of you know where all of the credit cards, ATM cards, bank statements and checkbooks are located, especially if you are still writing out checks by hand. If you use online bill pay, demonstrate to your spouse how it works. Don’t forget to highlight those bills that are automatically drafted from your bank account.

With the nuts and bolts down, move on to the investment and retirement accounts. If you manage the money yourself, walk your spouse through the most recent statements. Start with the overall objective (“we have a balanced portfolio, which means that we split the risk between stocks and bonds”), and make sure that you explain the different parts of the statement itself. This might sound silly, but I encounter far too many people who throw up their hands and say they just don’t know how to read their brokerage or retirement plan statements.

This process could raise difficult questions for you, too: Do you really have the time, energy and discipline to manage your money effectively? Have you assumed too much risk? Have things gotten away from you? Maybe it’s time to seek guidance from a professional.

For those who already work with a financial advisor or broker, schedule an appointment and let him/her lead the education. Before the meeting, encourage your spouse to engage the advisor and to ask questions. When I was an advisor, I recall a few instances of the “uninvolved” spouse posing questions about the investments that had never been raised before. By doing so, I was able to alter the portfolio to better meet the needs of the couple and to gauge where they stood versus the originally stated goals.

If you are handling the investments on behalf of the couple, but your spouse is unlikely to take over if you were to die, it would be smart to assemble your team now. That can include a CPA, an estate attorney and an investment advisor or broker. Interview these professionals together and make sure that your spouse can build a relationship with someone he or she trusts.

Other important areas of communication are insurance coverage and estate planning, but for now, get cracking on sharing the basics.

© 2012 TRIBUNE MEDIA SERVICES, INC.

Drowning in documents: What to shred, what to keep

The end of a quarter is the perfect time to fire up the shredder and to organize the myriad of documents that are piling up. It’s a good idea to buy a fireproof safe for your home in which to store important documents. While bank safe deposit boxes can be useful, remember that they are only accessible during branch operating hours, and some of your documents could require immediate access. Paperwork that you can toss:

Bank statements: Generally speaking, you only need to keep bank statements for one year, BUT if you think that you may be applying for Medicaid, many states require that you show five year’s worth of bank statements. Also, you should hold onto records that are related to your taxes, business expenses, home improvements, mortgage payments and major purchases for as long as you need them. For those who keep the random ATM deposit and withdrawal slips, stop making yourselves crazy! Make sure that the ATM transaction is reflected on your bank statement, and then get rid of it.

Credit card bills: Unless you need something on your credit card statement for tax or business purposes, or for proof of purchase for a specific item, you can shred credit card statements after 45 days. Like the bank statements, hang on to those statements that you may need for your taxes, as proof of purchase or for insurance.

Tax returns/supporting documents: Despite being able to amend your tax returns going back three years, the IRS has seven years to audit your returns if the agency suspects you made a mistake and up to six years if you likely underreported your gross income by 25 percent or more. As a result, you need to hold on to your returns and all supporting documents for seven years. Some CPAs are making things much easier by putting tax returns on CDs. Ask your tax preparer if that’s possible, because it cuts down on the bulging file cabinets.

Retirement account statements (including 401(k), 403(b), 457, IRA, Roth IRA, SIMPLE, PSP and Keogh): Keep notices of any portfolio changes you make intra-month (or intra-quarter for some plans) until the subsequent statement arrives to confirm those changes. After making sure the statement is correct, you can shred away. One note: keep evidence of IRA contributions until you withdraw the money.

Brokerage and mutual fund account monthly statements/periodic trade confirmations (taxable accounts): Retain confirmations until the transaction is detailed in your monthly report. For tax purposes, flag a month where a transaction occurs, because you may need to access this information in the future. Otherwise, shred monthly statements as new ones arrive, but keep annual statements until the sale of each asset within the account occurs and for 7 years thereafter, in case you get audited.

Pay Stubs:  Keep for one year and be sure to match them to your W2 form, before you shred.

Medical Records:  Given how hard it is to deal with health insurance companies, you should keep medical records for at least a year, though some suggest keeping records for five years from the time treatment for the symptoms ended. Retain information about prescription information, specific medical histories, health insurance information and contact information for your physician.

Utility and phone bills:  Shred them after you’ve paid them, unless they contain tax-deductible expenses.

Paperwork to keep for as long as you own the asset:

Appliance manuals and warranties: keep these documents handy,  in case something goes wrong and you need to cash in on the warranty or contact a repairman.

Vehicle titles and loan documents: Do you want to wait in line for an hour at your local department of motor vehicles office in order to request a duplicate of your vehicle title? Me neither, so keep this paperwork in a safe and accessible place.

House and mortgage documents: Your real estate lawyer will thank you if you can hand over the deed to your home when you are ready to sell. You should also keep home purchase, sale and improvement records until six years after you sell. Remember that improvements you make and expenses such as your real estate agent’s commission can increase the basis in your lose and potentially lower your capital gains tax. If you are a serial refinancer, make sure you keep the most up-to-date mortgage documents.

Insurance policies: Keep your homeowners, auto, disability and life insurance policies and declaration pages for as long as the policies remain in force. You can shred old policies.

Paperwork to keep forever (in a fireproof safe, on the cloud or in a safe deposit box):

• Birth/Death certificates and Social Security cards
• Marriage Licenses and Divorce Decrees
• Pension plan documents
• Copies of wills, trusts, health care proxies/living wills and powers of attorney (attorney/executor should have copies)
• Military discharge papers
• Copies of burial deeds and plots
• Safe-deposit box inventory