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.