Financial Parenting Tips

Every parent is challenged to prepare their children for living meaningful lives and managing their affairs responsibly.  Here are a few parental tips to help set the tone for your children and their approach to handling the money you provide.

My thanks to my WealthCounsel colleague, Wayne Ball, for turning my attention to these financial planning tips first shared by his legal colleague in Little Rock, Arkansas -  Dee Davenport of Delta Trust.

·       Make money meaningful:  Good financial parenting could begin with an allowance that is tied to the completion of specific chores.  It’s important to teach children that money is the result of performance or effort.  It must be earned.

·       A sense of sharing: Give young children holiday gifts in three pieces: one piece to spend, one piece to save, and one piece to give to someone who is in need. Families report great results with this simple plan, and heirs remember the lessons learned and speak of them gratefully for a lifetime.

·       Give just enough:   The sage of Omaha, Warren Buffet says “Give your children enough so they can do anything, but not enough so they do nothing”. At the same time, mature children whose values are intact could do so much good in the world, not only for themselves and their families, but also for their communities.

·       Think long range:  Some of the most successful families have constructed “100 year plans” (four generations) to pass on both the family values and the family financial assets. Increasingly, families are engaging community members in their legacy development processes to assure the effectiveness of the gifts made.

These are just a few guidance tips for instilling many of the basic tenets of financial planning.  I hope you find one or more that you can incorporate into your parenting activities. 

For more formal estate planning strategies, I would enjoy meeting with you and sharing my experience and knowledge.  We can meet – just give me a call, or you can leave a comment on this post.

 

Compensating Caregivers

One in Seven Americans are Caregivers

There are some serious issues looming on the horizon for baby boomers.  Almost one in seven Americans looks after a disabled person age 50 or older.  Many compensated and many not compensated, but it is a rapidly growing number (the number has jumped 28% since 2004). It’s an emerging situation that needs the compensation element to be formalized for many.

In the recent November issue of Financial Advisor the article “Compensating Caregivers” quoted a  2009 survey found that 14.5% of the U.S. population – about one of every seven of us – is responsible for the care of a disabled person age 50 or over, up 28% since 2004.  Increasingly, the elderly disabled are paying family members to care for them in family home. This raises a number of issues.

This article takes stock of the situation and urges caution and awareness. It may seem odd, unnecessary, or even heartless, but they advise that the arrangement with caregivers be legally formalized, reported, and in some cases even treated as employment. The reason is two-fold.

Firstly, by formalizing and documenting the arrangement, you make it legally acknowledged and transparent for both the care-giver and care-recipient. As the recipient of care, you may be able to claim an income tax deduction all or part of the payments as qualified medical expenses. Additionally, your payments will be well-documented, should Medicaid eligibility ever become an issue. Without this documentation, the unidentified transfer of funds to family members could be seen as an attempt to cheat the system.

Secondly, simply establishing a legal process for payment of care can help open up family dialogue, and raise awareness – especially among non-care-giving family members. Arrangements of this nature are bound to put stress on all parties, but dialogue, contractual understanding, and compensation can help smooth over difficulties for the care-receiver, the care-giver, and other family members. The care-receiver has a vital say in the arrangement, can avoid feeling like a “burden,” and remain a vital part of the family. Family members can discuss who is to administer care or how exactly they can support one another in fairly supporting the care-receiver. For that matter, too, sibling squabbles can be lessened when it comes to inheritance and estate arrangements if the family care arrangement is legally recorded.

I thank my WealthCounsel colleague in Nevada, Lizette Sundvick, for authoring this commentary on “Compensating Caregivers”.

Foresight, solid financial planning, and an awareness of the extent of any care arrangements are vital. I am always available to assist you with long-term care and other legal issues commonly associated with aging. You are welcome to give me a call to schedule a consultation, or leave a comment below this post, and I’ll share the dialogue with all. 

 

Filing for Bankruptcy: What Can You Protect?

With 1.6 million Americans expected to file for Bankruptcy this year, we know that at least these 1.6 million and very likely many more researching the bankruptcy option have been asking the same basic questions.  “What can I protect?”   “What will be left?”

A recent article in the Wall Street Journal Digital Network addressed these very questions.  My colleague in Nevada, Lizette Sundvick, offers a summary commentary on this article.

Some may opine that we are climbing out of the recession, but the effects are still wearing on us. According to estimate by the American Bankruptcy Institute, more than 1.6 million Americans are expected to file for Bankruptcy this year, with 42% of filers citing “job loss” and another 65% citing “income reduction” as the determining factor. Against this backdrop, it’s unfortunate that bankruptcy hits responsible persons the hardest because they likely have the most to lose. If you are filing this year, then you may have a great deal you wish to protect. I thought I’d share some tips from a recent article on SmartMoney about what you can protect.

• A Home: The protection afforded your home depends on your state of residency.  In addition, different states offer different acreage allowances for city and rural properties. Beyond that, the equity you have in your house also can be important to protect, because most states have an exemption allowing a certain amount of that equity to remain with the homeowner in the event that the home is sold by the bankruptcy trustee.
• Tax-Exempt Retirement Funds: These are usually safe, and IRAs usually can be protected up to $1.17 million per person. Don’t, however, try to dump other assets (i.e., from investments that are not protected) into the retirement fund. This is a no-no.
• A Car: Trying to retain the car is similar to retaining the house, since your level of protection depends on the laws of your state of residency. If the value of the car is below the exemption limit, and it is owned by the filer, then it can be kept. Otherwise, equity up to the exemption can go to the filer in the event of sale. Of course, in the 16 states that allow the federal “wild-card” exemption, the rest of the value of the car may be covered and the car itself retained, but this itself depends on state laws and exemptions.
• Life Insurance Policy: If the policy is term-life insurance, then it is generally safe. Whole-life policies are generally regarded as investment vehicles, however, and in that case it will depend on state exemption levels.
• College Savings: If college savings are held in a 529 plan or a Coverdell account, there are a couple of factors you need to know. If the account is only 2 years old, it is only protected up to $5,000. However, if the account is older than 2 years, it will be safe for so long as the beneficiary is not also the filer.

Generally speaking, the biggest factors are the state-specific exemption levels and allowances. Be sure you obtain competent professional advice to protect your interests (and stay out of hot water).

If you're worried about the future and how you can guard against economic fallout, we can give you some reassurance.  Give me a call to discuss your options.  If you have a question or two, please submit as a comment to this blog post, and I’ll respond in the comment thread or address in a fresh blog post.   

 

Priorities matter

Temptation is a difficult challenge. Regardless of who we are, where we live, how much we earn, or what we own – we are all tempted to acquire new belongings, and splurge on ourselves from time to time. Certainly there is nothing wrong with a day at the spa, or a new car, or any number of purchases that we might make for ourselves. But each of us has only so much legal tender to circulate, and where we spend that cash can have a profound impact on our future. In extreme cases, it can even cause us to relocate, by force if necessary.

There have been two high profile examples of poor financial decision making in the news this year. Okay, there have been lots of high profile examples of poor financial decision making in the news this year. But there are two that caught my eye, and I'm willing to bet that at least one of them caught yours, too. They are both income tax cases, and if you take the superficial view we could leave it at that. If you look more deeply though, these are both prime examples of successful men, with extensive means, who were unwilling, or unable to prioritize their use of resources. And both are paying a price for that failure.

Wesley Snipes was in the news often, well before his financial difficulties caught the attention of the public, or the federal government. An actor with an impressive resume, Snipes had successfully worked his way up to the heights of Hollywood, earning significant sums of money with his biggest hit movies.

Unfortunately, the government took the position that Snipes was not paying his fair share of taxes on that income. A contention that the courts ultimately agreed with. And so Snipes is in prison today, serving a three-year sentence for tax evasion.

Last week another highly paid professional was sentenced to prison for failing to pay taxes. This time it was an attorney, not an actor. Michael “Mickey” Sherman, a prominent Connecticut attorney who has been seen on a host of television news programs in the role of a legal commentator, was sentenced to one year in prison for failing to pay his full tax bill.

In both cases the tax bills in question were several years old. It may surprise some to learn that tax evasion cases are not filed quickly. These cases are built over a period of years. In many cases, with substantial fines and fees building up along the way.

The Los Angeles Times quoted Snipes at one point saying, “Everybody has tax problems,” and “Everybody's failed to file at some point in time.” A contention that I believe most of us would refute. But his example, and that of Mickey Sherman should give all of us pause. Prioritization is important when it comes to how you handle the contents of your pocketbook, and your bank account. Making the wrong choices just might lead any of us down a road we would really have rather not taken.

The ins and outs of robo-signing

  Robo-signing is a term that has come into common use lately. However, the term is new and largely misunderstood. Although it may be counter-intuitive, there are no robots involved in robo-signing. But as the term implies, the humans involved in signing foreclosure documents may in some cases be acting as robots, or automatons, by processing paperwork while putting little if any thought or research into the documentation they are working with. Paperwork that can lead to foreclosure actions that have the ability to financially and emotionally devastate a family.

In October 2010 the problem became mainstream and was splattered across the airwaves by national news providers. Courts got involved and began holding up foreclosures so that judges could review the documentation more closely. What was once perceived to be a virtual slam-dunk (the foreclosure of a property that was in arrears) had become a high-profile embarrassment for the financial institutions that held the paper on the loans that were used to purchase that property – if the paper existed at all.

CNNMoney.com ran a very good piece in late October that does a good job of explaining what the basics of the issue are, and why the problem of robo-signing should be of real concern to anyone who owns property, or hopes to purchase property that may have been involved in a foreclosure proceeding. The article can be found at: http://money.cnn.com/2010/10/22/real_estate/foreclosure_paperwork_problems/index.htm

I sincerely hope this helps to shed light on a truly modern problem that so many of us may find ourselves faced with at some point, now – or in the future.

The Tax "Deal" - the Forecast is Dark Clouds on the Horizon

My fellow member of WealthCounsel, Richard Wohltman of Alexandria, VA,  posted this relevant commentary on the Tax “Deal” currently being ushered through Congress. 

There has been a lot of talk this month about the "deal" to extend the Bush tax cuts. That "deal" also includes a substantial increase in the amount that can pass to your heirs without paying any federal estate tax. The 'exemption amount' will be increased to $5,000,000 per person.

The stated reason for that increased exemption amount is to help 'small' business owners and family farmers pass the business or farm to their heirs without having to pay estate taxes. It also means that all but a very limited number of multi-millionaires will have to file and pay federal estate tax.

Dark Clouds are Forecast.

There really are dark clouds on the horizon even if the "deal" is passed by Congress before the end of the month. The increase in the exemption is going to add billions of dollars to the federal deficit. The Treasury is going to have to borrow that money and we are all going to have to pay taxes or have benefits reduced just to pay the interest on those loans. And the day will come when the loan will have to be paid in full.

There is a more pressing problem, however, for estate planning. The "deal" only lasts two years! At the end of 2012 we will find ourselves right back where we are now -- facing a stupendous increase in the number of estate tax returns and tax payments when the exemption amount falls to just $1,000,000 starting January 1, 2013. The problems from the end of the Bush tax cuts (and the increased exemption amount from the "deal") return in 2o13. The uncertainty of how all of the estate and gift taxes will be interpreted once the large exemption disappears is the big grey cloud on the horizon for estate planners.

Estate planning attorneys have been hoping for some stability in estate tax policy so plans can be designed based on a clear expectation of how estate taxes will be calculated when death occurs. That stability disappeared with the Bush tax cuts. Estate planning attorneys all knew we were faced with the potential return to the 'old rules' with only a $1,000,000 exemption in 2011 and had to plan for the return of the middle class taxable estate. The same lack of stability continues since we can only look at what happens at the end of the next two years.

What does all this mean to you?

Don't think that the "deal" will make your estate planning easier just because you don't have Five or Ten Million Dollars. The vast majority of our clients require extra tax planning if the exemption returns to 1 Million Dollars.

Your estate planning lawyer must assume that the lower exemption will return and is forced to include options to address the substantial estate tax liability that will return in 2013. Your estate plan will continue to require more complication just to protect your family and your business with the automatic termination of the "deal" in 2013.

Where's the silver lining?

Just remember, if there is a silver lining in every grey cloud, that doesn't mean that the grey cloud is gone.  Don't let the proposed silver lining blind you to the limits inherent in any "deal" that lasts only two years!

What is, what was, and what might be

If you found yourself driving down the road this past 4^th of July while holding a cell phone to your ear, you were on solid legal ground in Connecticut. Talking on cell phones while driving was officially discouraged, but it wasn't going to result in a ticket. By Halloween the circumstances had changed, however. You would have been risking a ticket with a price tag of between $100 and $200, depending on whether it was your first offense, your second offense, or you deemed to be a habitually conversational driver. The same goes for texting on that phone while driving. What was perfectly okay during the summer months, was illegal and expensive by fall.

Change is constant, even for the law.

I mention this for the simple reason that we all make decisions based on what we know to be true. The problem for many of us is that what we know to be true, just isn't. It might have been true at one time, but times change, and the law changes with it. So while we may have complete confidence in our judgement based on years of experience and careful consideration, it is worth at least taking a moment to consider the possibility that the rules of the game may have changed since we last played.

As I write this, there is great consternation and concern across the country about what the tax code will be for 2011. Right now nobody knows for sure what that tax code might say, or what our tax rates might be. It is a fair bet that changes will be coming our way no matter which tax bracket we find ourselves in; and there is a lesson in that for all of us.

The law changes. State legislatures and governors spend a great deal of time debating issues, putting forward initiatives, and pressing for legal remedies for the challenges that confront their constituents. The result of all that work is law. New laws, specifically. And many of those new laws kick in with little fanfare or press coverage. In truth, the law often changes in ways that the average person never suspects, until they get caught in a jam. Because ignorance can be expensive. Which is a lesson that many Connecticut residents learned quickly and painfully when they found out that talking on a cell phone while you're at the wheel was no longer discouraged – it had become illegal. It is almost certain that at least a few of those who were first ticketed after the law went into effect in October said in surprise, “But I've been doing this for years – it's not illegal!”

That's a tough way to get an update on what the legislature has been up to.

When we act we have to make sure our actions are based on what is, not what was. And if we're really sharp we'll take into account what might be, too. Because the future matters, and while we can't predict the future with perfect clarity, we can certainly make educated decisions based on what we know to be true, currently. That's true of every facet of our lives, for as long as the law is in a state of constant change, which it always will be, I'm sure.

If nothing else, knowing this is incentive to read the paper more carefully, watch the news with greater interest, and perhaps do a little extra homework every now and then. That may require some extra effort on a continuing basis, but that time is well spent if you can save yourself the trouble of being out of step with the law. Nobody needs that kind of stress. Especially during the holidays.