Financial Awakenings

The Inside Scoop on Westhills Village - July 25th 11 AM MDT

Westhills Village is one of the most popular retirement communities in the Upper Midwest. On July 25, you can find out why and learn whether becoming a resident of Westhills makes sense for you. Patsy True from Westhills will be our guest and cover all of the costs and coverages associated with becoming a resident. Find out if Westhills Village is an alternative to maintaining an expensive long term care policy, how you can deduct your intial membership fee, and more.

Make your reservation today to attend this informative workshop, open only to KFG clients. If you can't attend in person, the workshop will be broadcast live via our webinar capabilities. It will also be recorded and available 24/7 on the KFG Client Only section of this website.

The workshop will be held on July 25 at 11 AM MDT.  You can register online now by clicking here or calling 605-343-1400.

One Person's Trash is Another Person's Family Heirloom

CLICK HERE TO LISTEN TO RICK'S WEEKLY COLUMN: Download family_heirlooms.mp3

As a financial planner, I am accustomed to helping clients make decisions on a large scale. In my profession, we often tend to look at the big picture.

Legacy planning, for example, deals with some significant issues such as options for distributing your estate. Do you leave money to children, other family members, or charities? What are appropriate amounts? What is the best way to leave that money?

Many of my older clients are focusing on this type of planning and on finding answers to such big, life-changing questions. One of these issues is how to decide when you or your parents are ready for assisted living. That is such a major question that we have made it the topic of our upcoming quarterly workshop on May 31. (For more information or to register for that class, to be held Wednesday, May 31, at 9:30 am MDT, click here.)

As one of my clients reminded me recently, however, there is another side to legacy planning. It may involve smaller decisions and lesser monetary amounts, but it is not necessarily less important. This is the issue of what to do with treasured personal items and family heirlooms. Disputes over these things can cause deep and painful family rifts.

It's tempting to address this issue the old-fashioned way—by ignoring it. That may be fine for today, but it isn't going to be any help at all years down the road when children are trying to sort out your stuff and decide who gets what.

Here are some alternative approaches, gleaned from several of my clients:

1. Perhaps the most common suggestion was to give things away while you are still capable of making the decisions about them. One woman, for the past several years, has given some of her collectibles, dishes, and other small treasures as Christmas gifts to her children and grandchildren. The recipients are thrilled with the gifts, in large part because Grandma is there to tell them the history of the various pieces.

2. Another approach is to include with your will a list of specific items that you want to go to various people. If you do this, it's important to keep the list up to date. It's also good to write down what you know about the history of each item.

3. Stop and think about how to define "family heirloom." That term isn't necessarily limited to things that are worth money or that are very old. Great-Great Grandmother's fine crystal would certainly qualify, but so might the mounted antlers of the five-point buck you shot, the ugly but interesting mirror you have by the back door, or your report cards from elementary school.

4. Ask family members what they would like to have after you are gone. You might want to employ this technique carefully, however. One of my clients recently offered his stepdaughter her choice of the items he had brought back from his travels. She chose a beautiful Middle Eastern carpet, and he said she could have it. The only problem was that he had previously promised that same carpet to his daughter. When he realized his mistake, he had to do some quick and uncomfortable tap-dancing—backwards.

5. Don't limit your thinking to family members. If no one in the family wants old photos, documents, or other things that might have historical value, consider donating them to a museum. Local museums and state archives might be delighted to receive things that your kids or grandkids would regard as junk. If in doubt, ask before you toss.

Regardless of their economic value, your family heirlooms may hold meaningful memories for those who care about you. Don't ignore them; they might be a priceless part of your legacy.

Preparing For One of Life's Most Difficult Decisions

Our next Legacy Workshop will be one that is sure to be eye opening and highly useful.  We will be helping clients establish a baseline that will serve as a measure to know when they, or a parent, are ready for assisted living.

This is an area that I've never seen addressed in the financial planning process.  Recently, Ben Coombs, CFP®, one of the first Certified Financial Planner's in the nation, addressed this difficult topic.  Ben is in his 70's and facing his transition into old age.  He recently started addressing this topic with his clients and has written a very helpful outline on how to establish a baseline.   We will be using Ben's work as we assist workshop participants in establishing their own plan.

As I was developing the workshop, I struggled to get enough time to fully address each of the 8 major points in the plan.  Finally, I decided to break the workshop into two parts.  Part I will be given in the second quarter of 2006 and Part II in the third quarter. 

I am letting you know well ahead of time about this important workshop, because we are going to do something a little different.  Since this topic is so important and involves both parents and children, we will allow clients to invite children or parents to accompany them or join us via our webinar.  Make plans today to bring your family to this workshop. 

Mark your calendars for May 31st at 9:30 am MST and go to our website (click here) to register.  Lunch will be served with a presentation after lunch by Paul Thorstenson, CPA, on the latest tax information seniors need to know.

529 Plans--Not Just for Kids

Listen to Rick's Weekly Column:  Download 529_plans_not_for_kids.mp3

A couple who are my clients have three adult daughters, all in their 20s. Two of them have chosen not to go to college for now, though they both intend to do so eventually. The third has completed two years of college classes but has put her education on hold for a few years because she’s busy with her own two toddlers.

My clients recently decided they would like to give each of the three kids some money to be used for education. Their reasoning was that it would be more helpful for their daughters to receive a few thousand dollars now than to inherit a larger sum years from now. Instead of just handing over some cash, they wanted to initially designate the money specifically for college or other education. Then, as each daughter turned 30, any money she had not used for school would be given to her outright.

After doing some research, we decided the best option would be to set up a 529 plan for each of the daughters.

I’ve written before about the advantages of 529 plans when it comes to saving for college. These state-operated plans can be set up by parents, grandparents, or other relatives. Contributions to the plan are not tax-deductible, but no federal tax is due on any earnings that are withdrawn to pay for college. The money can be used for tuition, books, and room and board, and can be used for any accredited school in any state. If the owner of the account dies, the account then goes to the beneficiary.

One of the big advantages to a 529 plan is that the account is owned by the donor, not the beneficiary. This gives the donor control over the funds. In addition, the funds are not counted as an asset for the beneficiary when it comes to qualifying for other types of financial aid. A second advantage is the plan’s flexibility. If one beneficiary doesn’t use the money for education, the donor can shift that money into an account for another beneficiary. In addition, there are no age limits for beneficiaries of these plans.

Those last two provisions were the main reasons we decided 529 plans were the best way for my clients to give college money to their adult children. The accounts can be set up now with the daughters as beneficiaries. If and when each one decides to continue her education, she can take money out of her account for tuition, books, and other expenses. If she doesn’t go to school, or doesn’t use all the money, the account will become hers in a few years.

The disadvantage of transferring ownership of the accounts to the daughters is that they will have to pay taxes and a penalty on the earnings if they use the money for something other than education. Since only the earnings are taxed, and since the penalty is ten percent of the earnings only, we didn’t see this as a significant problem.

One of the advantages of transferring ownership is that the daughters can then, if they wish, make their own children beneficiaries of the accounts. This would give them a solid head start on college saving for their own kids, while still giving them access to the account if they should need it themselves—either for education or for other purposes.

The intent behind 529 plans is to help families save for college. That saving doesn’t have to be limited to providing for young children. The flexibility of these plans makes them an excellent way to help adult children who may be going to school as nontraditional students.

Please, Go Ahead and Spend It

From Kathleen Fox, Co-Author of Conscious Finance

When my Uncle Ernie, a life-long bachelor, was in his 80’s and in declining health, he moved into an assisted living facility. He complained to my mother that living there was going to use up all his savings. Her answer was, “What do you think that money is for?”

A close friend’s elderly mother is currently in a similar situation. Nearing 90, she has enough money to provide comfortably for her needs—including assisted living or nursing home care, if necessary—for the rest of her life. Yet she frets about spending it. She tells her two sons, “That money is supposed to be for you.”

No, it isn’t. That money is supposed to be for her.

All sorts of investment options, from IRAs to 401(k) plans, are described as “retirement funds.” We talk routinely about “saving for retirement.” Providing for our needs in old age is one of the most important reasons for saving in the first place.

Yet, when retirement comes, it’s not easy to start spending that money. This reluctance is understandable. When you’ve been in the habit all your life of saving and putting money away, it’s hard to make a 180-degree turn and start spending it instead. It may feel like jeopardizing the security you have from knowing that money is there. In addition, many people want to leave a legacy to their children or to charity.

There’s nothing wrong with wanting to leave money to your children. But the money you’ve saved for your retirement is yours. It’s there to provide for you. Your children aren’t automatically entitled to it, and you don’t owe it to anyone.

Speaking as a middle-aged daughter of elderly parents, what sort of legacy do I want from them? When it comes to material things, all I really care about are the family keepsakes which are valued for what they mean rather than what they are—such things as my mother’s handmade quilts and my father’s books. What I want most, though, is to have my parents in my life for as long as possible. I want them to be comfortable, able to have more than they need and to do things they enjoy. I want them to use their resources for themselves so they can be an active presence in my life and the lives of my children.

If it’s hard for you to think about spending your life savings on yourself, you might consider this: Taking care of yourself is not taking anything away from your children. Instead, it’s a way of giving to them. When you have—and use—the resources to provide for your own needs, your children don’t have to take care of you. That leaves them free to build their own savings.

So please, when you get to a point where it’s time to start using what you’ve saved, go ahead and use it. After all, as my mother would remind you, what else is it for?

Why Do You Have Insurance?

CLICK HERE TO LISTEN TO THIS ARTICLE:  Download 01272006_why_do_you_have_insurance.mp3

Paul (not his real name) is in his 50's, never married, with no children. His net worth is around $2,000,000, he has no debt, and his portfolio produces enough for him to live a comfortable lifestyle and pursue his interest in the geology of the Black Hills. Paul also has a "die broke" philosophy—if on the date of his death he finally spends his last nickel, his financial planning will have been a screaming success.

At one of our financial planning reviews, Paul took his seat in my office and said, "Well, I've got good news! I called a life insurance agent; I am going to update my policy and add another $100,000 to it."

"Well, you sound excited about that," I replied. "Tell me again, Paul, why do you have insurance?"

He stared at me as if I had just asked him why he needed to breathe. It was obvious he had never answered that question before.

After several seconds of silence, he said, "Well, I have it because everyone has it. I mean, everyone needs life insurance, right?"

His eyes opened a bit wider when I replied, "No, everyone doesn't need life insurance, and you may be one who doesn’t."

The biggest reason people need life insurance is to replace their income earning potential. If the death of a person would not create an economic hardship on loved ones, partners, or creditors, then that person probably doesn't need life insurance.

You typically need life insurance in the following situations:

• You have minor children and your net worth is not sufficient to replace your income.
• Your spouse relies on your income to support his or her lifestyle.
• You have large mortgages or other indebtedness.
• You wish to leave an estate to heirs or organizations that is larger than your actual estate.
• You want to reduce the erosion of your estate by federal income taxes.

You typically don't need life insurance if:

• You are not married and don't have any children.
• Your spouse's lifestyle or financial future would not suffer as the result of your death.
• You have sufficient net worth to replace your income for the balance of your spouse's life.
• You couldn't care less about leaving more than you have to heirs or organizations.
• You have no large debts, or you have sufficient assets to pay off the debts and still fund heirs’ needs.
• Your estate isn't large enough to incur federal estate taxes or your “after tax” estate is sufficient to fund the needs of your heirs.

Clearly, Paul—with no spouse, no children, and no debts—had little need for insurance. He was relieved to know that, not only did he not need to obtain a new insurance policy, but he could cancel his old policy and go to Denver for the weekend on the savings.

How about you? Are you paying for insurance you don't need? Or do you need insurance you don't have? I probably run into far more people who need more insurance than those who don't need it. My rule of thumb if you have children is that you should have a minimum of $500,000 to $1,000,000 of life insurance. You don't need to mortgage your home to buy it, either. If you are in relatively good health, term insurance is typically inexpensive and adequate for most people.

The important thing is to ask yourself the question I asked Paul. Why do you have insurance? Don’t just assume you need life insurance. Instead, decide whether you need it after you consciously evaluate your particular situation.