Archive for Financial Planning

Advance directives and an in-hospital DNR

Each state has different rules( using Texas rules here) but here are three advance directives to communicate your medical wishes and to designate your spokesperson: 1) a Directive to Physicians (the so-called Living Will), 2) a Medical Power of Attorney, and 3) an Out-of-Hospital Do-Not-Resuscitate (OOH-DNR) Order. Lawyers typically include the first two in basic estate planning packages. Only doctors can complete the third.
The Directive to Physicians applies when you cannot communicate and have a terminal or irreversible condition. The standard choices are withhold life support or do not withhold life support. Custom language is allowed, e.g., let my doctor and my agent decide together.

The Medical Power of Attorney applies when your doctor certifies you are incompetent to make medical decisions. The agent is supposed to communicate the decision you would have made.

The OOH- DNR allows you to refuse CPR, airway management, ventilation, and cardiac pacing or defibrillation. It applies to nursing homes, clinic, and other out of Hospital settings, e.g., home or a restaurant. (www.dshs.texas.gov/emstraumasystems/dnr.shtm).

DNRs are not just for the terminally ill. Skilled nursing and assisted living facilities tend to offer them to all new residents, not just the sick ones. Cardiac patients who live at home may also have a DNR. These people have not given up hope, but are skeptical about being revived with CPR or sustained on a ventilator. Many lead happy normal lives. They take their vitamins, see their doctors and get flu shots.

DNR patients also go to the hospital. When transported a copy of the OOH- DNR must go with the patient. The OOH-DNR is effective in the emergency room. It is not effective once the patient is admitted to the hospital.

Covering For Threats by Paul Ferraresi

One risk area that is often overlooked involves liability risk. And something that you may not even think twice about – such as that backyard trampoline – could pose major financial risks.

Consider the case of a couple will call Rick and Sue Smith. They have a net worth of $1.75 million – $275,000 in home equity and $1.475 million in investable accounts.

While playing on that backyard trampoline, one of their friend’s children is severely injured. The child’s parents sue Rick and Sue for 2 million dollars in medical damages and negligence and they collect. The Smiths have $100,000 in homeowners liability coverage and a $1 million umbrella policy to cover losses over the policy limit.

Because their insurance covers only $1.1 million of the $2 million losses – not to mention hefty legal fees of $500,000 over the course of the lengthy case- the Smiths must come up with $1.4 million! If you’re assuming the couple will have to deplete their $1.475 million investment accounts, you’re right.

The solution would have been for the Smiths to have had a larger umbrella policy that also covered legal defense cost outside of the policy limit. A $5 million umbrella policy of that type would have covered the entire judgment and the Smiths legal bills – and left their savings, investment accounts and children’s college portfolios untouched. And while such a policy would have cost more than their original $1 million umbrella coverage, it probably would have cost just a few hundred dollars incremental annually.

Mistakes in Estate Planning

No one knows when they are going to die. Most people feel they have ample time to make preparations, but too often, people die prematurely. Here are some typical Estate planning errors I have seen in my career.

1) No Will or Trust.
2) Not updating beneficiaries in the Will or Trust.
3) Not updating beneficiary designations on IRA/401K or other qualified plans (especially after a death or divorce).
4) Not having a list of usernames, passwords, and answers to “secret questions”. This list needs to be available to spouse or executor of your estate.
5) Not notifying the three credit agencies immediately so no one can claim identity of the deceased. Unscrupulous people check obituaries and then try to apply for credit cards in the name of the deceased.
6) Not requesting at least twenty original death certificates with raised seals to unlock insurance benefits, investment accounts, Social Security, Medicare, Medicaid benefits (some people say, but all your accounts are JTWROS? You still must provide proof of the death).
7) Not preparing for highest automobile insurance rates when one spouse dies (since the risk is higher for only one person).
8) If the deceased was the owner of a credit card and the spouse was a user, then the accounts will be cancelled. Consider having separate cards.
9) Special collectables like guns and sports cars need to have all the paperwork available to sell or transfer the title.
10) Not having any accurate summary of ALL your finances.

The list goes on and on.

Sit with your financial advisor to get started on it today, not tomorrow.

Mistakes in Estate Planning

No one knows when they are going to die. Most people feel they have ample time to make preparations, but, too often people die prematurely. Here are some typical estates planning errors I have seen in my career.
1) No will or trust.
2) Not updating beneficiaries in the will or trust.
3) Not updating beneficiary designations on IRA/401K or other qualified plans (especially after a death or divorce).
4) Not having a list of usernames, passwords, and answers to “secret questions”. This list needs to be available to spouse or executor of your estate.
5) Not notifying the 3 credit agencies immediately so no one can claim identity of the deceased. Unscrupulous people check obituaries and then try to apply for credit cards in the name of the deceased.
6) Not requesting at least 20 original death certificates with raised seals to unlock insurance benefits, investment accounts, Social Security, Medicare, Medicaid benefits (some people say, but, all my accounts are JTWROS. You still must provide proof of the death).
7) Not preparing for higher automobile insurance rates when one spouse dies (since the risk is higher for only one person).
8) If the deceased was the owner of a credit card and the spouse was a user, then the accounts will be cancelled. Consider having separate cards.
9) Special collectables like guns and sports cars need to have all the paperwork available to sell or transfer the title.
10) Not having an accurate summary of ALL your finances.
The list goes on and on.
Sit with your financial advisor to get started on it today, not tomorrow.

IRA Mistakes on RMD- #3

What happens when a person gets RMD aggregation wrong?
There are two potential penalties when people make RMD aggregation mistakes: the penalty for excess contributions and the penalty for missed RMDs.

THE 6% PENALTY
RMDs that are rolled over to another retirement plan create an excess contribution in the receiving account, which must be corrected as soon as possible.
When an excess contribution is corrected by October 15 of the year after the year for which the contribution was made, the amount of the excess plus or minus the gains or losses attributable to the amount of excess contribution must be removed from the account as well.
Excess contributions that are not corrected are subject to a penalty of 6% per year for every year they remain in the account. Form 5329 should be filed with the IRA owner’s tax return to report the excess contribution and to calculate the 6%.

THE 50% PENALTY
When a distribution is taken from the wrong type of account, you have a missed RMD. For example, suppose a person accidentally takes the 403(b) RMD from his IRA. This is against the rules. The person has a missed RMD in the 403(b). The penalty for a missed RMD is a steep one- it is 50% of the amount not taken.

Most people use qualified plans like 401k,403(b) and IRAs to save for retirement, but, the tax traps are so heavy that I do not recommend using them. I share with my clients much better accumulation strategies that provide tax FREE income for life and are not a tax trap like these other vehicles.