Creating a last will and testament is a key part of end-of-life planning. However, to clearly articulate your wishes for your assets and dependents upon your death, you must engage in the larger process of estate planning. A will is an excellent starting point, but it’s only one piece of managing one’s estate.
The terms will and estate plan are often (incorrectly) used interchangeably. Here’s how they’re different.
What Is a Will?
A will is a legally binding document that outlines how your property should be distributed after you die. Wills can be made quickly and easily—you simply need to put your wishes in writing or dictate them to someone else. You can include everything from who will receive your assets to who will take guardianship of your children to who will manage your business. A will also can include information about who will serve as its executor and make sure all of the instructions in your will are followed.
Wills are important because detailing your wishes can avert conflicts between family members over your property and about who should make important legal decisions following your death. Without a will, your family also would have to pay a lawyer or work with a public trustee to deal with your property.
What Is an Estate Plan? The
A broader approach, estate planning is a more involved process that ensures your beneficiaries receive the maximum benefit from your estate and that taxes and other fees and expenses are minimized. Estate planning allows you to provide input into matters that go beyond a will, such as trusts and property transfer.
Estate plans also can address issues such as power of attorney, superannuation, and transfer of financial assets. As with wills, you can appoint a guardian or trustee who will make sure that your beneficiaries are protected and your assets are transferred according to your desires. An estate plan can have numerous features, outlined below.
These designations outline who will receive what from your estate, including who will receive your retirement account, your savings, your home, and your life insurance policies. This aspect of estate planning allows you to carefully and strategically appoint who will receive which pieces of your estate. Designating beneficiaries helps prevent posthumous conflicts between family and friends over your assets and ensuring that you maximize your estate among your beneficiaries.
If someone does not leave a will or designate an executor, the estate can be turned over to a probate court, which will distribute it. This can be a lengthy and costly process that also can be made public. The easiest way to avoid probate is to move your assets into a living trust, which will distribute your assets and property in the trust to your beneficiaries upon your death.
Because your property has already been distributed to the trust, you can avoid probate altogether. Owning properly jointly (it will go to the surviving co-owner) and designating beneficiaries for major assets such as bank and retirement accounts can also can help avoid the probate process.
Powers of Attorney
This important designation allows a person or people you trust to act on your behalf—including in legal matters—if you are incapacitated or if you die. You can appoint as many people as you’d like, and you can designate different powers of attorney for different situations.
Letter of Intent
Working with a financial professional to draw up an estate plan can be a timely process in which you discuss your plans—and the motivations behind them—at length. Together, you can draft a letter of intent for the executor of your estate that outlines everything from the details of your funeral to an overview of how and why you want your estate executed.
While a letter of intent is not a legally binding document, it offers an opportunity for you to share your heart and your values with your beneficiaries. As they make significant decisions about your estate, the letter will give you a guiding voice.
Where Do I Start?
The popular stereotype that wills and estate planning are for the rich is wrong. Anyone who has assets, no matter how modest or how many, can write a will or plan their estate to ensure that their property is handled how they want after their death.
Some end-of-life documents, such as a living will, also allow you to legally establish your end-of-life wishes in the case that you are unable to make decisions yourself. Estate planning can be an involved process, but the peace of mind you will gain, for yourself and your beneficiaries, will be invaluable.
If your estate is small, you can find guidance online for making an estate plan. However, if you have a large or complicated estate, a qualified financial professional can assist with this process. They will spend time getting to know you and your wishes for your estate and then incorporate that knowledge into the plan they craft with you.
A new year is a natural time for a fresh start and a new resolve, so there’s no better time to consider new ways to approach your finances in 2021—especially in light of the unusual circumstances that 2020 wrought on our finances and lives. Instead of setting out complicated resolutions that could be hard to stick with, consider adopting some of these more straightforward approaches that still can help you create a stronger, stabler financial position.
Save More Money
This resolution is the complement of the common resolve to spend less, and experts say it’s easier to follow. Rather than solely focusing on how you budget your money, try turning your attention to saving. You’ll be surprised at how much this shift can impact your finances.
First, decide now how much of your income you’d like to save every month based on your bills and salary. You may choose a percentage, such as 15 percent of your take-home income, or a dollar amount, such as $400 each month. Then, make sure you move the money into a savings or investment account or create a savings column in your budget to avoid absorbing it elsewhere, such as overspending on your credit card to compensate for the income now going to savings.
Track Your Spending
Whether your spending goals include buying a house, paying off a car loan, or spending less on groceries, keeping track of how much you spend is a vital first step to creating a budget to help you get there. When we estimate our spending, we often underestimate, which can lead to overspending and no progress toward larger financial goals.
You can figure out exactly how much you’re spending by examining old credit card and bank statements or using budget tracking software. Then, you’ll have a realistic idea of how much you spend and can make educated decisions about budgeting and saving—including chipping away at those big spending goals.
2020 provided some unique opportunities for spending changes that you may want to make permanent. Many people saved money due to restrictions on travel, dine-in eating, and entertainment venues. If your budget benefited, you may want to consider making those spending cuts permanent.
Focus on the Future
Sadly, COVID-19 cut many lives short unexpectedly, and it often left these people isolated in hospitals and assisted living facilities unable to consult with family, friends, or planners who could help them with financial paperwork. Future financial planning, whether it’s outlining your wishes for your estate or solidifying your retirement savings plan, is vital.
One smart resolution is to create a detailed retirement plan and stay with it. Do you want to continue your current lifestyle after you retire? Downsize your home and lifestyle? A planner can help you figure out how much you need to save to achieve your retirement goals and show you how to organize your financial documents to keep your spending and savings up to date. With a retirement plan in place, make it your resolution to follow it.
Estate planning is another key factor in planning for your financial future. A financial planner can talk to you about your goals for your estate and help you put plans in place now.
Pay Off Debt
Aside from causing anxiety, debt can hold you back from living the lifestyle you’d like and reaching big goals like traveling the world or purchasing a house. If you struggle with debt, resolving to pay it down is vital.
Financial planners recommend approaching your debt strategically. That means paying off higher-interest debt, such as credit card balances, first. You could also take a wider approach and focus your payments on debts that carry a specific interest rate and above.
Whatever approach you choose, resolve to understand the amounts and interest rates of your debt and create a strategy for tackling them in 2021. And that doesn’t necessarily mean paying them off completely. If repaying 25 percent of your balances in 2021 is realistic, set that as your goal. The satisfaction of reaching it will only serve as a motivator to continue working toward debt-free finances.
Build up Your Emergency Fund
If we’ve learned anything from 2020, it’s that life can change drastically, and sometimes that comes with unexpected financial ramifications such as a job loss or hospitalization. While financial experts recommend shoring up at least six months’ pay in savings for such situations, the Financial Industry Regulatory Authority found that almost half of Americans don’t have enough in an emergency fund. Without savings set aside, you are risking financial disaster.
Savings like this doesn’t happen quickly, so plan to build it gradually by committing to a monthly contribution to your emergency fund. Additionally, set this money aside for true emergencies—don’t dip into it to pay bills or offset extra spending if you can help it.
Sometimes, we decide we’d rather not know the details of our finances. Maybe we’re worried that an in-depth look at our money would reveal spending habits we’d prefer not to acknowledge, or perhaps “ignorance is bliss” and we don’t want to think about how little money we have in the bank. Perhaps we’re embarrassed by our lack of savings and investments.
Financial planners note that these kinds of fears, whether of change or the unknown, often prevent people from seeking financial planning services. We know it’s important to save money and plan for our future, but we often don’t know how to do it, and sometimes, learning seems overwhelming. However, taking charge of your finances by working with a financial planner can help you achieve major financial goals such as buying a house or paying for your child’s college tuition.
Here are a few ways to approach your finances with confidence.
Remember: No One Is Judging You
Whether your savings are scant, you’ve taken on two large car payments, or you’ve made a poor investment, a financial advisor will not judge your decisions. Finance professionals are there to help you manage your money—they aren’t concerned with how much you earn, what your assets are, or what financial mistakes you’ve made. Their job is to help you get into a better financial situation. And remember, you will not be the first client they’ve worked with who’s made a financial mistake!
Don’t Believe It’s Only for the Wealthy
One common misconception is that financial advisors are only for the ultra-wealthy. Many people worry that their money doesn’t warrant advice or that they don’t have enough to invest. This may have been true in decades past, when most financial advisors required clients to have a minimum amount of assets, but today, financial advisors are increasingly offering services catering to people who have less money to invest. These services focus on helping people manage their money, often through online financial planning investment services. Financial advice benefits everyone, even those who haven’t accumulated a lot yet.
While the details of financial planning can be intimidating at first, once you delve in, you will likely find rewards in managing your money well. There’s a certain satisfaction that comes with paying off credit card debt, retiring student loans, and building your savings and retirement accounts. The best part is that once you get a taste of the personal benefits of financial planning, you’ll want more.
Know You Can Afford It
While the perception is that financial planning is expensive, it’s simply not the case. Working with a traditional financial planner can indeed cost thousands of dollars, but there are less-customized options for financial planning that are much more affordable. While you may have to trade in-person, personalized attention for an online financial management service, these cheaper alternatives are still excellent options for helping you invest and manage your money.
Also, these services typically don’t require cash up front. Instead, they’ll take a percentage of the money you invest through them. They usually charge around 1 percent, so if you invest $10,000, your financial advisor’s fee will be $100, which likely will be deducted directly from your investment account.
Computer-based services, also called robo-advisors, are another affordable way to manage your investments. They likely won’t require a minimum account balance (or if they do, it’s low), and their fees are based on your assets under management (AUM). The AUM fee will range from .25 percent to .5 percent, which calculates to between $12.50 and $25 for a $5,000 account balance. While you won’t get personalized financial advice for your fee, computer algorithms will create and monitor your portfolio for you.
Online financial planning services, a step up from robo-advisors, offer investment management along with personalized financial planning. Some services don’t require a minimum account balance, and their customized services can range from a dedicated Certified Financial Planner to a team of financial planners. Typical AUM fees for these services range from .30 percent to about .9 percent or a flat annual fee starting at several hundred dollars based on the level of services you need.
Take the First Step
While finance professionals have sometimes gotten a bad rap as predatory, self-serving people, that’s not reality. Financial advisors care about their clients, work with their best interests in mind, and don’t judge clients’ situations or choices. They are focused on finances and helping you make the best decisions with your money.
When you find the financial planning service that best matches your needs and goals, you’ll be glad you did. The peace of mind you’ll get from having and sticking with a financial plan will be well worth the discomfort you may feel when you first reach out to a professional for help.
Due to the pandemic, colleges across the United States are starting to rethink their approach to how to provide an education. In response, many families are wondering whether paying for a college education is worthwhile right now.
Recent statistics bear out this trend. In October, the National Student Clearinghouse Research Center reported that undergraduate enrollment is down 4%. Experts attribute the decrease to concerns about contracting COVID-19, a dislike of online learning, and issues with families not being able to afford tuition. Some students are opting to take a gap year or to postpone college.
While reconsidering your college plans may be an option for some, financial planners advise families to continue saving—at least in some form—for their children’s college education. The following is some information and advice on how to manage your 529 college savings plan as the educational system navigates COVID-19.
Community College An Option
One popular option for students who don’t want to virtually attend a pricey university is to enroll in community college, which is generally a less expensive choice. Some financial advisors recommend that parents pay the lower tuition for community college out-of-pocket rather than draw on their student’s 529 plan, a popular education savings plan that allows families to invest money that has already been taxed into several investment options. Your earnings grow tax-free, and withdrawals for qualified expenses are not taxed.
This approach offers several benefits. Parents can continue contributing to their child’s 529 account and increase its long-term growth potential. In addition, they will not be withdrawing money from their student’s college savings account and taking a loss during an economic downturn. Students can also take out separate loans for community college and use the 529 proceeds later to repay up to $10,000 of those loans (principal and interest), a one-time option now available under the recently passed SECURE Act. As an added bonus, up to $10,000 in 529 plan distributions can be put toward the educational debt of each of the beneficiary’s siblings, including stepsisters and stepbrothers.
Continue to Contribute
The market ups and downs over the last year may set off warning alarms for your 529 college savings plan. Your account balance may drop, which may make the plan seem less valuable. The statistics back this up. According to data from the College Savings Plans Network, the average account reached a high of $26,054 in 2019, but now it is down to an average of $25,657.
Even with so much uncertainty, advisors recommend that families continue contributing to their 529 college savings plans as much as they can. Recent research finds that many are doing just that—total investments in 529 plans have risen to nearly $374 billion, a record. Investors value the savings plans’ tax-free deductions when the funds are used for qualified educational expenses such as tuition and books.
“When it comes to 529 college savings, staying the course is an essential component of a successful long-term savings strategy,” stated Michael Frerichs, the chairman of the College Savings Plans Network, in a recent interview with CNBC.
Other Ways to Use the Money
COVID relief legislation that was passed earlier this year allowed families who had paid for tuition from their 529 plans—before classes were moved online due to the pandemic—to receive refunds from the colleges. As long as the money was deposited back into the 529 plan within 60 days, the withdrawal was not taxed.
While families have the option to leave the money untouched, there are other ways they could use it because the law allows for 529 funds to be used to pay for a variety of qualified educational expenses. Up to $10,000 per year can be spent on private school tuition for each younger child per year (private, public, or religious education for students in kindergarten through 12th grade), and in many states that amount can be applied to reduce the taxable income of the parent or grandparent who started the fund.
The money also can be used to pay for apprenticeship programs, vocational school, and other post-secondary institutions that participate in the U.S. Department of Education student aid program. Qualified expenses also include computer software, textbooks, and supplies.
The Long-Term Outlook
For families with younger children, now may be a good time to think about what higher education will look like in a decade. Some experts predict that post-COVID, the cost of a college education will become even more expensive. In order to compensate, you can change the asset allocation of your 529 plan portfolio, making it more aggressive or conservative based on your feelings about the market.
Parents may want to explore other savings options, as well, so that they can work around the restrictions on the 529 plan. Other good investment choices include U.S. Treasury bonds, one of the safest—and slowest—investments, or stocks, which will be more volatile but could provide a much larger payoff. Parents also could consider a Roth IRA savings account, which offers the tax savings of a 529 account without the restrictions.
If your target retirement age is less than 10 years away, it may be tempting to glide into your post-work life and hope for the best. However, without proper retirement planning, you may find yourself making a bumpy landing.
Here are seven steps to ensure that you’ll be financially prepared for retirement.
Consider Your Plans
As the reality of your post-work life draws closer, it can be helpful to envision what your days will look like. Will you be traveling around the world? Downsizing your house? Taking up a pricey new hobby? Will you volunteer or work part-time? All of these decisions will play into your retirement budget.
Most importantly, ask yourself if you have the money to pay for your retirement dreams. If you don’t, there’s still time to save. First, go over your current budget and look for items that can be cut. Do you need Netflix and Hulu? Could you cut out coffee runs and eating out? Any money you save can be invested in your retirement savings.
If your dreams outsize your financial reality, it may be time to reconsider what retirement will look like. Steps such as moving into a more affordable home or working a 10-hour-a-week job could positively impact your retirement budget. A downsized retirement budget, however, doesn’t mean a downsized retirement. Spending more time with grandchildren can be more rewarding than an expensive vacation to Europe.
Get a Handle on What You Have
This step can be intimidating, especially if you haven’t been on top of retirement savings. However, you need to face the truth to best prepare for the future. You need to know how much you’ve saved and how much you’ll likely receive in Social Security and pension payments so that you can calculate a reasonable retirement budget. If your retirement savings are in several different accounts, consolidating them could provide a better idea of how much savings you have.
A financial planner can help sort through your financial situation and build a strategy for retirement savings to maximize the time you have left to save. With an accurate assessment of what you’ve saved, you also can make decisions on whether you need to work more to increase income or cut back on spending to boost your savings.
Pack Your Retirement Savings Accounts
This is the time to increase your contributions to your retirement account to the maximum allowable, including making catch-up contributions permitted under IRS rules (the agency gives contributors age 50 and older extra time each year to contribute). Also, check with your employer about whether the company matches employees’ retirement account contributions.
Get a Plan
It’s easy to put off retirement savings and justifying spending what could be potential contributions to other items. However, it’s never too late to map out a retirement plan—even if retirement is just a few years away. A financial professional can help you maximize your savings, create a strategy, and chose the most advantageous options for claiming your employee pension or Social Security when the time comes.
Pay Down Debt
Retirement budgeting will be much easier with less debt, and it’s wise to pay off as many loans and outstanding balances as possible while you’re employed. That can mean making extra mortgage payments, paying off credit cards quickly, and limiting new debt. One wise move is to pay cash for larger purchases to avoid additional credit card spending. The overall benefit? Less of your retirement income will go toward debt interest payments.
Choose your location
Your retirement budget will largely depend on where you choose to live. Downsizing to a smaller house in a more affordable area could drop your mortgage payment. On the flip side, you’ll also need to consider your budget if you move to a more expensive house or location to be near grandchildren, which can increase your retirement budget.
Factor in Medical Costs
While it’s impossible to predict the state of our personal health at retirement age, it’s wise to consider how to cover potential increased medical costs without decimating your retirement savings. One option is to maximize your contributions to your health savings account now—if you don’t spend the money, it will grow tax free and be available to spend in your retirement.
Another option is to buy long-term care insurance, which will pay for home health aides and, if needed, assisted living facilities, which aren’t covered by Medicare. The earlier you buy the insurance, the lower the premiums will be. If you wait to buy, you’ll risk rejection from insurers if you are in poor health.
Finally, you can protect your retirement savings by investing in additional health insurance. When you turn 65, Medicare will pay for most of your routine health bills, but you’ll need supplemental coverage to fund non-routine medical issues.
If you want to leave your estate to beloved family members or friends upon your death, a life insurance payout can be key to helping them pay for expenses that could decrease the impact of your estate.
Dispersing an estate can take time—sometimes months or longer, particularly for complicated estates. In the meantime, beneficiaries can be left with bills for everything from funeral costs to debt payments.
To leave those you love in the best financial position possible, it’s important to include a life insurance policy in your estate planning. Here are ways that life insurance policies can be utilized when planning your estate.
Paying funeral fees
Even the most basic of funerals can cost thousands of dollars. Low-end caskets generally start at about $2,000, on top of fees for embalming, funeral home staff services, and a grave marker. Meanwhile, cremation costs can start at $4,000. A life insurance policy can provide immediate cash to pay these costs so that your beneficiary doesn’t have to spend their savings or go into debt themselves to pay for these expenses.
Paying estate taxes
A life insurance policy can be an excellent planning tool for protecting the wealth you plan to pass on. If you anticipate your estate will be subject to federal estate taxes, which heirs must pay within nine months, your life insurance policy can pay them instead. If your estate is primarily real estate, this strategy will prevent heirs from having to sell property or liquidate assets to pay estate taxes.
It’s not uncommon for decedents to leave unpaid debt and monthly payments, including credit card bills and utility bills. A recent study by credit company Experian found that 73 percent of Americans who die leave debt behind.
While creditors likely won’t try to get payments out of surviving family members, they often will from the estate. The collections process can send an estate into probate, which can stretch out for years as creditors try to collect from it. Life insurance policies, however, aren’t subject to probate laws. That means beneficiaries can receive the entirety of the policy quickly.
Building financial wealth
A life insurance policy, especially one with a large payout, can change your beneficiaries’ lives and your or their family’s legacy. For example, life insurance payouts can be used to pay off a beneficiary’s mortgage or student debts. Without this costly debt, they can invest or save their money, building wealth for future generations.
Replacing family income
If you are the primary earner in your family, life insurance can replace vital income if your spouse does not work or is underemployed. A life insurance payout will provide survivors will financial stability while they reconfigure their lives in your absence. Financial experts recommend that a life insurance policy cover between seven and 10 years of your income.
Life insurance also can become very important for families with young children or children with special needs. In these cases, surviving parents or guardians may not be in a position to cover the children’s financial needs on their own. Life insurance benefits, however, can pay for everything from medical bills to education.
Protecting family real estate
Family-owned property can become an immediate financial issue for heirs, who must make decisions about who will own the property. In some situations, heirs may decide to sell the property and divide the proceeds, but preparing the property for the market and waiting for a sale can take time. In the meantime, the mortgage must be paid.
In these cases, a payout from a life insurance policy can help. Beneficiaries can use it to make mortgage payments or, if they decided to keep the property in the family, pay off the mortgage.
Giving to charity
Life insurance can be an excellent way to make a significant gift to a charity of your choosing. Any charity can be designated as the beneficiary of a life insurance policy.
As you integrate life insurance into your estate planning strategy, there are many factors to consider when deciding how much and what type to invest in. You’ll need to look at whether you are the primary income earner in your household and how many people depend on you financially. You’ll also need to factor in your debts and other financial obligations (including your mortgage), whether your estate will be subjected to federal estate taxes, and whether you’d like to leave any of your estate to charity. Life insurance will provide liquidity and readily available funds for your beneficiaries.
Estate planning professionals can help you determine how life insurance can benefit your estate, regardless of your age or income. It can be a key tool in providing peace of mind that your family will be financially protected and your estate preserved as you pass it on to your heirs.