Legacy

Dave Ramsey’s FPU Class, Insurance Lesson

The Dave Ramsey Financial Peace University multi-week class has an entire lesson on insurance, or risk management. Wisdom with insurance is key to financial planning to protect the things we own or our family from risk, using as few dollars as possible. To underline a few items from this lesson, and a few things I have a little different opinion…

  • Evaluate your life insurance and type: if you have minor children and a mortgage a good rule of thumb is 10 times income (an insurance expert or financial planner can help you calculate your amount). You can subtract from that number your group life amount and other insurance, savings and investments. If your spouse doesn’t work outside of the home, she probably needs it too. Consider term insurance since it is pretty inexpensive, and buy as long a term as you can afford usually, such as 10 – 25 year level term
  • If you haven’t shopped your auto and homeowners insurance in a while, call some independent and captive agents for quotes for various deductibles, you may be able to save a goodly amount.  Be sure to have your policy’s declaration page or description of coverage handy to refer to.
  • Talk to your agent about ‘personal catastrophe’ or ‘umbrella’ insurance to protect you from excess liability. A few million dollars of coverage costs less than $200 usually.
  • Ask your agent about your homeowner’s ‘replacement cost’ coverage for dwelling and contents.
  • For long-term-care insurance, if you are in your 50′s it is not better to wait until 60 as Dave says, since the rates go up with age, and sometimes our health changes more as we age.
  • Review your short-term and long-term disability coverage at work, even if you have it, it may be a good idea to consider supplemental since group DI is taxable.
  • Dave recommends dropping all permanent life insurance (whole life, universal, variable), but if you’ve owned a policy for a long time or your health has changed you probably should consider keeping it. It is always good to get an enforce computer ledger to evaluate and compare before making this drastic change, and don’t ever drop coverage until the new policy is in force. Also, some people have some permanent needs, so again it is wise to consult a financial advisor first.
  • Lastly, Dave recommends good estate planning. Be sure to contact an attorney about having a will, power of attorney written for you. If you believe in end-of-life planning, ask about living wills and health care power of attorney. Trust planning makes good sense for asset protection, and to take care of minor children, not including privacy and tax and probate cost minimization.

Counting on Inheritances

Many people are counting on receiving an inheritance, therefore they don’t adequately make good financial plans. It isn’t unusual for some to not fund their retirement plans, because they think their parents are well off and will leave them enough money to live on. Parents though may not have as much money as we think they have, but they might just be really good at personal finances. On the other hand a lot of money might be consumed by health care in older age, or the parent might leave the money to a new spouse, skip you and transfer to your children, or might just not make good plans and the money is lost through mismanagement.

The Wall Street Journal had a pretty good article, if you want to read more about this topic, but suffice to say most experts agree that your financial plans should probably not take inheritances into consideration.

Estate Planning for Blended Families

A marriage counselor friend of mine recently said that only 25% of households in some areas are made up of single people and traditional nuclear families of once married couples with their own children. The other 75% of households make up the rest of unmarried couples or remarried couples following separation, divorce or death, with children from more than that relationship coming from prior marriages or other relationships.

Estate planning for these step or blended families becomes vital to make sure that ownership of assets and designation of beneficiaries, as well as wills and trusts are arranged so that assets flow in the direction the person wants them to. In the absence of proper planning, assets will flow to the wrong people, and conflicts will ensue, including costly legal battles. In the wake will be harmed relationships and perhaps money not available to care for people that may have needed it.

I have seen this happen many times, especially to elderly people who remarried later in life. For example, let’s say Bill and Dorothy Welloff have been married 50 years, have accumulated several hundred thousand dollars in retirement savings and other investments, and own a very nice home. They could easily have a net worth of $1,000,000. For the purpose of this example, let’s say they are in their upper 70’s and Bill dies. The normal I-love-you will and estate planning leaves everything to Dorothy Welloff, as it probably should. And when Dorothy dies, whatever is left is distributed to Bill and Dorothy’s children, Joanne and Kevin Welloff.

Let’s say Dorothy remarries Bob Broke and Bob has no money but has 2 children from his prior marriage, Linda and Chris Broke. Without thinking or planning too much they change their wills and beneficiaries, and don’t use trusts, and they set everything up to take care of each other should either of them die. What ends up happening most of time, it seems, is that Dorothy Welloff dies first, and all assets flow to Bob Broke; and even though Dorothy’s wishes were to have the assets left to Joanne and Kevin Welloff after Bob Broke dies, they all end up in the hands of Linda and Chris Broke. This tragedy seems to happen more often than it should, and it could be avoided by proper ownership of the home, and proper directions for the flow of assets through a trust to provide some assets for Joanne and Kevin Welloff right away, income to maintain Bob Broke in a decent lifestyle, and the remaining assets at Bob’s death for Joanne and Kevin Welloff.

If you have a blended family, your situation is more complex. Take time now to make good plans. If your parents have remarried and the example above may apply to them, try to talk to them. This can be a very delicate situation. Perhaps show them this to break the ice. A note to Mom or Dad: your children are not doing this because of greed, but because they want you to be aware of what may happen if proper planning doesn’t take place. As good stewards and managers of money you have worked a lifetime to earn and accumulate, you should make the time and spend a little money to make good plans with your attorney; then follow the wise and thoughtful interests and needs of Dorothy, Bill, and Bob so that assets are ultimately distributed fairly, according to what Dorothy and Bill would have originally wanted. However, you should be mindful of Bob’s needs as well.

Estate Planning Documents Most People Need

The following are the most common and basic estate planning documents. If you don’t have them, plan now to get them. If you do have them but it has been several years since they were updated, update them now. If you don’t have properly drawn-up documents, your family members will have great difficulty in planning the disposition of your property in an orderly, lower-cost manner in case you become incapacitated or die.

A Will provides for distribution of property you own at the time of your death in any manner you choose, subject to state limitations. A Guardian is someone you name in your will to care for your children in case something happens to both parents. Trusts are created to hold, own, control and allocate property now, or as most people do after they die. Trusts can be particularly helpful if distributing assets to several people and over a period of time, with conditions. They can also help your survivors avoid some parts and expenses of probate court. They can also provide creditor protection and privacy. A Living Will and Health Care Power of Attorney help if you become unable to make medical decisions for yourself. A Durable Power of Attorney grants legal authority to a trusted person to handle your finances and property if you become incapacitated and unable to handle your own affairs. This is just a brief list of the documents and concepts; talk about these and more with your attorney, including letters of instruction and the organization and storage of important papers.

What is Estate and Legacy Planning?

Legacy planning is the new phrase that is used synonymously with estate planning these days, and is the general process of arranging your financial affairs in a way that reflects your main priorities and values. People often think about wills and trusts, and this type of planning will always incorporate that, but the documents are not the tail that wags the dog. Legacy planning has evolved today into holistic approach to incorporate people’s overall financial planning goals and concerns:

  • Providing for many aspects of the financial, emotional, professional, and legal needs of surviving spouses and children
  • Maximizing and controlling their wealth for themselves for long life spans
  • Gifting to family members while they are alive, so that they can transfer wealth in a way that helps rather than hinders the individual
  • Transferring their business (possibly to a family member) in a cost-effective way, taking into account all possible tax concerns
  • Charitable concerns for which they have a passion
  • Transferring their important values and beliefs to the next generation
  • Providing enough assets for their minor children and surviving spouse if they die, but also arranging it in such a way that maintains privacy, protects assets from creditors, and provides ongoing professional management
  • Transferring wealth to spouses and adult children, that cares for the surviving spouse, and transfers remainder amounts to the intended children, which is especially important if there are blended families, or the spouse becomes remarried

When people have discussed their concerns about these items and many others with their attorney and trusted financial advisor, then it is the attorney’s job to draft up the wills and trusts that work  to address these concerns.

 The next issue that many people neglect is to change the beneficiary arrangements to work hand-in-hand with the legacy plan. A beneficiary is someone you designate in writing in an appropriate form (beneficiary form) directing the holder (bank, insurance company, investment firm) of an asset, where to send your money when you die. When doing estate planning be sure that your beneficiary arrangements are consistent with your overall plans. Check your beneficiary arrangements for life insurance, IRAs, annuities, and retirement plans. In addition, investment and savings accounts can have beneficiary arrangements too, called Transfer on Death arrangements. Be sure that you have them and they are up-to-date!

Go to Top