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How to do Annual Estate Planning Financial Check-Up?

Last update on: Jun 17 2020
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The early part of the year is a good time for a quick Estate Planning financial checkup and to evaluate the progress we’re making toward financial security for ourselves and loved ones. You probably are working on your tax return anyway, so it takes only a bit more time to answer the simple question, “How am I doing?”
Let’s start with the big picture.

Your income, investment returns, and other popular gauges aren’t the key to determining your financial health. Thomas Stanley, co-author of The Millionaire Next Door, found that financial success is best measured by how much one’s total net worth increases each year. The net worth of a financially successful person increases by a seemingly modest 1% to 2% annually. Make a list of your assets and your debts. The difference is your net worth. Make the list for a few years and measure the change in net worth. Someone who is well into retirement doesn’t need to see the net worth to increase, but should measure how much it declines. Everyone else needs a modest increase to be financially secure.

Many people with high incomes and strong investment returns have little or no increase in their net worth each year. They spend the money at least as fast as it comes in. Or they try to increase net worth quickly by investing aggressively, and end up losing wealth. Too much debt, especially high interest credit card debt, is another good way to prevent net worth from increasing.

If your net worth is not increasing by 1% to 2% annually, estate planning steps can be taken.

 

Estate Planning Step #1

Paying down debt is an effective move these days. Short-term interest rates are less than 2%, and many money market funds pay less than 1% after expenses. Rather than keep a lot of cash in low-yielding investments, pay mortgages and other debts that charge higher interest rates. Be sure to keep enough cash to handle emergencies and unexpected expenses.

If you haven’t refinanced an old mortgage, look into it now. Also, look into using a home equity loan, with its lower and deductible interest payments, to pay debt that charges higher, nondeductible interest.

Always keep in mind that purchasing something with debt often means that the total cost including all interest payments is about twice the purchase price. Borrow to buy something that declines in value and you’ve ensured a decrease in net worth. The amount you owe will exceed what the item is worth.

 

Estate Planning Step #2

Reducing income taxes is a great way to boost net worth, as long as the savings aren’t spent. I give income tax saving ideas in almost every one of our monthly visits. Use the tax strategies that you can and let the savings boost your bottom line.

 

Estate Planning Step #3

Spending control is another strategy, but most people don’t know how to do it right. The key is to know where your money goes. Few people can explain how they spent a significant portion of the cash they dispense each month. Keep track of where the money goes and it is easier to set priorities and spend less without depriving yourself.

 

Estate Planning Step #4

Investing also can significantly increase net worth. I urge you to adopt our Retirement Watch philosophy of investing with a margin of safety. Avoid the big risks that lead to big losses ? as we’ve done in this bear market ? and the natural growth of the economy and the markets will increase net worth. Also, keep an eye on investment expenses. Especially with today’s low returns, high expenses really eat into profits.

After snapping the big picture and measuring the growth of your net worth, examine some vital details. I refer to this group of items as the financial emergency kit. This kit protects both you and your loves ones. If yours isn’t complete and up to date, take some time to work on it.

  • Set up an emergency fund. I recommend that most people in or near retirement have an amount equal to about one years’ expenses in safe investments such as money market funds, CDs, or short-term bond funds. I also recommend putting about two to five years’ worth of expenses in an intermediate bond fund, a bond index fund, or my Income Portfolio. The safety fund ensures you can ride out almost any bear market without being tempted to sell long-term growth investments. The amount you put in this portion of the safety fund depends on how safe you want to be. With interest rates so low, an alternative is to use a home equity line of credit to pay emergency expenses instead of having cash in short-term investments.
  • Have a power of attorney. This document ensures that someone can manage the portfolio, pay bills, and take other necessary actions in case you become incapacitated. Each spouse should have one. In the document, name the person you want to be taking these actions. It might be your spouse, an adult child, or someone else. You can have a general power of attorney, or if that makes you uncomfortable limit the individual’s power to specific actions. The broad power is best, because you cannot anticipate what circumstances might prevail.Most people use a durable power of attorney. This takes effect right away and continues in effect after you become incapacitated. Some states also allow a springing power of attorney that doesn’t take effect until certain named circumstances occur. The springing power could cause a delay, say until your doctor certifies the incapacitation. It also might not cover all circumstances.Be sure a proper power of attorney is on file with all your financial institutions. Many require that their own forms be used and on file. Putting all your investments in a living trust is an alternative, since a successor trustee or co-trustee would automatically have authority to act under the terms of most trusts. Be sure the financial institutions have all the information and documents they require to ensure things work smoothly. 
  • Insurance coverage also should be reviewed. You might consider owning disability, life insurance, and long-term care insurance, in addition to homeowner’s, auto and health insurance. Whether you need each and the amount you might need of each depends on your circumstances. Also consider an umbrella liability policy to cover any damages for which you are responsible that exceed the limits of or aren’t covered by other policies. The coverage usually is a rider to a homeowners’ policy and a few million dollars of coverage can be purchased for a couple of hundred dollars a year.
  • Finally, be sure the estate plan is up to date and will accomplish your goals.

As a key part of every estate plan, I recommend preparing a notebook for your executor. This notebook should contain an updated will, personal financial statements, income tax returns, insurance policies, recent statements for all financial accounts, a list of contacts, the locations of necessary files and documents, and a letter of special instructions with any thoughts or advice you have. Let the executor know where the notebook is kept.

While preparing or updating the notebook, ask some important questions. Is there a will? Have there been changes in your personal or financial life since it was written? Are the beneficiary designations on IRAs, annuities, and insurance current? Remember these assets pass according to the designation; nothing in your will affects them.

Most of us spend a lot of time focusing on details such as which mutual funds we should own. At least once a year take a good look at the big picture and determine what estate planning you can do to make it look better.

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