Personal Finance
Avoid these 4 awkward issues when drafting a will
Every family has its skeletons, but when you leave this earth, the last thing you’ll want to do is create more drama.
We spoke to AARP Bulletin columnist and personal finance expert Jane Bryant Quinn to find out why it’s so important to make a will that won’t disrupt family dynamics, or leave your children bickering long after you’re gone.
Here, we’ve highlighted the most difficult scenarios facing parents today and some key factors to consider.
The successful child vs. the unsuccessful child
All parents struggle with whether to leave their successful child less money, especially if the other child wasn’t as wealthy. However, Quinn says “the whole focus should be how the family will be after you die, and whether leaving unequal shares will make everything easier.”
If you choose to leave unequal shares, the wealthy child could end up feeling penalized for doing well, while the struggling sibling could feel slighted for not following in the other child’s footsteps.
What’s more, there’s always the chance one child’s successful business might go under, or that he or she may get a divorce or illness and lose all their savings.
“You never know what will happen,” says Quinn, so “it’s better to focus on the best outcome now.”
Family dynamics
Some families see eye-to-eye on everything, while others can’t stand to be in the same room. If your family has any bad blood, leaving an unbalanced will could drive an even deeper wedge between them, says Quinn. Conversely, “a healthy family will have a healthy result” and be able to talk through any jealousies or slights.
The key thing to ask is “Can I help or can I hurt?” You can definitely hurt by “sticking to” members you didn’t care for, or by leaving someone out of your will entirely. For children, a disinheritance can leave a psychic wound they may never recover from, leading to an all-out war.
Step-children and special needs
Not every situation calls for an even split. In fact, in some cases where step-children are involved, the inheritance may have already been determined in the divorce agreement. However, step-children typically come under the equal shares rule if no arrangements were made beforehand.
For children requiring lifetime care, Quinn says it’s usually best to leave that child more. Not only is this what the family members would typically want, it makes it the process of outlining care much easier when they money’s already accounted for.
Real estate issues
The case for a fair will cannot be overstated when it comes to divvying up real estate, says Quinn. She recommends consulting with the children to see how they feel about taking on a beach house or condo, and if they’re not up to it, then selling the property and putting the proceeds toward other funds.
Planning your parent’s retirement
The Baby Boomers are doing some serious retirement planning these days.
Just one problem. They forgot to plan for their parents.
They may be 55, but their parents now need their children more than ever before.
I have many clients that have at least one parent with Alzheimer’s disease — often in their 80s or 90s. The Boomers face many social, physical and mental challenges with their parents. These can be very difficult on their own.
In addition, there are several financial challenges that arise that must be faced and in every case, intergenerational or cross-family financial discussions are the key to a positive outcome.
Here are four challenges to deal with and possible solutions:
1. We saved for our retirement, but didn’t plan on paying for everyone else’s as well.
Every retirement planning discussion should include the following question: “Are your parents and in-laws likely to be a financial burden, fairly independent, or are you expecting a meaningful inheritance?”
While many people have a hunch about it, they really need to have a better handle on it, as it is key to their own retirement plans. In my firm, we recommend that, if possible, they have a conversation with their parents that starts with: “We are doing some personal retirement planning, and we were asked a question about our parents. We don’t need to get into huge detail, but we wanted to have a discussion about whether we might need to provide some financial support to you or whether we thought there would be a meaningful inheritance. (Wait for laughter to stop.)”
It is possible that this question will have a pretty short response and won’t go further, but in most cases it does open the door to a more complete discussion.
2. Why are we responsible for Mom and Dad? What about your brothers?
Sometimes life isn’t fair. There is always someone who shoulders more of the load. It doesn’t stop just because Mom is getting old and needs support.
Support for older parents is both in terms of time and energy, and also can be in terms of money.
In many cases, women in particular have to retire early and give up an income to look after parents. This in itself could affect their retirement plan. Should they be entitled to get paid by the parents? Should they get a larger inheritance?
In an ideal world, the child that provides most of the caregiving is not in need of any compensation, and the parents can pay for any needs that arise.
In the real world, sometimes there does need to be some financial compensation for all of the time that one child puts in. With siblings, you will likely never get full agreement on these arrangements. It is usually something that should be co-ordinated between the caregiver child and the parent, and other siblings should be notified of the facts. It isn’t a vote.
3. We should have had the insurance discussion sooner.
If you are 45 years old, do you know what insurance coverage your parents have? Do they have critical-illness insurance, long-term care insurance, individual life insurance, joint first-to-die, joint last-to-die life insurance? Did their insurance coverage expire at 65 or 75?
The reality is that this is your business. All of these insurance policies, other than joint last to die, will have an impact on your parents’ financial well-being. They may mean the difference between them being able to look after themselves financially or require your financial support.
This conversation is also a good eye-opener for the 45-year-old — and it may raise some opportunities.
Opportunity No. 1: It may be too late for your parents to be properly set up due to health issues, but now is the time that you should be ensuring that living benefits like critical-illness insurance, in particular, is explored.
Opportunity No. 2: If one of your parents is in reasonably good health — even if they are 75 years old — taking out a life insurance policy on a parent may be an important part of your retirement plan. I know this may not seem right at first glance, but if the 45-year-old is going to have to look after the parents financially, it can impair his personal retirement plan. If his insured parent dies in 20 years, the son will receive a tax-free insurance payout at age 65 — a perfect time from a retirement perspective. In many cases, the return on investment of this type of insurance policy can be 7%+ on an after-tax basis.
4. Do Mom and Dad have powers of attorney in place? What about their will?
Once again, what might not be considered your business can quickly become your most important business. They should have a power of attorney over personal care. This provides guidance on who can make medical decisions on the patient’s behalf, if he is unable to make his own decisions. It usually deals with items like whether you want doctors to make ‘heroic efforts’ to save your life, or not.
There should also be a power of attorney over property. This gives someone the ability to sign documents on another person’s behalf. Without it, many necessary financial transactions and decisions will happen at a snail’s pace.
As for their will, do you know where to find it? Has it been looked at in the past 20 years? Are the executors of the will up to date? Have the named executors died 10 years ago? These issues could become a nightmare for the survivors if they aren’t reviewed and clarified.
I believe the most important issue here is opening up the lines of communication with older parents. It is important to position the conversation in terms of your own personal planning, and addressing questions that you need to answer to complete your plan.
As the Baby Boomer children, you need to have these conversations with your parents. It will benefit everyone in the long run — and there is no day better than today.
Financial Post
Ted Rechtshaffen is president and chief executive of TriDelta Financial, a firm that provides independent financial planning and
investment advice.
How to get out of paying for kids’ education
NEW YORK – Tracy Repchuk’s three children are still in grade school, but she’s already got college funding figured out. The Repchuk kids are 14, 15, and 16 and when they head off to college in a few years, here’s how much their parents will be chipping in: Zero.
Not because they are being punished for something: Tracy calls all three wonderful, outgoing and well-adjusted. And not because the family is strapped for cash: Tracy, 47, is an author and social media strategist, and her husband David Repchuk is a mobile solutions developer.
Instead, the financial tough love is simply the way the Burbank, California, resident was brought up, and she sees it as the best way to foster the self-reliance that will pay dividends for the rest of their lives.
“I’ve told my children that if they’re interested in college, it would be their responsibility to pay for it,” says Repchuk. “This wasn’t a surprise announcement, since I’ve felt this way forever. It’s their life, not mine.”
It may seem a tad harsh, but Repchuk certainly isn’t alone in letting children fend for themselves once they’re grown. According to a new study from the University of Michigan-Ann Arbor, 62% of young adults (between the ages of 19 and 22) are getting some kind of financial help from their parents — which means 38% aren’t getting a dime.
Drill down further into the numbers, and just 35% of those kids ages 19-22 are getting tuition assistance. Sometimes that’s because parents don’t have any money to give, and sometimes it’s because their offspring are no longer in school by that point.
But other times, parents could potentially afford to help, but don’t. “We did three waves of interviews, ending in 2009,” says Patrick Wightman, the study’s lead author. “Over the course of the recession we saw even higher-income families cutting back on their financial support.”
It’s not surprising that some parents are turning off the spigot. According to the Department of Agriculture, which tracks expenditures, the inflation-adjusted bill for raising a child up to age 17 these days (not even including college costs) is almost US$ 300,000 for every single Sophia and Samuel.
Given the horrific state of savings in this country — 49% of Americans aren’t chipping in to any retirement plan at all, according to financial-services trade association LIMRA — it’s hardly shocking, and perhaps highly necessary, that parents should be thinking about themselves first. As we’re told on airplanes before every takeoff: In case of emergency, put on your own oxygen mask first, and only then help out your kids.
But even among those with the financial wherewithal to pay for their kids’ college, there are some who just don’t believe in the message it passes along. Without any skin in the game, the thinking goes, young adults won’t truly understand the value of their education — or the value of a dollar.
“I worked, received scholarships, and took out loans,” says Nerina Garcia, a psychologist and assistant professor at the New York University School of Medicine. “It made me more responsible and work harder at school, because I knew I couldn’t flunk out; it would cost me too much. Now I plan to do the same for my 10-month-old daughter.”
Of course, these are trying economic times that we live in, and college is less affordable than it was when many of these opinionated parents did their coursework.
Tuition is already at record highs and rising: The average student who takes out loans is graduating with around US$ 23,300 in debt, according to data from the Federal Reserve Bank of New York. While median incomes have stagnated over the last 20 years, tuition and fees have shot up 130 percent, according to the College Board. If your attitude towards your children is “sink or swim,” it’s entirely possible that some kids may drown.
Also, don’t think that just because parents aren’t footing the bill, that kids will magically be granted even more financial aid. Almost all students in their late teens or early 20s are still considered dependents, so parental incomes and assets will still factor into the equation.
If mom and dad aren’t contributing any money at all, it’s the student who’s going to have to come up with the difference — by dipping into any savings they might have, working part-time while pursuing their degree, or taking costly loans.
FIRST, DO NO HARM
Here are some guidelines for handling the tricky subject of tuition help while sticking to your parental principles:
— Don’t torpedo financial aid offers. Even parents who aren’t going to contribute should fill out what’s called the Free Application for Federal Student Aid (FAFSA), which is basically the gateway to all federal grants and loans.
If parents don’t intend on chipping in? “It doesn’t matter,” says Joe Hurley, founder of Savingforcollege.com. “The parents’ assets and income must be reported on the FAFSA.”
If they don’t fill it out, the student won’t get any federal financial aid, and their options become very narrow. In that case, their only shot at federal aid is if they’re officially classified as an “independent student” — which is highly unlikely unless they’re already married, have a kid, or are over age 23.
— Get creative. There are ways to give your kids a running start in life, without necessarily writing them a blank check. When children attend college in their hometowns, some parents let them stay at home rent-free for a while. That frees up the kids’ cash flow to be earmarked for other necessities like tuition or books, without putting a dent in the parents’ own savings. Or reserve the right to help out with student debt later on, after your own retirement-savings goals are further along.
— Find the right balance. College financing isn’t necessarily an either/or proposition. With an obligation to cover a portion of their education, kids will learn the value of the dollars coming in and going out, without being totally crushed by financial burdens.
“We contribute when and what we are able,” says Jacquie Whitt, co-founder of Adios Adventure Travel and mom to 21-year-old college student Keenan Whitt Linsly. “But should college students contribute to their own education? I would have to say ‘Hell, yes!’ Our son chooses to work and contribute, and we support his efforts. It’s good for him. It’s good for everyone.”
© Thomson Reuters 2012
Borrowing to invest can make sense
By Talbot Stevens
Borrowing to invest, or leveraging, is certainly one of the most controversial and poorly understood topics in all of financial planning. Although the situation should improve with the federal government’s financial literacy campaign, most of us were not taught about managing money.
For advanced investment strategies like leveraging, the lack of information, and misinformation, makes it even more difficult for both investors and financial advisors to objectively understand if, and how, leverage can be used responsibly as part of a financial plan.
One of the common myths is the view that all debt is bad. Ironically, many Canadians have no problem borrowing at expensive, non-deductible interest rates of 19% or more, to buy personal stuff that depreciates 20% to 40% per year. This type of “bad debt” should be avoided like the plague, as it is guaranteed to hurt you financially.
One of the common myths is the view that all debt is bad
Last year, the private banking division of a Canadian bank revealed that 46% of their high-net-worth clients used leverage as an investment strategy. Yes, the wealthy often use “good debt” to borrow at low, near-prime interest rates to invest in things like businesses, real estate or the stock market, which generally increase in value over time. But leveraging is not restricted to those who already have lots of money.
Even the government recognizes the difference between “good debt” and “bad debt” with its tax policy. To encourage “good debt” and increase economic activity, borrowing for investments that have the potential to produce income is generally tax deductible. Borrowing for “bad debt,” of course, is not.
Occasionally, there are stories in the media about investors who have lost lots of money using leverage.
These serve as valuable cautionary tales about how greed combined with a lack of understanding can result in very costly “life lessons.” Before the market crash of 2008, the greed of some financial advisors to increase commissions and the greed of clients looking for big returns produced a dangerous combination.
If leveraging has a bad reputation, it has been earned. In the past, there was too little focus on client-first practices, too little regulation, and too little understanding of when and how leveraging should be considered.
The good news is that I believe we have entered a new Leveraging 2.0 era, one that is a much safer environment for everyone who contemplates borrowing to invest. Regulators have provided clear suitability guidelines for leveraging, and are holding financial planning companies accountable for enforcing them.
Financial advisors and their firms have learned that weak training, policies, and supervision of leveraging are bad for clients and their business.
The two 50% market crashes in the last 12 years have also helped both investors and financial advisors learn the cold, hard fact that leveraging implemented irresponsibly is much worse than none.
There are many leveraging strategies, with varying levels of risk and complexity. In this safer Leveraging 2.0 era, responsible leveraging means only considering responsible strategies, responsible amounts and responsible timing.
Almost all of us use vehicles to get us where we want to go faster. But what is the downside of using this strategy? Not only is there a financial cost, we can get hurt badly, or even killed. Like using a vehicle, leveraging is a strategy that can either help you or hurt you, depending on how it is used. Also like a vehicle, the strategy is very powerful, which means that returns can be magnified a lot, and more so in the negative direction. Because of this, it is essential to fully understand how to use the strategy carefully, responsibly, with all of the appropriate guards and precautions in place before you get in the vehicle.
The critical question to start assessing leveraging objectively is this: If you only drive or leverage carefully and responsibly, can you be confident that the strategy will help you instead of hurting you? Think about this, deeply. If you’re not committed to this approach, please stay off the road.
You don’t have to use the more powerful and dangerous strategies of vehicles or leveraging to get where you want to go more quickly. You can choose to walk and stick to safe, guaranteed investments. Or you can use a bicycle to go a little faster and invest in unleveraged equities and accept moderate long-term risk. If you do choose the much faster and riskier strategy of borrowing to invest, for your sake leverage responsibly or not all. Understand how to use the concept with confidence before you start.
Talbot Stevens is a financial speaker and author of Dispelling the Myths of Borrowing to Invest. TalbotStevens.com.
Couples who bank together stay together
Paulina Nozka recently got together with a couple of friends and it wasn’t long before talk turned to relationships and her friends talked Ms. Nozka into throwing her name and profile into the online dating pool.
Two hours later, Ms. Nozka had completed what turned out to be a comprehensive personality profile.
Scotia Insight
By Lindsay Hay
With wedding season approaching, happy couples are preparing to start their new lives together. Even though financial experts cite the importance of creating an open dialogue about money, it’s not uncommon for couples to put off talking about it until after the wedding.
Since personal finance will be an important part of every adult’s life, it makes sense to talk honestly about financial goals before you head down the aisle.
This is true for all kinds of relationships – from young couples just starting out to people entering subsequent marriages with established financial habits.
Read more here
“It was incredibly in-depth,” Ms. Nozka says. “I wasn’t expecting that.” Still, she recalls, there were only a few questions related to money and finance.
“Money may not ruin a relationship but it can certainly create a lot of stress,” says Janet Freedman, certified financial planner and president of Finance Matters in Toronto.
“Couples, particularly couples getting married or living together, should be talking about money and their approaches to money sooner rather than later. It should be more of a priority in pre-marital classes, but from what I’ve seen and heard it’s not treated as a critical part of a relationship.”
Certainly talking openly about money is step one in determining whether you’ve found your financial match.
“By having these discussions early you gain an understanding of the other person’s motivation and style when it comes to money and finances,” says Ahmad Dajani, vice-president of investments, GICs & sales tools at Scotiabank.
“One individual may be more comfortable with debt while the other is a disciplined saver. While talking about finances is not the most romantic part of starting a relationship, understanding those motivations and creating common goals is important in achieving financial success as a couple.”
Planning for a wedding is a good catalyst to those important conversations and laying groundwork for the future and even retirement.
“We are big believers in creating a financial plan, which can go a long way in calming pre-wedding jitters,” Mr. Dajani says.
“The big step is putting it all down on paper. In terms of the wedding itself, will it be a big wedding or a small wedding, what will the venue, flowers, photographer, DJ cost? How will you save for it? And that’s just the start. A financial advisor can look beyond the wedding. Do you plan to buy a home, start a family, travel? It’s important to think of the future goals and dreams together and what you want those to be.”
Setting goals together can help couples that may be coming at finances from opposing viewpoints find that all-important common ground to help achieve those goals, says Julie Hauser, media relations officer at the Financial Consumer Agency of Canada in Ottawa.
Based on one of the recommendations from the recent Task Force on Financial Literacy, the FCAC has put together an educational series based on the teachable moments life offers.
‘Step one is to be up front and disclose all financial assets and obligations’
Deciding to live together is one of those moments and the FCAC offers advice on its site to help people move into healthy financial relationships. For example, it lists money conversations every new couple should have. These include everything from full disclosure of what you own and what you owe to a look at your financial personalities to financial roles to budgeting to organizing your finances.
“Should you have separate bank accounts, joint accounts or a bit of both? There’s no right or wrong answer, it’s what you as a couple feel most comfortable with,” Ms. Hauser says. “In having these discussions, you learn more about each other.”
You also won’t be hit with any unwanted surprises.
“Step one is to be up front and disclose all financial assets and obligations,” Ms. Freedman says.
“Once you’re on the same page, sit down and talk about your individual life goals and your goals together. I’m talking about the global goals, not necessarily the details. For example, what do you want retirement to look like? You are not locked into anything but you get a clearer picture of how your goals mesh — or don’t.”
Once you understand the big picture, you can dive into the details, like who pays for what. To keep stress out of the equation, she recommends dividing up the expenses proportionate to income and maintaining separate credit cards. “This way you each have your own credit rating.”
Another key piece of advice: Keep talking. “Your financial situation spills over into the rest of your relationship,” Ms. Hauser says.
“Sit down once a month and check in on your finances. It will help you check in on your life together and maintain your relationship.”
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