Now Is the Time to Make Sure Financial Arrangements Are in Order
Andrew Leckey - Successful Investing

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Make Sure Financial Arrangements Are in Order (Mark Weber)

Family finances have never been more important than in tumultuous 2009.

But the devil is in the details.

A solid family budget, a viable long-term financial plan and up-to-date legal documents can keep you on the right track. Making sure each spouse is informed of all financial arrangements is vital as well.

Most Americans realize that if you lack estate documents such as a will or living trust, it will be up to the state to determine who receives your assets.

However, if you don't also pay attention to the designated beneficiaries listed on your investment accounts, or if you allow legal documentation to become outdated, you'll increase the headaches for your heirs one day. Your plans won't be carried out in the manner you intended, either.

This is a good time to check whether the financial logic behind existing wills and estate plans still holds up. The decline in personal portfolios and property so common these days can affect the relative proportions of your various assets.

"You can't change your will every time the stock market fluctuates," said Rita Brown, a certified public accountant and AEP (accredited estate planner) with Jackson, Thornton & Co., Montgomery, Ala. "But if you want to leave a certain amount of money to your children and your stock portfolio no longer allows for that, you may need to go back and make some changes."

Your will, as the legal document that gives instructions to be followed after your death, spells out the beneficiaries of your assets, any specific gifts, what should be done with remaining assets, a guardian for minor children and nomination of an executor. Self-help books or software are available for a basic will, though an attorney is necessary as your property and accounts become more complex. You must be confident that everything is exactly as you want it.

The value of your estate, which includes all of your assets, is the fair market value of your property after your debts have been deducted.

The estate value determines whether your estate is subject to estate taxes after your death and whether beneficiaries are subject to capital gains taxes. In 2009, the first $3.5 million of an estate, or $7 million for couples, is exempt from estate taxes. There is also a gift tax with a $1 million lifetime exemption.

"I have clients who, because of changes in the value of their portfolio or changes in family dynamics, will want to amend their existing estate plan," said Bernhard Aaen, an attorney and AEP in San Bernardino, Calif. "Estate planning can typically cost $2,000 to $5,000, and it can be $1,000 to $2,000 to have plans amended (though fees vary)."

Failure to update beneficiary designations in documents such as individual retirement accounts, 401(k) plans, life insurance policies and annuities is a common mistake. Individuals fill out account beneficiary information on a company form when they begin a new job and forget to update it when family situations change due to events such as the birth of additional children or a divorce.

That may mean, for example, that the firstborn child inadvertently winds up receiving the entire account when the parent dies.

In addition, people often forget which of their accounts are jointly held. At death, money in a jointly held account goes directly to the survivor, no matter what the will may say.

"Sometimes you can have these lovely will or living trust documents that an attorney spent time on and that you've paid for," said Brown. "But then we find out that all of the person's assets are jointly held with rights of survivorship."

A living trust, created while you're alive, lets you control how your estate is distributed and helps your heirs avoid probate court and its fees. Though it makes the most sense for larger estates due to the cost of setting it up, a living trust averts complications for your family.

You transfer ownership of your property and assets into the trust. You can serve as trustee or select a person or institution to serve as trustee. If you're the trustee, you must name a successor trustee to distribute assets at your death. Terms of the living trust need not be made public. A living trust does not remove all need for a will, since generally you would still need a will to cover any assets not transferred to the trust.

"People frequently come to me and say their spouse had a trust and when that spouse died everything went very smoothly, which is what you want to hear," Aaen said. "They have the trust to be sure that everything goes smoothly for their kids when they die."

The Federal Trade Commission recommends that you seek advice of an estate planning attorney or financial advisor about your need for a living trust, noting that state law often requires that an attorney draft the actual trust. If transfers aren't handled properly, the trust could be invalid.

In all family financial matters, be organized so you don't leave a tangled mess of financial documents behind for heirs. Market panic has prompted many investors to stop funding their accounts altogether and put financial matters out of mind. That attitude can lead to negative repercussions for your retirement and for your heirs.