Losing Your Inheritance to Uncle Sam – or Others

Successful estate planning takes not one generation, but two. The first generation needs to make a clear, sensible plan and the second needs to be involved in that plan.

The best estate strategies tend to be made with the advice of a financial adviser or an estate planning attorney. Without proper planning, estates can be eaten away by bad planning in ways ranging from the simple to the complex. They include:

Failure to leave a will: Most Americans know what a will is. So why won’t they take the time to make one? The estimated numbers of Americans without any kind of will is staggering – between 60-70 percent. Yet without a will in place, some or all of a person’s estate may be transferred to Probate Court with a complete stranger assigned to decide the future of the deceased’s assets. If you are a parent, make a will. These days, consumer software programs offer will kits that conform to legal language in each state and are legally binding and inexpensive to complete. They also prompt you to do health care and other directives (see below) necessary for a complete estate plan.

No plan for incapacity: An 80-year-old grandmother sinks into dementia. A 30-year-old father of twins is left in a coma after a car accident. Anyone can be left incapacitated at any age with no clear game plan for spouses or heirs. This wastes money, time and creates great emotional hardship. Advance health care directives designate health-care decision makers and delineate their powers, and leave very precise instructions about life support and other treatment options. Some individuals underscore written directives by videotaping themselves giving these instructions. Powers of attorney can also be created to assign financial decision makers to the situation.

Failure to coordinate or update beneficiaries: Any child who has struggled to settle a parent’s estate is very likely to have had problems with beneficiary designations on retirement accounts, investments, insurance policies, savings accounts and bonds. Many people think that beneficiary designation occurs at the creation of the will -- not true. Beneficiary designations should be reviewed every few years for accuracy or when a major life event requires a change.

Failure to inventory: A parent may think they’ve got a great system for organizing their investments and estate instructions. But if they die or are incapacitated, heirs may find it difficult to navigate their bookkeeping system or find key documents and investments left inside the house or in safe deposit boxes elsewhere. Financial advisers can provide a centralized system of organization for clients by keeping a separate index of those materials to help guide family members and heirs through a serious illness or estate settlement. Failure to find key documents may lead to severe tax consequences later.

No attention to special situations: If both parents die, how will substantial assets or life insurance proceeds be managed for minor children? If there is an adult child with a disability, is a Special Needs Trust or other directive in place? If a parent, friend or sibling dies without instructions for his pet, who will get Fido? A person’s last wishes are as unique as they are and should be considered part of the estate planning process. Heirs should insist on those provisions so they can distribute assets with maximum speed and minimum disagreement.

No Power of Attorney or inadequate joint name provisions: An incapacitated relative not only needs someone properly designated in his or her directives, but they need that person to have proper access to funds. To provide for this, a durable power of attorney can be filed with the account custodian, or joint names can be listed on the accounts so bills can be paid. Naming a joint owner to an account may cause negative consequences, so consult your financial or tax professional before doing this.

Failure to update: Anytime there’s a divorce, a change in permanent residence or a major life transition, it’s a good reason to review an estate plan. Enlist your legal and financial planning professionals in this effort. Both perspectives are necessary.

April 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA

Creating an Ethical Will

You may or may not have heard the term “ethical will.” But, for those who care about making their values and ethics part of their legacy, it is a tool to consider when planning your estate.

Unlike a “last will and testament”, which provides for the distribution of a person’s material assets, or a “living will”, which contains instructions for how you want to be treated medically at the end of your days, an “ethical will” is designed to let someone preserve and share their values, principles and beliefs for heirs and future generations, though it’s not legally binding.

According to Personal Legacy Advisors’ Web site, an ethical will is a letter that transmits the non-material assets that are also of great importance: your values, your story, the lessons life has taught you and the other information that is too valuable to risk being lost. Your ethical will is the tool that enables you to address the question, “What do I want my loved ones to know?”

Financial writer Bruce Fraser says, “As a concept, ethical wills are not new. The first written reference to ethical wills occurs in both the Hebrew and Christian Bibles. Examples are Genesis, chapter 49, and The Book of John, chapters 15-18. Over time, they evolved into written documents.”

While ethical wills were traditionally shared after death, along with the reading of an individual’s last will and testament, today they are often shared during the author’s life. Exact figures aren’t available for how many people are writing ethical wills but they are on the rise based on increased Web activity and sales of ethical will resources. They have gained impetus particularly in the wake of tragedies like the September 11, 2001, terrorist attacks.

Fraser shares these tips and tactics in a November 2006 Financial Advisor magazine article:

Why create one? People are inclined to write an ethical will when facing a challenging event, or at a turning point in life. Some examples are facing the loss of a loved one, birth of a grandchild, expectant parents, becoming an empty-nester or approaching the end of life. Other reasons to create an ethical will include:
- Your reflections will confirm what’s important and renew appreciation of your life to date
- You will create a personal message to those you love, of priceless value in the event of your absence
- If you do not tell your personal (and family) stories, they may be lost forever
- Your material assets can be given within a personal context
- You will mitigate confusion and hurt feelings with a personal explanation of potentially controversial elements of your legal will
- Your spirit will be expressed on paper, living beyond you in a timeless way
- Your words will link the past, present and future generations of your family
- You will enjoy peace of mind knowing the most important things will have been said.

Pros and cons. The pros of an ethical include having an opportunity to influence future generations. Through the process of writing an ethical will, the writer can gain self-knowledge and come to an understanding of what’s most important to him or her. This is valuable information not only for their families but their professional advisers as well. Another pro is that ethical wills are private documents. Unlike a will, which if admitted to probate will become a matter of public record, an ethical will is a private communication and will not be made public unless the author (or recipient) so desires. The con is that an ethical will is not enforceable in a court of law. Those who want to provide specific instructions, such as who is to receive which asset or how assets are to be distributed and under what conditions, would need to put the instruction in a will or trust.

Setting up an ethical will. Ethical wills come in a variety of forms, from a short letter to a lengthy autobiographical statement, from an audio-recorded message to a bound album. There are three basic ways to create an ethical will.

1. Begin with an outline and list of suggestions. Once you’ve created a rough draft, you can review and personalize it as much as you wish.

2. Begin with guided writing exercises. For example, start with phrases such as “From my grandparents, I learned…” or “I am most grateful for…”

3. Begin with a blank sheet of paper and write down whatever is relevant about your thoughts, experiences and feelings. This is an open-ended approach. Eventually you should be able to create a comfortable structure for your ethical will. For one-on-one help, an organization like the Association of Personal Historians may be of assistance.

Other tips from Personal Legacy Advisors include the following:
- Start today: If you were not here tomorrow, what is the most important thing you would not want left unsaid? Write it down - now you've begun
- Relax: You are not trying to write for the Pulitzer Prize. The letter is a gift of yourself, written for those you love
- Ask yourself: What do I want to make sure my loved ones know and have in writing
- Take it topic by topic: Don't try to write it all at once
- Be yourself: You cannot bequeath what you never owned to begin with
- Be careful, be loving. The reach of this letter is unknowable.

Sharing your will. It’s a good idea to share your ethical will not only with family and friends, but also with your financial adviser and attorney. Knowing what you value and what’s important to you will help them to develop a personalized plan that can help you to leverage your values in the future.

An ethical will speaks to one’s posterity or descendants long after the legal will has been probated and forgotten. Of note, an ethical will is a dynamic document. Just as a will or living trust document needs to be revisited so does an ethical will, because events occur in ones' life that have an impact on ones' value systems.


April 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by , a local member of FPA

What Are Exchange-traded Funds and How Do They Work?

An exchange-traded fund (ETF) is a basket of securities created to track as closely as possible a particular market index, such as the Standard & Poor’s 500 Index or the Dow Jones Industrial Average. They’re similar to mutual funds in that they represent investments in the same types of securities, but they generally have lower fees and can be bought and sold with more pricing immediacy than mutual funds. They also have some clear tax advantages.

Since their launch in the early 1990s on the American Stock Exchange, there are now hundreds of ETFs available for investors to buy. As the market has struggled its way back since 2000, investors have embraced ETFs as a more efficient alternative to a mutual fund invested in the same securities. A financial planner can tell you whether ETFs are right for your portfolio, but here are some details to know beforehand:

How are ETFs created? An ETF is created by large institutional investors who buy stocks aligning with the shares in a particular index, and then they exchange those shares – in baskets as large as 50,000 shares – for shares in the ETF. The redemption process works the same way in reverse -- the institutional investors exchange shares of the ETF for baskets of the underlying stocks.

Are all ETFs based on indexes? Yes. Indexes, like the S&P 500 or the Hang Seng Index (the primary stock index of the Hong Kong Stock Exchange), are a listing of stocks reflecting the activity of a particular investment sector on a stock exchange. One of the first popular ETFs had an unusual nickname – Spiders – a play on its actual name, SPDR, short for Standard and Poor’s Depositary Receipts. Newer ETFs track less well-known indexes, even indexes of bonds, and some ETFs are tracking very dynamic indexes that almost act like actively managed funds.

How are ETFs traded? Unlike mutual funds, which have their prices set at the end of the trading day, ETFs are priced and traded every moment of the trading day. That’s generally more meaningful to institutional investors who buy and sell constantly than long-term investors who buy and hold. Furthermore, unlike mutual funds, ETFs can be bought on margin or sold short.

Why might ETFs be more tax-efficient? Generally, ETFs generate fewer capital gains due to the unique creation and redemption process as well as the usually lower turnover of securities that comprise their underlying portfolios. Financial planners note that investors can better control the timing of the tax treatment of ETFs relative to mutual funds. Most importantly -- by holding an ETF for at least one year and a day, capital gains will be treated as long-term capital gains, which are currently taxed at a federal rate of 15 percent (5 percent for low tax bracket investors).

Are there other advantages? Unlike traditional mutual funds, which must disclose their holdings quarterly, ETF holdings are fully transparent, and investors know what holdings are in the ETF at any given time. Each ETF also has a NAV tracking symbol for even more precise analysis. This helps keep ETFs trading within pennies of their intraday NAV.

What about fees? Shares of index-based ETFs may have even lower annual expenses than similar index mutual funds, which, in turn, tend to be lower than those of actively managed mutual funds. ETFs must, however, be bought and sold through brokers, and those trades do involve transaction costs. ETFs may prove to be more expensive than mutual funds to investors who add money each month to their portfolio.

What’s the downside? Unlike regular mutual funds, ETFs do not necessarily trade at the net asset values of their underlying holdings. Instead, the market price of an ETF is determined by supply and demand for the ETF shares alone. Usually, the ETF value closely mirrors the value of the underlying shares, but there’s always a chance for ETFs to trade at prices above or below the value of their underlying portfolios. Also, since so many new ETFs are hitting the market, investors should be aware of the maturity of the particular ETF they are considering.

April 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA

Here are the 20 worst mistakes that investors make with their 401(k)s:

Please see below where I was quoted in an article in the Morris County Daily Record:

Sunday, April 1, 2007

Here are the 20 worst mistakes that investors make with their 401(k)s:
Not contributing to a 401(k).

"By far, the worst mistake is not contributing,"says Claire E. Toth, JD, CFP, of Point View Financial Services in Summit. "As a minimum, contribute enough to get the full employer's match. Typically, your employer will match 3 percent if you put in 6 percent of your salary. That's making 50 percent on your investment, guaranteed. You wouldn't leave 3 percent of your salary on the table, so don't leave the employer match, either."
Not contributing enough.

The average investor contributes 8 percent or 9 percent. Experts recommend 15 percent for medium- to high-income employees.

"Ideally, you should contribute the maximum you can, which is $15,500 this year for most people and $20,500 for people 50 or older by the end of the year. Your contribution is untaxed, so Uncle Sam is helping you out," Toth says.

"They do not enroll as soon as possible,"says James F. Christie, CFP, of Freedom Wealth Management in the Basking Ridge section of Bernards. "Less than 45 percent of men under 35 invest in their company's 401(k)."

Not having a diversified portfolio.

"When I look at 401(k)s, the mistake that stands out like a sore thumb is a frightening lack of diversity," says Jo-Ann Gallerstein of JG Advisors in Morristown. "Most folks stick with the perceived safety of what they know best -- large U.S. growth stocks -- at the expense of adding funds with small, value and international companies.

"Investors have no better ally than diversity to cushion market plunges and to increase their return."

Not deciding on an asset allocation: what percentages you have in various types of investments.
A crude rule: Take your age and subtract it from 100. That's how much you should have in the stock market.

Failure to rebalance.

Every so often, check your asset allocation. If you decided on 60 percent in stocks and 40 percent in fixed income and you're now 70 percent in stocks, cut back your contributions so you're back to 60 percent. Unless you have decided to become more aggressive (maybe you won the lottery) or more conservative (you're getting older).

Not considering your partner's 401(k).

Patricia Q. Brennan, CFP, of Rutgers Cooperative Extension says, "One of the big mistakes I see is people not treating all of their investment money as a single pot of money and dividing it up accordingly.
"If each spouse makes a separate decision about diversification in his or her own accounts, the combined investments might not be appropriate for both of them -- or even make sense.
"Instead, treat your investments as if they were one portfolio. Think of it as a single investment 'pie,' where each of you are contributing the 'slices' (large cap, small cap, international, bonds, etc.).
"One spouse might be more conservative than the other. Therefore, the wife, for example, could provide the fixed-income investments and the husband contribute the stock 'slices' to the pie.
"Bottom line, always think 'total portfolio.'"

Being too conservative.

Studies have found that most 401(k) investors fall into one of two camps: the excessively conservative, who have nothing in the stock market, and the excessively aggressive, who have 80 percent or more of their money in the stock market.
Sheri Ianetta Cupo, CFP, of Sage Advisory Group in Morristown has seen investors who park their money in a stable-value fund until they feel more comfortable about the current market. They wait and wait and wait. By the time they feel comfortable, they have missed a lot of gains.

Being too aggressive.

These people may just be antsy. "They are constantly changing the investments in their 401(k) based on the current 'market buzz,'instead of looking at a longer time horizon," Christie says.
Then there are investors who think that the stock market keeps going up and up. They don't know that from August 1929 to June 1932, the Standard & Poor's 500 lost 83 percent of its value.
Some investors are too aggressive because they think it's a competition.
Ted Benna, an insurance agent who created the first 401(k) plan, says, "The major issue is having enough when you retire, not whether the value of your investments went up or down today."

Buying whatever is hot.

This is sometimes known as "shooting where the rabbit was."
A corollary is selling whatever is cold. Both strategies lead to buying high and selling low.
Not updating your beneficiary designation.
Steven Kaye, CFP, of Watchung reports that one woman finally checked her named beneficiary and found that it was her first husband, not her current fiancé.
Not complaining if your plan needs improvement.
"If I think that my clients have a 'bad' plan, I explain why so they can lobby their employer for improvements," Cupo says. "Bad plans have expensive fund choices, very limited fund choices (ignoring major asset classes), little or no match, a match only in company stock and so forth."
Choosing everything.
Cupo says, "I've seen some people put an equal percentage in each of the fund choices, thinking that this creates a balanced portfolio." Heaven knows what mess the investor may wind up with.
Having too much money in company stock.

Michael Green of Wechter Financial Services in Parsippany says, "One of the biggest mistakes in recent history was the investment of Lucent employees in Lucent stock. As the telecom boom began melting down in mid-2000, Lucent lost 99 percent of its market value and three-quarters of its employees. Many of those employees had socked away years of hard-earned money into Lucent stock. Now they not only didn't have their jobs with Lucent, but they didn't have most of the money they had saved for retirement.
"I stood in front of a room full of these employees and tried to help them, financially, in any way I could. Many of them broke down crying as they realized they would not be retiring for many more years than they planned."
Some observers think that 10 percent of your 401(k) in company stock is the high limit. Other suggest: nothing.

Not increasing your contribution when you can.

Benna says, "Assume you contribute 2 percent of your pay to your plan and get a 4 percent raise. Increase your 401(k) from 2 percent to 4 or 5 percent before you get used to seeing this additional income in your paycheck."
Spending the 401(k) money when you leave the company.
Benna asks, "Is having a new car (say) worth having to work for another 10 years?"

Withdrawing money for a financial hardship.

It had better be a darned serious hardship. Any money withdrawn is taxable and subject to a 10 percent penalty tax if you are younger than 591/2.
Typically, 30 percent to 40 percent of the money withdrawn is lost to taxes, Benna says. Also, your nest egg may shrink drastically. For example, if someone age 35 withdrew $10,000, it would have grown to more than $132,000 by age 65 if invested at 9 percent a year.

Keeping your money with your employer when you leave.

Jerry A. Miccolis, CFP, CFA, of Brinton Eaton Wealth Advisors in Morristown says, "A big mistake is keeping the 401(k) (with your employer) after you leave employment -- instead of doing a tax-free rollover to an IRA, given the relatively higher (and often deeply hidden) costs inside a typical 401(k)."
But it depends on the particular plan. "Rolling over to an IRA isn't necessarily a good thing if you are in a high-quality plan with negotiated fee levels," notes Kristi Mitchem, head of Barclays Global defined contribution business.

Borrowing from your 401(k) without good reason.

Benna warns: You must repay the loan. And stopping contributions to the plan while you repay the load will seriously reduce the amount you will save for your retirement. The losses are even greater if you miss your matching employer contributions. And if you leave your job before repaying the loan, the unpaid balance will be taxable.

Not asking for help.

Men, in particular, prefer to do things themselves -- and relatively few would dream of asking a financial planner for guidance.
By the same token, men don't like to ask for help when they're driving and they're lost, Brennan says. She adds: "Why does it take 10,000 sperm to fertilize one egg? None of them will stop to ask for directions."
-- Warren Boroson