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Consumer Borrowing in 2009 Will Mean Making a Plan

If you’re planning to buy a home or a car in 2009, the process is going to be a lot tougher without an excellent credit score and a significant down payment. So that means you’re going to have to work harder—and possibly wait a little longer—to make those key purchases.

What’s a good credit score? According to credit scoring giant Fair Isaac Corp., the best FICO score range as of late 2008 stood at 760-850, according to reports; that minimum is roughly 20 points higher than it would have been a year ago.

Barring any major federal action to loosen up these markets on the consumer level, these factors make it particularly important to make sure there are no skeletons in your credit closet.

The Federal Reserve Board’s statistics show that outstanding consumer credit has increased from a bit more than $2 trillion in 2003 to $2.5 trillion by the end of the second quarter of 2008, representing a 25 percent increase over five years. These high levels of debt, combined with a global credit crunch, have tightened up lending to all but the best customers–and they’re having trouble too.

If you have extraordinarily high debt levels, a record of late payments or very little money to put down on that home or car, you need to do some advance planning before you contact any lenders. Here are issues you need to incorporate into your planning:

Get some advice: You might be focused on paying down debt or saving up your down payment, but credit is only one part of your lifetime financial picture. It might be a good idea to talk with a tax professional or a financial planner to learn how to best use credit. It’s always good to determine what your limits should be.

Pay down the balances you have: Next year, Fair Isaac Corp., the company that created the FICO score, will be adjusting the way it computes its credit scores. One of the top changes will be a greater negative weight on credit utilization–how close you get to the borrowing limit of each of your accounts. The company says that for optimal scoring, each account’s outstanding credit should be no more than 50 percent of the credit line and hopefully less. As you’re paying down your balances, it’s wise to focus on the highest-rate credit cards or loans first.

Set a credit report review schedule: You have the right to get all three of your credit reports—from Experian, TransUnion and Equifax—once a year for free. You can do so by ordering them at www.annualcreditreport.com. Don't order all three of them at the same time, though. By spreading out the dates you receive each of your credit reports, you'll get a continuous view of how your credit picture looks because the three bureaus feed each other the latest information. It's a good way to clean up errors and keep a steady watch for identity theft. By the way, all those ads that advertise free credit reports? Most of them will demand a credit card number from you, which means at some point those reports won’t be free. The aforementioned Web site is the best place to get reports that are truly free of charge.
Pay on time and pay more than the minimum. If you’ve been late with payments or have stuck only to paying the minimums, it’s time to give that up now. Here’s what you do. To avoid late payments, note the due dates when the bills arrive and then set a date for payment five to seven days ahead so you’ll definitely be able to mail your payment on time. To put more toward the balance, finally do a budget–this will help you identify the non-essential spending you’ve been doing so you can pay your outstanding credit balances faster.

Cut up cards, but don't close the account: Closing accounts—even those that have had zero balances for years—is a bad idea. Lenders want to see a long record of responsible credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint.

No-doc or low-doc loans? Find another way: If you are self-employed or otherwise don’t have a lot of verifiable income, you may have the most trouble getting a loan. While banks and other lenders two years ago might have bent over backwards to lend to people with unverifiable income, that gravy train is mostly over now. If you do get a loan, you’ll pay far more for it than you would have before the credit markets blew up.


January 2009 — 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.

As Worker Shortage Increases, So Will Incentives to Keep Boomers on the Job

For several years now, various agencies and academics have predicted a systemic labor shortage that will create a labor shortage over the next 25-30 years as the gap between Baby Boomers and entrants of college-educated workers widens due to the Boomers’ mass retirements.

There are plenty of arguments over this theory, but employers are acting now to keep older workers in their jobs just a little longer. Some Boomers are finding out their bosses don’t want them to retire or are willing to make interesting compromises to give them an incentive to stay on full- or part-time. In a survey of older workers in the July 2008 EBRI Issue Brief, published by the nonpartisan Employee Benefit Research Institute (EBRI), 29 percent of workers said that feeling truly needed for an assignment was one of the top three most effective draws for staying on the job. Other incentives that ranked highly include:

• Receiving a full pension while working part time;
• A pay increase;
• Continuing company-subsidized health insurance at the same level as full-time workers, and
• Receiving a partial pension while working part time.
  

So what would convince you to stay on the job or un-retire if your employer comes calling again? It makes sense to talk over such issues with a tax professional and a financial planner. No matter what the incentives put in front of you, there are key issues to consider:

Make working retirement a variable in your planning: If you’re 5-10 years away from retirement and reviewing your retirement thinking so far, it makes sense to ask yourself under what conditions you’d return to the workplace. You obviously need to know based on current projections how much money you’re likely to gather from savings and other retirement resources. Then you need to consider how much money you’d be satisfied making in your post-retirement working life.

Consider how a return to the workplace will affect you personally and socially: If you’re 40, 50 or 60, working right now probably feels like breathing – when have you not worked? But it may not be the best option after a year or two out of the workplace.

How will it affect your taxes? Tax issues shouldn’t determine your ambitions and goals, but it’s important to consider the impact work-related income will have on your retirement. Many retirees find that it doesn’t take much post-retirement, work-related income to tip them into a higher bracket. Look for ways to control the taxes you’ll ultimately pay, including continued participation in qualified plans, IRAs, and other tax-favored accumulation vehicles and using annuity income to fill the gap between the beginning of the “post-retirement” period and the age when full Social Security benefits can be drawn without an offset for employment income.


Consider what earnings will do to all your retirement payments: If you are planning to work, consider not only the tax impact, but also how that might change the way you plan to draw on your retirement savings and investments as well as Social Security. If you are planning to work, it’s important you consider delaying receipt of those benefits for as long as you can.

Look at all the incentives: The top incentives luring experienced workers back to the workplace may be very attractive to you, or not attractive at all. Do some thinking about this. If you get the call, be prepared with a counterproposal of what would really convince you to come back.

Consider insurance issues: If a retiree returning to the workforce is already receiving Medicare or covered by a “Medigap” policy, they may be able to lower their costs or improve their coverage by accepting group coverage as primary underwriter of their medical expenses. Since people over age 55 are generally the greatest users of the healthcare system, coverage issues are particularly important to run by a financial expert.

Keep saving: If you return to the workplace, see what you can do to take advantage of your new employer’s 401(k) plan or any other tax-advantaged retirement savings benefit, particularly if an employer matches your contribution. Don’t miss a chance to enhance your retirement savings.

November 2008 — 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.

As Medical Expenses Rise, Don’t Miss Key Deductions

There are plenty of horror stories about uncovered medical expenses these days, and the truly horrifying part is that many of them belong to people who actually have health insurance. But anytime you or a family member is facing a health crisis or an unusual medical-related expense, it’s best to check to see if you might get a break from Uncle Sam.

A tax professional and a financial planner should be consulted to determine whether there are any tax issues or any ways to defer cost or save money at any part of the process. The Internal Revenue Service lets you deduct medical costs as long as they are more than 7.5 percent of your adjusted gross income (AGI). That means if your AGI is $50,000, you can deduct only those unreimbursed expenses that exceed $3,750.

Getting there requires some planning, which is why it’s so important to gather up every dime of unreimbursed medical, dental and vision care expenses and review it carefully.

Here are things people often miss:

Medically related travel: The IRS evaluates the standard cents-per-mile allowance each year for travel to and from medical treatments. Between Jan. 1-June 30, that rate was 19 cents a mile. Between July 1 and Dec. 31, the rate will rocket to 27 cents a mile.

Insurance payments from already taxed income: This includes the cost of long-term care insurance, up to certain limits based on your age.

Uninsured medical treatments: This includes what you spend for an extra pair of eyeglasses or set of contact lenses, false teeth, hearing aids or artificial limbs.

Rehab treatment: What you pay for alcohol or drug-abuse treatments can be noted on Schedule A.

Weight-loss to smoking cessation: If a doctor prescribes it, you’ll be able to deduct it.

Laser vision correction surgery: May be an allowable expense to deduct on your current taxes.

Doctor-recommended equipment and related expenses: If your doctor tells you that you need a humidifier installed on your heating and air conditioning system to help your breathing problems, you might be able to deduct all or part of the cost for the device as well as the additional energy costs to run it.

Some medical education costs: If you, your spouse or child have a chronic medical condition and you attend a conference to learn more about it, you can count admission and transportation expenses as a deduction, but not meals and lodging.

If you’re self-employed: You may deduct, as an adjustment to gross income, the full cost paid for medical insurance for you, your spouse and your dependents.

Lodging for out-of-town treatment: When accompanying a minor dependent to out-of-town medical treatment, hotel bills may be partially deductible.
Here are some less common expenses to watch:

Medically necessary home improvements or equipment: If you do a home improvement or bring in special equipment that’s considered medically necessary for you, your spouse or your dependents, you’ll be able to deduct the cost. These may include special entrance/exit ramps to your house, widening doorways, modifying kitchens or bathrooms, or adding a chairlift for the physically disabled. Because these improvements are not expected to add to the market value of the home, they are considered fully deductible. If the improvement increases the value of your home, only the amount of the expense that exceeds the increase in the property value of your home is deductible.

Nursing services: If you are paying out-of-pocket for a home-based nurse, these expenses may be deductible.

Lead paint removal: Lead paint is dangerous, and the money needed to remove the paint from a home is deductible.


November 2008 — 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.

Preparing Your Finances for a New Baby

Your parents might have mentioned at least a couple of times while you were growing up how wonderful and expensive you were. The bottom line? Bringing a child up is a tremendous financial responsibility, and it’s better to plan in advance than deal with a surprise down the line.

The U.S. Department of Agriculture compiles an annual survey on what it costs to raise a child from birth through age 17. In 2007, in the lowest income group, expenses ranged from a total of $7,830 to $8,830 for a two-child, husband-wife household to between $15,980 to $17,500 for families in the highest income group. Once again, those are the latest annual figures – so if you held spending unrealistically static for the next 17 years, the cost of raising a child in the lowest income group would range from $133,110 to $150,110 adjusted for inflation. In the highest income group, that range would be between $271,660 to $297,500.

Note that we haven’t begun to discuss college yet. Across the United States, the average tuition and fees at four-year private institutions in 2007-2008 was $23,712, representing a 6.3 percent increase of more than $1,400 over 2006-2007, according to College Board’s 2007-2008 Annual Survey of Colleges. At public four-year colleges, the average in-state tuition and fees averaged $6,185, a 6.6 percent increase.

All parenthood comes at a price. But with the help of a financial planner you can create a strategy to afford kids from birth through college. Here are some key points in that process:

Create or review your financial plan: A financial plan is a written set of goals, strategies and a timeline for accomplishing those goals. For many individuals, it may be the first time they seriously examine their financial future in such black-and-white terms. But it starts with the basics – determining how much you really have in savings, debt, insurance and investments. Your financial planner can also help you understand how much the additional costs of raising a child, including the startup costs of birth or adoption will affect all those numbers. A financial plan should be reviewed with every major change in life, and having kids is certainly one of those landmark events.

Get rid of your high-interest debt: A major decision like having a child is a good reason to take a “clean slate” approach to debt. Before you can build a reserve fund, it’s wisest to pay off your credit cards first.

Make sure you have a will: If you die without a will, you won’t have a clear path of guardianship for your child, nor will your assets be properly directed to support that child. Any good adoption attorney will insist that you develop and file a will as part of the adoption process.

Check your insurance options: In today’s health insurance environment, the addition of a child to a policy can bring tremendous additional cost – sometimes without the guarantee of the best coverage. Check with your employer or your independent insurance provider to make sure you have the best coverage for what you can afford. Also look into medical savings accounts with your financial planner if you decide to take a high-deductible policy to keep premiums low.

Know your tax advantages: If you’re adopting, you can get some tax relief. In tax year 2008, parents will be entitled to a one-time tax credit of $11,650 per eligible child. There are income limits – the credit disappears for individuals with modified adjusted gross income of between $174,730 for individuals and $214,730 for couples.

Ask what your employer can do for you: If you’re working at a family friendly company, it’s often considerably easier to apply for leaves of absence or work schedules that make more sense when you’ve got a young child at home. Some companies may offer to reimburse some portion of their workers’ adoption expenses.

Build your reserve fund: When a baby, toddler or older child comes into the house, money flies out the door at a velocity most childless people have never seen. Children always cost money and sometimes unpredictably so, but it pays to build your savings before they arrive so you won’t overuse your credit cards. Also, it’s possible that a birth mother’s health may take a turn during the pregnancy, so that’s an expense that needs to be anticipated.


September 2008 — 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.

Blended Families Should Plan Early for Their Kids’ College Financial Aid

Finances for blended families – one of the fastest-growing demographics in the United States – can be complicated. The needs of stepchildren may fall into direct conflict with one’s own, and aside from the many financial entanglements that result from previous marriages or partnerships, college planning is a particular area where couples should seek help.

Why? Because more than 60 percent of all college students now apply for some form of financial aid, and those numbers will go higher as college costs rise. Add that to the sometimes conflicted financial goals within families with children from previous marriages and relationships, and a couple’s financial picture may become a source of considerable strain based on negotiations with former spouses over the welfare of children from previous relationships.

That’s why both tax experts and financial planners should be consulted before couples remarry – to address the host of financial issues blended families face. In particular, individuals with children from a previous marriage should think through how college will be funded for their own children as well as any children born after the remarriage.

Here are several key issues that soon-to-be remarried individuals should consider with regard to planning for college:

Divorce agreements should spell out college support: By the time individuals are planning to remarry, a divorce may be long past. But in cases where a divorce may be pending before remarriage, couples may have the opportunity to secure adequate college support if state laws allow that as part of a settlement. Even if the children are very young, support agreements should always look ahead to the years when the child heads to college, not only to make sure that the education is properly funded, but to spell out those financial responsibilities for each divorcing spouse.

Prenuptial agreements should too: Even if a remarrying couple has very small children, it makes particular sense to look to the future when the children of this blended family are heading for school. In many situations, it’s common for remarrying spouses to shoulder the full burden of the blended family’s college expense. But a prenuptial agreement – a financial agreement made by two individuals planning to marry -- can do two things. It can look into the past and document existing agreements with ex-spouses to pay for college expenses and other financial support and it can look into the future to do contingency planning for the kids in case this marriage ends up in divorce as well.

Get advice about the FAFSA: On January 1 each year, students become eligible to file their Free Application for Federal Student Aid (FAFSA) online for the coming school year. This process can get very confusing in blended families because parent-child relationships determine the level of financial responsibility and the potential for aid. In some cases, it might be wiser for a couple not to marry while children are still receiving financial aid in college, so it is critical for divorced spouses to get advice on this issue. Colleges will determine financial aid packages on the custodial and financial profile of parents based on any of the following parental scenarios:

• The parent who had provided the majority financial support to the child during the past 12 months.
• The parent who supplied more than half of the child’s support and pledges to continue to do so.
• The parent who has legal custody of the child.
• The parent who claimed the child as a dependent on their taxes.
• The parent who provided the most financial support to the child during the most recent calendar year.
• The parent with the greater documented income.

College financial aid is tough enough for traditional families to navigate. A financial planner with specific expertise in navigating financial aid issues as well as your overall financial picture can help you make the best choices in preparing your application for college aid.

Remember that if the parent who provided financial support was single, divorced or widowed but has since remarried, the student will have to submit the stepparent’s financial information. While this information will be evaluated, it doesn’t legally obligate the stepparent to provide financial assistance.


September 2008 — 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.

Always Have a Plan for Leftover 529 Plan Money

With the high cost of education, it’s hard to envision that there might be money left over, but it does happen. Kids get scholarships; they might finish early; sometimes they quit school never to return.

In the case of 529 college savings plans, it’s particularly important to have a backup plan for the possibility of leftover funds, not only to support another family member’s educational goals, but as a potential addition to your estate planning.

As a refresher, a 529 college savings plans – named for the federal law that created them in 1996 – allow a parent to open a tax-deferred college savings plan with as little as $25 to start in some states. You should know that a 529 college savings plan is NOT the same thing as a 529 prepaid college tuition plan. Prepaid tuition plans are just that – tax-deferred savings plans that allow you to save for tuition for in-state schools [though some plans allow you to transfer out a portion of those assets to out-of-state schools]. Also, it’s important to note that prepaid tuition plans are not an automatic guarantee a student will get into that college.

As part of sweeping pension reform signed into law by President Bush in 2006, withdrawals from 529 plans are now permanently tax-free. In some states, contributions may also be deductible on state tax returns. All 50 states now have 529 plans college savings plans, and a majority of them provides additional incentives, such as a state-tax deduction to in-state residents who invest in their respective plan.

It’s a good idea to have your financial adviser help you sort through the details of various state plans. There are various services – including Morningstar Inc. – that now rank the offerings of each state’s plan. SavingforCollege.com and finaid.org are leading sites to help educate you in how these plans work.

So, if you’ve made all these moves, how should you handle surplus 529 funds? There are a few options:

Change the beneficiary: If Student #1 doesn’t spend out the funds, you can replace the beneficiary with another blood relation – that means brother, sister, first cousin, even you or your spouse – to continue spending down those funds for educational expenses. Also, if you have a grandchild headed for college, you can arrange for your 529 plan to make the withdrawal payable to your grandchild as the beneficiary.

Take a penalty and spend the money on whatever you want: This isn’t the most sensible financial option, but you do have the option to take leftover funds as a nonqualified distribution for your own non-educational use. However, you’ll owe ordinary federal tax with an additional 10 percent on the earnings portion of the distribution. Don’t forget state tax, either.

Let your successor owner make the decisions. When you apply for the account, you are asked to name a successor owner. When you die, you can simply trust the successor owner or the beneficiary of the funds to do what they want with the money.


September 2008 — 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.

Top 10 Money Moves for Today’s College Freshman

With average college tuition up 6.3 percent at private schools and up 6.6 percent at public schools this past school year, money management is a bigger issue than ever on college campuses. That’s why it’s good to send your freshman off to school with a 10-point plan on how to best manage their money:

1. Take baby steps with credit: It’s one thing for a teenager to use their parents’ credit card while they’re still living at home. It’s quite another when they get their first taste of freedom hundreds of miles away. Parents may co-sign the student’s credit card but keep it in the student’s name. That way, parents will know when financial missteps occur, which will be a strong incentive for the student to keep his credit rating clean for the next four years. Most important: Parents should do whatever it takes to make sure the child doesn’t sign up for any credit cards on campus.

2. Bank smart: Students need to get some familiarity with the banking system before they head to college. Kids generally should set up a checking account on campus, but talk to them about debit options and how banking fees (particularly for overdrafts) can eat away at their money. Also ask your child to ask the bank about direct-deposit options if you’re planning to deposit money for their tuition or agreed-to spending needs. You want your child to be independent, but if necessary, make it a joint account and check those balances online.

3. Work with them to set up their first emergency fund: A young person should get used to the idea of savings and reserves for unforeseen events such as emergency trips home or related expenses. Make it clear that late-night pizza and mochas are not an emergency.

4. Put the student in charge of maintaining her financial aid: Each year, the FAFSA (Free Application for Federal Financial Aid) is due in June. State applications are due earlier. While parents need to run the financial aid process, students need to be equally aware of how their education is paid. Everyone should file the form whether or not you think your child may be eligible, and your child should be searching for scholarships at all times. It might also make sense to take your child to your tax preparer to make sure you’re taking advantage of the child’s “tax capacity” and other income tax opportunities. It will be a good learning experience.

5. Make them budget: If they’re leaving for college with a new computer, consider giving them personal finance software to track their everyday expenses and make sure the computer has a security password. Work together to determine necessary realities about everyday expenses, tuition and financial aid. Then tell your kid that when he or she comes home at Thanksgiving, you will sit down again to review those figures and make reasonable adjustments. You obviously need to trust your kids, but you might want to do this for as long as it takes them to develop solid and consistent money habits.

6. Schedule a holiday budget and credit check: When the triumphant freshman returns home for the holidays, schedule some R&R, home cooking and the first reading ever of their fall budget figures and their first credit reports. Since credit reports can be ordered online, parents and student should sit down with each of the child’s three credit reports from Experian, TransUnion and Equifax and review them for activity and errors. Since everyone is entitled to one free report from each of the agencies each year, go to www.annualcreditreport.com for theirs.

7. Help them open their first IRA: Get some advice on this from a trusted financial planner but if your 18-year-old child is earning wages by working part-time at school, at home during breaks or for your own company, have them open a Roth IRA in a growth fund. Make sure they understand this is essential to their future savings so they don’t cash it in.

8. Discuss identity theft: Personal financial data left on laptop computers, cell phones and other electronic devices can be readily stolen on campus or in a dorm or roommate environment. Tell your kid to keep all paper records in a safe place and introduce passwords to keep all their digital information safe.

9. Get them networking: Internships and jobs in their chosen field during summer breaks can give your student a head start on their career path. Encourage them to research these opportunities freshman year so they’ll be in the front of the line when it’s time to apply.

10. Handle mistakes the right way: Most kids will make money mistakes in college. If they overdraw a checking account or overdo it with their credit card, make the criticism constructive but firm and always come up with a corrective plan you’ll work on together.


August 2008 — 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.

Insuring Your Vacation? Make Sure You’re Actually Covered

High energy costs, a tough economy, you name it; there’s still plenty of travel delays and headaches in the skies and on the ground. Those delays can potentially cost a lot of money, which is why it’s a good idea to carry travel insurance on expensive trips to cover missed connections that can delay your arrival for a day or more. The same goes for lost baggage or sudden medical expenses in different regions of the U.S. or other parts of the world.

But take a moment before you rush out to buy a Cadillac policy for your two-week trip to Hawaii. Travel insurance, like any coverage, should be tailored to your specific needs. You’ll see it sold as a one-size-fits-all product, but that’s not how you should buy it. Here are some pointers:

Call your HR department or health insurer: Yes, you might be out hundreds or perhaps thousands if you can’t get to your destination, but that’s not the biggest potential money risk on any trip. What if your health benefits won’t cross state lines, much less international borders? As you’re planning your trip, check to see if your personal health coverage for you and family members will be effective at your destination. If the answer is no, see whether your credit card company offers health care coverage there and if so, what it costs and what it entails. The next step is purchasing specific travel health insurance that will be accepted at your destination, which may be sold in a package with other coverage we’ll mention momentarily. Also, it might make sense to make an action plan for a health emergency. Call the concierge at your destination to get information on the best nearby hospitals and clinics so you can check if your coverage applies, and see what ground or air transport options exist to get you to the best hospital. Transport can be costly if you’re in a remote location.

Start at least a month in advance: Most people make major trip reservations fairly far in advance to get the best fares and hotel rates, and you’ll need to do the same for travel insurance. You’ll find that carriers are particularly picky about pre-existing conditions for medical or dental treatments, so read the fine print.

There’s no such thing as full coverage – unless you’re willing to pay for it: What’s full coverage? That’s a good question, and it sometimes depends on dozens of factors unique to your trip. Your carrier might not offer protection on your chosen airline or cruise line. You’ll find that terrorism insurance is rare and complicated. And you have to examine medical insurance options closely to understand exactly what is covered. The rare soup-to-nuts coverage – covering trip cancellations, lost luggage, delays that leave you stranded, flight accident, emergency medical and medical evacuations – is typically priced in the hundreds of dollars and may only cover only up to 75 percent of the total cost of your trip.

Make sure your insurance covers missed connections: Cancellation insurance doesn’t cover everything. Investigate whether a missed connection – and the resulting meals, overnight hotel bills and taxi or train transportation you’ll need if you’re stuck overnight in a strange city – is covered.

Start online: Go to some of the leading websites that deal in single or multiple-insurer offerings. InsureMyTrip.com is a market leader and a good first stop in analyzing coverage – you start by punching in the necessary information on your trip (dates, age of travelers, medical coverage needed, etc.) and it spits back more than a dozen possibilities at all price levels. Clicking on any of the choices will give you a detailed view of what those policies will and won’t cover.

Ask about hurricane coverage: The 2008 Atlantic hurricane season began June 1 and will run through the end of November. Even if you don’t live in a hurricane area, hurricanes can disrupt the flow of air travel all over the country. Ask whether your travel insurance has hurricane coverage – or other weather-related coverage -- and what you’ll need to file a claim.

Fight ATM fees – before you leave: It’s not guaranteed, but your bank might agree to waive any fees you incur at overseas ATMs if you ask in advance. Call them and check.

Watch that cell phone: Increasingly, domestic cellular phones are working in more areas of the world. That’s the good news. The bad news is whether you’ll be charged extra fees for using your phone in those areas. Check before you leave.

Marooned? Ask for a break: If you’re sidetracked as the result of a major disaster (weather-related or otherwise), always ask if your airline, hotel or other components of your vacation might be willing to give you a credit or discount on your bill. It’s rare, but some destinations might see it as a chance to build goodwill so you’ll be a repeat customer. The worst thing they can do is say no.


July 2008 — 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.

Don’t Make These Retirement Planning Mistakes

It really doesn’t take much to derail a retirement plan. Most of the errors in planning for retirement are those of neglect, omission or panic. If you don’t know exactly where your retirement plan stands, get some advice – a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional is a good start – to review your overall retirement options and give you some ideas where to start.

Here are some common mistakes people make:

Failing to start: It is amazing how many people find so many excuses never to start retirement savings. But no matter how daunting debt or other spending priorities seem, you have to save for retirement on a regular basis, even if it’s only a cursory amount. Over time, those small assets will grow to something considerably larger.

Failing to link planning for your at-work and personal retirement portfolios: One of the critical problems in retirement planning comes from failing to treat the investments you make at work versus the ones you make independently as a unified whole. Working with a financial planner can help you look at every place you’re putting your money and finding out if you’re implementing those assets in the right way.

Failing to evaluate a prospective employer’s retirement options: Benefits can be worth as much as a nice paycheck. It’s possible you might be working for a company that still offers a traditional defined pension benefit plan in addition to a 401(k) plan. If you think you’re going to get an offer, it’s wise to interview prospective employers on the benefits side of what they’re offering you – particularly the timeframes on when those various benefits kick in. Above all, company matching of any assets you place in your retirement funds is key as well as the vesting period for making those assets your own.

Failing to consider both kinds of IRAs: The biggest difference between a traditional IRA and a Roth IRA is the way Uncle Sam treats taxes on both types of IRA investments. If you put money in a traditional IRA, you’ll be able to deduct that contribution on your income taxes. In a Roth, you don’t receive the tax deduction for those contributions, but when it’s time to take the money out, you won’t have to pay taxes on it. If you and your spouse are not covered in workplace plans, you may be able to fund fully deductible IRAs. Talk to a tax professional or a financial planner about which options are best for you.

Failing to update your beneficiaries: Starting in 2007, a direct transfer from a deceased employee’s IRA, qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity, 403(b) plan or a governmental deferred compensation plan to any qualified IRA can be treated as an eligible rollover distribution if the beneficiary is not the deceased’s spouse. That means your kids or any other designated recipient can inherit your IRAs without negative tax consequences at that time. Non-spouse beneficiaries need to check with a tax expert when they must begin distributions from an inherited IRA. Of course, no matter what the investment, make sure your beneficiaries are always current.

Failing to reinvest your tax refunds: Did you know you could deposit your tax refund directly into your IRA? It works for a health or education savings account as well. While many people use their tax refund as a bonus to buy a treat or pay off bills, consider filing your taxes a bit early and arrange to e-file a direct deposit to your IRA so you can note that deposit for the 2007 tax year by next April 15.

Withdrawing money early from an IRA or blowing a rollover: Money taken out of an IRA is subject to income taxes and a penalty if you are under 59 ½ years of age and do not put it back into an IRA within 60 days. When moving assets, most of the time a trustee-to-trustee transfer can be more efficient and with less margin for error. If the IRA distribution check is made payable to you, there is a greater chance you’ll miss the 60-day deadline and you’ll face taxes and penalties.

Failing to contribute the maximum: Not every employee can afford to contribute the maximum allowed by their respective work retirement plans or individual retirement investments, but it should be a goal.


May 2008 — 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.

Why a Business Owner’s Exit Plan Is So Important

There are plenty of days when we want to “take that job and shove it.” But what happens when we’re sick of a job we’ve created for ourselves in a business we’ve founded?

The idea is to make a plan that allows you to get out before you tire of your company or before you are overwhelmed by personal, industrial or economic factors that force you to sell, transfer or close a company. This is called an exit plan.

Everyone glamorizes creating a business as a way to completely control one’s own destiny. But it’s ironic how many businesses go on day-to-day without any thought to a proper ending. An exit plan is not only a set of mental notes about how one should pack up and move on. It is a way to focus an owner’s thinking about:

• A family legacy – should a business be passed on to family or associates, or should it simply be sold or closed?
• The owner’s own career goals – does an owner want to do this for the rest of his or her life, or should they make way for other professional or personal directions?
• The creation of wealth – too many people think of a business as a job and a paycheck instead of a creator of wealth that can support one or more generations of a family. A paycheck supports short-term goals; wealth is accumulated money that can either be invested smartly in the business or outside the business to support philanthropy, or family and personal goals.
• A retirement strategy that allows an owner to do everything they’ve dreamed after they quit.

An exit plan isn’t born in a day. In fact, many financial experts in investment, tax and estate planning disciplines think it’s wise for business owners to come up with an exit plan when they start a company if possible, and if not, within 3-5 years of the date they’d like to exit. A CERTIFIED FINANCIAL PLANNER™ professional with specific expertise in working with business owners could be a helpful partner in helping you determine the following:

• How many more years do I want to run this business?
• What’s the optimal way to get rid of the business when I’m ready to go?
• Do I want to sell it, transfer it to family or associates or just close it down?
• What if I got a fantastic offer on the business tomorrow? What would I do?
• If I sold my business, how would I protect myself from a personal and business tax standpoint?
• How do I communicate my wishes and ideas with my spouse, kids and other family members with a stake in the business?
• What about my employees, clients and customers?
• How do I protect them if I die or decide to leave?
• How much money do I want in my life after my business, and what would I do with it?
• What should I do to make my business as valuable as possible?
• How do I plan the tax implications of my actions toward the end?
• If I have investors, how do I make them happy as I leave?
• Are there any specific accomplishments I want this business to make before I leave?
  

An exit plan allows you to not only to change your own employment, but to help you change your whole career if you choose. No one has to stay in the same industry – or company – for life, and with an exit plan, you can leave open the possibility for an endpoint that will allow you to travel, do philanthropy or any number of new activities in business or other walks of life.

The financial planning aspect of the exit plan will align your monetary needs with your career or post-career needs. Your exit plan can do whatever you want it to. Some entrepreneurs build sabbatical time and other arrangements for study and learning into the timeframe leading up to their exit to help them refresh their minds and decide what their next career or vocation will be.

The bottom line is that it’s never really too early to start thinking of an exit plan for a business you’ve formed. Today, smart entrepreneurs start asking themselves those questions as they’re organizing and forming companies. Get some good advice to start that discussion.

May 2008 — 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.

Q&A: Consider Making an Estate Check-Up a Multi-Generational Family Matter

Questionable estate planning has gotten some recent attention with the sudden death of actor Heath Ledger. The 27-year-old actor died suddenly this year with an older will that provided only for his parents and other immediate family – he never revised those documents to accommodate his young daughter or the child’s mother.

Though Ledger’s parents told the media that the daughter and mother would be fairly provided for, that’s not the same thing as a solid estate plan that leaves nothing to chance. And if Ledger’s death offers a lesson, estate planning should be done at the earliest point in your life that you start to gather assets and responsibility for others.

In estate matters, it’s a good rule of thumb to review your plans every three years or whenever there’s a material change in your family’s lifestyle – a marriage, a divorce, a remarriage, the birth of children, the loss of an immediate family member or a major rise or fall in assets. Those are the biggies.

For individuals and couples with elderly parents and/or young kids starting out on their own, it might be smart to do a multi-generational estate checkup at the same time. Why? Because in families with significant assets or other pressing financial issues involving businesses or dependents, each generation’s wishes for the dispersal of shared or personal assets should be documented legally and shared with all the relevant parties.

Q: What are some of the multigenerational issues in estate planning?
A: In some families, this may mean the future of a multigenerational family business, perhaps one of the most complex estate issues any family will face. In others, the assets may consist mainly of cash, property and other investments, but similar problems can occur when all the parties aren’t on the same page about who will get what.

Q: What kind of problems can be prevented by multigenerational estate planning?
A: It’s important to realize that estate planning isn’t just about splitting up money – it’s also about disaster planning. If a family hasn’t planned for business succession, it’s possible that other damaging secrets may emerge like problems in the business or significant debt the family might be liable for. Also, the sudden death or lengthy incapacitation of the head of a family may turn chaotic without proper health care or financial directives to manage the person’s illness or the money and business issues that follow.
Multi-generational estate planning may not be the easiest thing in the world to accomplish given how families communicate – or don’t communicate – about money. But such dialogue might be the smartest thing any family does together.

Q: How does an estate plan support a family legacy?
A: Proper discussion, documentation and review of a family’s assets – with the participation of the right legal, tax and financial planning advisers – can keep more of those assets in the family and working to the family’s wishes. In the case of a family business, generations of family members have built careers there or might otherwise be depending on that income to live. Yet a business might not even be at the heart of an issue – families may also have foundations or other charitable activities they’ve supported for years with a certain mission that those in charge don’t want changed. More than a few families have imploded in ugly legal squabbles over these situations and more. The results can be lengthy legal battles with damaging tax consequences, a potentially unfair split of assets among relatives or simple mismanagement of those assets going forward.

Q: How can estate planning fail?
A: Bad estate planning can happen in the wealthiest of families. It’s not unheard of in the richest of families for the matriarchs and patriarchs to die or become incapacitated without proper wills or directives for their heirs. Every adult family member – young or old -- should commit to the creation of such documents and as appropriate have them written in a way that doesn’t shipwreck the family fortune or mission, no matter how big or small it is.

Q: What should be done about non-married family?
A: The Ledger situation is a good illustration of the potential for estate problems when couples are not legally married. That’s why multi-generational planning should also address estate and child custody arrangements for unmarried heterosexual or gay couples who might or might not have done the appropriate legal planning necessary to secure the estates of their current or past partners and their heirs. At the very least, all family members should understand the need for such planning to avoid conflict later. As non-traditional families become more common, families need to be open to that discussion.



May 2008 — 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.

A Long-term Care Insurance Primer

As millions of Baby Boomers head into their retirement years, it’s surprising how few actually know that the government provides little more than a few weeks of financial support for home-based or nursing home care when the average person needs it for at least a year.

A 2006 Genworth Financial Survey says the national average private room rate at a nursing home – the most expensive care option – was $194.28 per day/$70,912 annually.

Long-term care insurance (LTC) may be one solution for those who need to bridge the gap between their savings and the actual costs they’ll face.

Determining and paying for long-term care is almost too complex a topic to be covered in a short article like this, which is why it makes sense to discuss your individual situation with a Certified Financial Planner ™ professional. Here are some of the questions you need to answer before investing in long-term care insurance or other options:

What resources do you have? We’re not just talking about money here. While care giving puts a strain on family, it’s important to consider whether family and friends are truly willing and able to help with your care, which can provide a considerable financial and emotional benefit. Also, if you live in a community with reliable volunteer resources to help, that’s something to note, though today’s services may not be there tomorrow.

How old are you and your spouse and what’s your health history? People in good health purchasing long-term care insurance at the age of 55 usually get the most affordable deal in LTC insurance. But an individual’s family health history and current health status are the real determinants of what your LTC insurance policy will cost – or if you’ll qualify for coverage at all. Also, it’s important to note that 40 percent of long-term care is provided to individuals between the ages of 19 and 65, so the need for care can strike at any time.

Are you a single female? Again, personal and family resources come into play here, but since women typically live longer than men – and they still earn less on average than men – women should take a heightened interest in providing for their long-term care safety net. Long-term care insurance might be a good solution given their other investments and their health history.

What types of services are covered? Over the course of time, long-term care policies have evolved to place more emphasis on home-based care or assisted living, since most people would choose to recover or live out their last days in a familiar environment. A basic LTC insurance policy pays for assistance with activities of daily living including eating, dressing, bathing, toileting, incontinence, and transferring (bed to chair, etc.). Each policy lists the types of services that are covered under nursing home care and under home health care. Homemaker services are generally covered and other services as listed in the policy.

What triggers coverage? A qualified LTC policy won’t go into effect until the covered individual can’t perform two tasks of daily living for a period, typically 90 days, or when that person needs substantial supervision related to cognitive impairment. This is where you have to read the fine print since some policies are more restrictive than others. More affordable policies generally take longer to kick in. See if coverage for other physical ailments is available as part of the policy and what per-diem or monthly allowances are offered.

What if I never want to go to a nursing home? The idea is to cover every eventuality. The best-designed LTC policies will pay the same amount of benefit whether care is received in a long-term care facility, an assisted living facility, an adult day care center, or in the home. Some policies do offer reduced percentages for home health care versus nursing home care, but it’s a better idea to keep full percentages on home health care benefits since most people would rather stay in their homes.

What’s the record of particular companies in this business? Over the past generation, more companies have gotten involved in the LTC insurance business, and it makes sense to see not only who the leaders are at the time you’re buying and what they’re offering, but how financially healthy these companies are and have been over the course of time. You’ve probably heard of insurance companies that have gone out of business and stranded customers. There’s no restriction on that happening with LTC providers, so check their ratings and financial history very carefully.


April 2008 — 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.

How Not To Go Broke If Your Kids Move Back After Graduation

The after-college reality is much different from a generation ago. Two thirds of college graduates owe significant money after graduation. According to the Project on Student Debt, debt levels for graduating seniors with student loans from 1997 to 2007 more than doubled from $9,250 to $19,200 – a 108 percent increase.

That’s why it’s now very common for graduating seniors to move back to the family manse for some time after graduation. For those who don’t have ready employment, it’s probably a necessity. For those with jobs, moving back in with the folks is a way to save for a down payment on a car or possibly a home.

It’s absolutely fine to welcome family back home, particularly if it means you really have an opportunity to help your kids. But it’s not a terribly good idea to welcome home what the experts are calling “boomerang kids” if you’ve put your own retirement savings on the back burner and you’re also facing both expense and strain from taking care of elders.

Like all family transitions, this one requires some planning, and it may not be a bad idea to get some advice. A Certified Financial Planner ™ professional can give you advice not only how to manage the financial aspects of your relationship with your grown child, but how to make sure the other aspects of your financial life are healthy.

Here are some steps:

• Promise not to overextend yourself. Don’t let the return of the prodigal son or daughter derail your own retirement or debt repayment plans. Parents may also have some challenging financial problems to solve, and your child should understand that you should be helping each other.
• Still your house, still your rules: Granted, your kid’s now an adult, not an 11-year-old. But if your child is moving back in, you need to set specific rules for the way you want him operating under your roof. If you want him to pay rent (it’s probably a good idea), set those terms in writing. Set terms for household expenses if you prefer. And to make sure there are no misunderstandings, make sure you both understand where you stand with non-financial issues – how much of their stuff you’ll want them to move in, overnight guests, checking in when away, etc.
• Set an endpoint: If your child needs a year to start paying off credit card bills or tuition debt or is hoping to scrape together enough for a down payment on a condo, discuss it and figure out how long that’s going to take. Deadlines enforce goals.
• Chores are necessary: You may charge rent or demand payment in kind, but a mixture of both is best. You’re not running a B&B. You might insist that your child handles laundry, makes (not buys) dinner a few times a week or helps with a major home renovation project if they have those skills.
• Supervise their financial planning: Some parents bail out their kids entirely. Instead, work with them to build better financial habits. Help them set a budget after you both figure out their net worth – a real eye-opener for many young adults. You might consider, however, matching the amount that they’re putting toward debt or a home down payment each month. If you don’t want to take full responsibility for that training, you might set up one or a series of meetings with a CFP® professional to get them started the right way. Consider it a graduation present.
• Keep records. Even if you never share these with your kid, make sure you keep track of payments, chores and other in-kind efforts made by your “tenant” during the term of his or her stay. It’s a way to look back and see what’s gone on during this phase in your relationship.
• What about the rent? If you are in a relatively good financial position and you don’t need your child’s rent to pay your own bills, you might consider investing those amounts on behalf of your child to chip in for his or her home down payment or possibly a wedding.
  
  
  
  April 2008 — 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.

Estate Planning for the Worst Possible Scenario –The Death of Both Spouses While the Kids Are Young

The reason why some parents hesitate to make an estate plan is understandable. It calls into consideration your worst fears – the possibility of your death or your kids facing life without one or the other parent.

But what about an even worse scenario – the possibility that you and your spouse could die at the same time or in close succession by accident or illness. One might be reminded of the situation of actor Christopher Reeve and his wife Dana; Dana died of cancer within two years of her husband’s death and they left a teenaged son behind.

From the standpoint of individuals, planning generally gets done with the mindset that one parent will be left to raise any minor children and continue earning and investing for the family. But in reality, you both should consider a plan that accommodates the absolute worst scenario -- the loss of both parents and what would happen to your kids’ lives and finances if that happens.

Most financial experts advise you to revise your estate plan every five years or as lifestyle issues change. It’s important to get help for the financial aspects of your estate plan as well as legal instructions for the support, education and general well-being of your kids. Here are some general topics to explore with tax and estate attorneys as well as a financial planner such as a Certified Financial Planner ™ professional:

Talk first about who would best raise your kids: This is clearly the most important decision you’ll make. You need to find the best person – or couple – to raise your kids if something happens to both of you. You know better than anyone else what hard and soft skills that will require – they need to be people whose own lives won’t blow apart by adding your kids to the mix. It’s also wise to name alternates in case the people you name have a change of heart for any reason, or if something happens to them.

Then talk about who will handle the money: After you choose your guardian and your alternate, you need to build a financial plan that will support those decision makers in the best way possible. Many experts advise you to split the responsibility of handling the kids and the money. This is a personal decision, obviously, but the concept is a good one. Absorbing someone else’s kids into a new family in a tragic situation is a tremendous responsibility with plenty of margin for error. For some time, it will be a full-time job. The appointment of a sharp financial trustee will allow you to allocate resources for day-to-day living expenses, education expenses and if there’s money left over, for investment.

Start thinking through an estate plan: For most of us, it’s going to be a challenge simply to stretch what we have to help our kids after we die. After all, when we go, there goes the weekly paycheck. For individuals who own businesses or have more substantial assets, the idea is to protect first those assets and then continue to grow them as investments. The trustee and whatever advisers you attach to this process will be key. But the first step is to get some general advice on managing the assets you can leave behind or backstopping your kids’ anticipated needs with various insurance options you can put in place now.


About those insurance options: Some married couples may elect to buy insurance together within the same policy. These policies take the form of either a joint first-to-die or a joint second-to-die (survivorship) design. With first-to-die, the death benefit is paid at the death of the spouse who dies first. With second-to-die, no death benefit is paid until both spouses are deceased, and that makes them a useful estate-planning vehicle in the right situation. Ask which policy choices are right for you from a qualified agent.

Make sure you figure this worst-case scenario into your education savings plans: Elementary, secondary and college education costs – particularly if all are in private schools -- need to be factored into the estate picture, and a CFP® professional might be useful in getting a savings plan in place while you’re alive that covers all possible events.



April 2008 — 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.

Get A Head Start On Tax Planning For 2008

It’s still a month until most of us will file our 2007 tax returns, but it’s a good idea to keep in mind key tax changes that will affect our 2008 returns. Here are some of the highlights:

Wider tax brackets: In one of the rare cases in life where inflation looks like a good thing, all tax-bracket thresholds will be increasing. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $65,100, up from $63,700 in 2007.

Personal exemption: The personal exemption – which you’re allowed to claim for yourself and each dependent you have -- will go up $100 to $3,500 for 2008.

Standard deduction: Single filers will see this deduction increase $100 from 2007 levels to $5,450. Married couples filing jointly will see their standard deduction rise to $10,950, $200 more, and the amount for heads of households who don’t itemize will be $8,000, up $150. For married taxpayers age 65 and older, they’ll be allowed to add $1,050 to the regular standard deduction – unchanged from 2007, and singles will get an extra $1,350 compared to $1,300 in tax year 2007.

Phase-out of itemized deductions: Taxpayers will start to see the value of their itemized deductions go down after their taxable income exceeds $159,950 in 2008. That’s $3,550 higher than in 2007.

Retirement plan contributions: The contribution amount allowed for Roth IRAs begins to phase out for joint filers with incomes exceeding $159,000 (up from $156,000 in 2007) and $101,000 (up from $99,000) for singles and heads of household. For contributions to a traditional IRA, the deduction phase-out range for an individual covered by a retirement plan at work begins at income of $85,000 for joint filers (up from $83,000) and $53,000 for a single person or head of household (up from $52,000). The annual contribution limit for most defined contribution plans rises to $46,000, up from $45,000 in 2007.

Hope education credit: The maximum Hope credit, available for the first two years of post-secondary education, is $1,800, up from $1,650 in 2007.

Energy breaks: The federal government extended its credit on 30 percent of qualified solar generators for residential use.

The Kiddie Tax: The amount of investment income a child under age 19 -- or a full-time student under 24 -- can earn before excess earnings are taxed at his or her parents' rate will go up $100 to $1,800 in 2008.

Tax-free parking and transit passes: Employers will be allowed to give employees parking valued at $220 a month as a tax-free fringe benefit in 2008, up $5 from 2007.


March 2008 — 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.

Say Goodbeye to 2007 with Some Smart Tax Moves

December’s a busy month, but it’s not too late to focus on last-minute tax savings. Consult a tax or financial advisor such as a Certified Financial Planner™ professional to see if these might work for you:

Do an AMT sweep: One of the reasons why it’s wise to consult a tax adviser before you start accelerating deductions is that certain people over $75,000 find themselves more susceptible to the alternative minimum tax if they proceed. The AMT is an alternative taxation process that’s figured separately from your regular tax liability and you have to pay whichever tax is higher. State and local income taxes and property taxes, for example, are not deductible when figuring the AMT. Under the regular rules, medical expenses that exceed 7.5 percent of adjusted gross income can be deducted under the regular rules, but under the AMT, that threshold is 10 percent. Also, under regular rules, interest on up to $100,000 of home-equity loan debt is deductible no matter how the money is used, but under the AMT, the deduction holds only if the money was used to buy or improve a primary or second home. It pays to check your AMT risk before you execute any end-of-the-year tax-savings strategy.

Check investment gains and losses: If you have some capital losses in your taxable investment accounts, see if it makes sense to sell and offset them against any capital gains you've realized this year. Such losses can offset 100 percent of capital gains plus up to another $3,000 in ordinary income. Any losses in excess of that number can be carried forward to the next tax year.

Prepay property taxes: If it makes sense to accelerate that deduction, pay those early 2008 taxes before the end of the month.

Prepay state taxes: Again, if it makes sense based on your tax situation, consider making a fourth-quarter estimated state tax payment due in January this month to accelerate the deduction.

Defer income if possible: Self-employed people and some business owners might elect to invoice customers in January so they don’t have to include that income on their 2007 return. Keep in mind that it only makes sense to defer income if you think you will be in the same or lower tax bracket next year.

Got time to go green? December isn’t exactly everyone’s favorite month for home renovations, but if you are inclined to replace windows, insulation or heating/air conditioning systems that meet particular energy conservation standards, you might qualify for a credit up to $500.

Consider the sales tax/income tax tradeoff: Taxpayers in 2007 will again have the option of claiming either state income tax paid or state sales taxes paid as itemized Schedule A deductions. If your state doesn’t have an income tax, definitely start totaling all the sales taxes you’ve paid. However, if you do pay a state income tax but have purchased such big-ticket items as cars, boats or construction supplies and equipment during the year, run the numbers anyway. The total sales tax deduction is figured on an amount from the IRS state sales tax tables in addition to the actual sales tax amounts paid on the major purchase items. The alternative is to ignore the IRS Tables, and simply add up all sales tax payments.

Plan a stock donation to charity: If you have stock with a large unrealized capital gain that you’ve held longer than a year, you can give that stock to a qualified charity and claim a deduction for the current fair market value of the security. If you have a stock with an unrealized capital loss, do the opposite – sell the stock, claim the capital loss, then donate the resulting cash proceeds to charity. This is actually better than just donating cash, because you get the same deduction and never have to pay the capital gains taxes from the appreciated security.

Make sure donations are documented: As of January 1 this year, you now must have a either a receipt or a canceled check to back up any contribution, regardless of the amount. If you don't have such a written record, the IRS will reject the write-off if the lack of proper record keeping is discovered in an audit.



December 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.

Will Your Kid’s Inheritance Make Her a Monster? Not If You Plan Carefully

The airwaves are full of cautionary tales of young people with too much money too soon – wretched excess is in, and responsibility seems, well, pretty boring. And your last name doesn’t have to be “Hilton” for you to worry.

Inheritances, trust funds and other benefits from hard-earned family fortunes of any size can affect the children of wealthy individuals in incredibly positive and negative ways.

Most financial experts, such as Certified Financial Planner™ professionals, will tell you the best scenarios involve early planning, solid parenting and complete family involvement from the start. Here are some suggestions on how to raise a responsible heir:

Get advice early: If you have created a successful business or amassed a fortune working for a fast-growing employer, it makes sense to sit down with tax, legal and financial advisors to talk not only about the No. 1 goal of protecting those assets, but passing them intelligently to the next generation. Because these conversations should go beyond sensible money and tax management to how these assets will affect your family’s entire life, one of the first questions you should ask is, “How do I train my kids to inherit this money?” Also, it’s critical that you include the unthinkable in your discussion – how your surviving spouse or designated guardians will continue this stewardship if you die. You need to make sure your plan is effective particularly if you’re not there to carry it out.

Start basic money training early: In most households, kids start learning about money and what it does around age 4 or 5, even if it’s only centered on how to buy a popsicle. Obviously, your kid might have some idea already that his parents have money, so you have to strike a balance between the reality of your fortunate situation and the responsibility training all kids need no matter what their circumstances. You don’t need to lie about what you have, but when kids are this young, you’re not anywhere near discussing what they may inherit when they’re older. It’s not their money anyway. Your job should be to introduce your kids to chores and a modest allowance to cover essentials, treats and savings that you’ll agree upon. Then watch closely to see how your kid is learning these skills. This is the bedrock of how they’ll be handling money the rest of their lives.

Lead by example: If a kid grows up in a house where parents spend indiscriminately and settle disputes with the kids with money and toys, chances are the kids will repeat those patterns as teens and adults. If a kid grows up in a house where parents set money priorities for themselves, participate in charity and community service and expect children to do the same, that’s a powerful lesson about wise choices in time and money for a lifetime.

Do a family mission statement each year: This may get an eye roll from some family members. But a once-a-year meeting to discuss what’s important in family life is a great mechanism not only to find out how the entire family is doing with regard to personal values and goals, but a great way to work in a purposeful wealth message that expands over time. When children are young, they should be allowed a vote in how family money is spent for particular luxuries like vacations, and as they get older, parents can elect to expand their vote in other areas, such as general investment policies for the family holdings.

Involve the kids in investment and planning: If a child is inheriting wealth at a certain age, it is entirely fair to bring them into the process of the care and feeding of that wealth at a significantly earlier age, possibly in their early teens. Before that, it might be fun for them to buy a particular stock or mutual fund that they can own jointly with you so they can see how investments perform. Eventually, you can migrate their attention to their potential inheritance, how that money is currently invested and what efforts are taken to protect its principal are essential if they are going to take over responsible management of those funds someday. Kids need to understand that wealth needs to be tended to in order to grow – you might even consider bringing them to meetings with your money managers so they can learn about the process over time.

Raise the suggestion that wealth should stay invested. Wealthy relatives need to tread carefully here, because if a young person gets money, they’re going to understandably want to have some fun with it. But it’s important to teach the message that a significant part of the inheritance should stay responsibly invested so the child can address a personal goal (advanced education, starting a business or their own philanthropy) or have wealth to pass on to their families.

Get them some independent training: The wealth management industry – including financial planners – are directing training resources toward younger clients who may come into considerable fortunes at a later date. It’s to their benefit – they want to keep that business. But if you are already working with investment experts whom you trust, why not ask them about training your kids can receive when you’re not around? As adults, they are going to eventually handle decisions on their own – it might be wise to continue their learning in an adult environment where they can take the lead in a discussion.


November 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.

A Family Mission Statement Can Keep Family Goals First and Money Squabbles at Bay

When rich families squabble over the family legacy, it becomes headline news. Witness the recent battle over the ownership of the Wall Street Journal between members of the Bancroft family. When approached by media titan Rupert Murdoch, various family members fought over whether to preserve the family legacy at the legendary daily business paper or take the money and run. Money eventually won.

For most average Americans, such stories are an illustration not only of how money doesn’t buy happiness, but how it breeds dissention and distance between people who could be enjoying their wealth and moving in concert. With all that money, how can people be so unhappy and contentious?

Families with substantial assets – or the promise of substantial assets as a business grows – might consider creating a family mission statement. While the end product should produce a document built from discussion, argument and consensus, it’s not so much about the piece of paper as the process. When a family sits down to discuss what is really important to them, it’s an opportunity to take the machine apart and see how it works. Many families start the process as a way to build consensus about long-term financial, business, estate and philanthropic goals, but to their surprise, money can take a back seat. Families discover particular strengths, weaknesses and unexpected courses of action within their ranks. The process might identify future leaders of the family.

Trained financial advisors, such as Certified Financial Planner ™ professionals, can explain and guide the process. Some planners may be trained to facilitate such discussion based on the size and goals of the family involved.

The general creation of a family financial mission statement should have four key touchpoints: estate issues, philanthropy, business direction and family dynamics.

Here are some questions that should be asked of everyone in preparing the family’s financial mission statement. They should focus on relationship issues first, and then move into business and money matters.

• What’s most important about our family?
• What do you think our goals should be?
• When do you feel most connected to the rest of us?
• How should we relate to one another?
• What are our strengths as a family?
• Where do you think we’ll be as individuals in 5, 10 and 15 years?
• In order, what are the five things you value most in life?
• How should we behave toward each other?
• How should we resolve our disputes?
• How important is the family business to you?
• What should we be doing differently with our family money as well as our assets inside the business?
• What’s the best way for us to be building our wealth?
• What do you think the role of our family should be in helping the community?
• What should we be doing individually and as a family with regard to philanthropy?

Structurally, the written mission statement can be whatever you agree it should be – a few paragraphs or a page or two. And it needn’t be set in stone – a family should have a meeting every year or two to revise or approve its mission. The family mission statement helps your family establish its identity and the variety of voices within. It can help set goals and diffuse tensions later. It can also be used to moderate discussions that inevitably happen after major changes within the family – death, divorce or happily, an increase in the number of heirs and participants.

As for the age of the participants, it can start in very basic form with younger children and the process can mature as they age. It’s actually a good idea to bring young members into a customized version of the process for youngsters so they can comfortably adjust to working as adults with the older members of the family.

For a handy resource on writing a family mission statement, go to this site: http://www.nightingale.com/mission_select.aspx?from=homepage&element=missiontitle


November 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 You Can Do Before the Kiddie Tax Loophole Closes

When President Bush signed new legislation in May to limit gifts to children that take advantage of their lower tax rate, it was the second time in just over 12 months that Congress extended the reach of the so-called kiddie tax, which subjects a child’s income to his/her parents’ higher tax rate.

Maneuvering around the kiddie tax has helped parents save for college educations for years, and given the changes, it’s a good idea to consult a financial or tax adviser to discuss your options.

Congress apparently got fed up with a particular tax strategy used by wealthy families who transfer large piles of stock, mutual fund shares and other assets to their kids (who are typically in the lowest two income brackets of 10 percent and 15 percent) so they could sell those securities at a low capital gains rate. The top rate on long-term capital gains and qualified corporate dividends is 15 percent, but since 2003, those in the lowest two income brackets had a shot at a 5 percent capital gains, which is scheduled to drop to zero for those low-income taxpayers in 2008.

So here’s what’s happening this year and next. During 2007, investment income for a child 17 years old or younger (measured as of Dec. 31, 2007) above $1,700 is subject to his parents’ higher tax rate. (Before 2006’s changes in the law, the kiddie tax applied only to kids younger than 14.)

Starting in 2008, the age limit for the kiddie tax will rise to 18 and under, or 23 and under if the child is a full-time student. There are some exceptions for kids with paid jobs – the expanded provision applies only to children whose earned income does not exceed one-half of the amount of their support needs.

What you can do now

If you had put appreciated securities in your child’s name and the child is a full-time student under the age of 23 but at least 18, your child can sell those securities this year and still claim the 5 percent capital gains rate. There won’t be a zero capital gains rate available to your student next year, so you need to act before the end of the year to take advantage of the 5 percent rate before it becomes the parents’ 15 percent rate in 2008 via the kiddie tax.

You may also want to start or redouble your efforts in the 529 college savings plans you’ve set up for your kids. Qualified withdrawals for education are tax-free and therefore wouldn’t be subject to the kiddie tax. The same is true for qualified withdrawals from Coverdell education savings accounts.

Outside of 529 plans, you might consider investments that generate little or no taxable income such as municipal bonds.

Watch out for financial aid

Whatever gift and tax strategies you apply to your college savings strategy, make sure those assets don’t undermine any efforts your child is making to secure financial aid.


October 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.