By Mark Colgan, CFP

By definition taxes are a fee charged by the government on a product, income, or activity to support public prosperity. This is assuming you are talking about monetary taxes. There is, however, an even heavier burden people often contend with. It is the devastation of personal legacy taxes. By definition personal legacy taxes are the negative consequences survivors face as a result of an individual dying without having properly documented her/her values, life lessons, memories and final wishes. If you have ever experienced the loss of a loved one you would likely agree that the absence of this vital information is emotionally taxing.

Before I expand on my concept of personal legacy planning, let me first let me clarify that I am not talking about common estate planning. As you know, estate planning traditionally addresses your material assets and possessions of financial value, and your wishes for how they will be disbursed in the event you should pass away or cannot communicate for yourself. Estate planning is accomplished with tools such as a legal will, trusts, powers of attorney, health care proxies, etc.

Your true wealth, however, is not measured in just dollars and material assets ― and that is where legacy planning comes in. Personal legacy planning addresses your non-material assets, possessions of emotional value. This includes your values, life lessons, memories, and final wishes ― information that is too valuable to risk being lost. It is a perfect complement to your estate plan.

Let’s get more specific. A couple of years ago Bob, a client of mine, called and told me that he had terminal cancer. He wanted to proactively document everything he could think of (both personal and practical) that would be beneficial to his wife. He had already taken care of his estate plan and made sure she was okay financially ― but he was more concerned about her emotional well-being and her ability to move forward after he died.

When I told him about our legacy planning solution, he was relieved. He was able to document practical information about things such as his funeral arrangements, maintaining the household, his plans for the kids, and the location of important documents. He was also delighted to share important personal messages such as thoughts about how and why he loved his wife, favorite memories about their family vacations to Florida, his views on religion, and other philosophical thoughts that he felt could positively impact future generations. The legacy planning process helped Bob gain clarity and confidence that everything that mattered to him would be passed on to those he loved.

Imagine the peace of mind Bob had, knowing that instead of a tangled web of unanswered questions, his loved ones would have all the information they would need and long for.

The absence of a carefully planned legacy leaves loved ones with an impending tax that will burden their soul. Recently, I had a heartfelt discussion on this topic with a professional acquaintance of mine Russell Friedman. Russell is the Executive Director of The Grief Recovery Institute frequently cited grief expert and author of several books related to grief recovery. According to Russell, “Grief is difficult enough without complications, but having interacted with thousands of grievers, I have learned that the absence of a carefully planned legacy leaves them with financial and emotional distress which compounds their grief

exponentially. The real tragedy here, beyond the loss of a loved one, is that these issues are totally avoidable. All you need to do is take the time and energy to prepare a well thought‐out legacy plan.”

Don’t let your fear stop you from doing what you need to do. Here’s what happens if you don’t plan your legacy.

1) Those you leave behind, when burdened by financial challenges and unanswered questions, will often bury their grief in an attempt to survive.

2) Distracted from their natural need to deal with their grief, the grief stays hidden, and since time can’t heal emotional wounds, it gets worse, not better.

3) The loved ones you leave behind won’t know how you really felt about them – I know, you tell them every day, but it is not the same thing.

4) Your loved ones won’t know where to find the vital documents they need to carry out your wishes – you’ll unintentionally leave behind a mess.

5) It can potentially cause incredible rifts between family members leaving emotional holes that can never be filled.

6) You won’t have the opportunity to have these discussions now, while you are still able to see what a powerful impact they can have on the people you love the most.

7) Your legacy will die with you. Your great-grandchildren and other future descendents will only have empty photographs and presumptions about who you were.

Don’t leave your loved ones with a legacy of pain because you didn’t take the time to put together your legacy plan. And don’t put it off because you are young, in good health or have a crazy schedule. It doesn’t matter how old you are, or how healthy you are. Every day the news is filled with tragic stories of young and healthy people whose lives ended suddenly. And while we would all like to believe “it will never happen to me,” the only way to ensure your loved ones are protected is to act now and plan your legacy.

If you’ve never taken notice of disability coverage before, it’s time to start.

Disability insurance protects your ability to earn an income. It provides money to pay your rent, mortgage and basic living expenses if you are injured or sick for an extended period. It is called disability insurance or disability income protection but think of it as income replacement when you are sick or hurt and cannot work. At any age, you are about six times more likely to become disabled for some period of time than to die.

Think your employer’s coverage is enough? Think again. You may have whatever sick leave you have coming, and then if an employer offers short-term disability coverage, it generally doesn’t last more than 12 weeks. There are employers that offer long-term disability coverage, but if you’ve never checked the terms of that coverage, you should.

It never hurts to consult a financial advisor with expertise in this subject, such as a CERTIFIED FINANCIAL PLANNER™ professional.

Basic components of long-term disability coverage:

Monthly benefits:

Depending on your income, long-term disability insurance is generally structured to pay 50 to 70 percent of your income up to age 67 or your normal retirement age. Research if the policy you’re buying offers you the chance to buy more insurance as your income increases in future years.

Benefit term:

For each disabling incident, your policy may pay benefits for a certain period – two or five years, or until retirement. It’s all about how your policy is constructed. Some policies even pay for life if you purchase this benefit and you are disabled prior to age 60.

Buying younger is generally cheaper:

Like health and life insurance, the younger you buy, the less you’ll pay. Occupation enters into the picture because high-risk jobs (where disability is a greater work-related factor) tend to draw more claims. Like health insurance, the company will consider your medical history and your lifestyle, including your weight, pre-existing conditions and whether or not you smoke.

Premium cost:

The premium will depend on a wide array of factors and can vary dramatically from person to person. Such things as your age and your gender (women pay more for disability insurance because they tend to live longer and may work longer) will be considered.

Non-cancellation provisions:

Make sure that once you’re approved, the insurer can’t cut your coverage unless it decides to stop writing coverage for everyone in your job class. It should also state that the insurer can’t raise your rates.

Guaranteed renewable:

Like the category above, this means your insurance can’t be canceled,. The insurer can, however, raise the rates for everyone in the category.

Own occupation vs. any occupation:

If you have “own occupation” coverage, it is intended to go into effect if you can’t perform the functions of your current job. “Any occupation” coverage pays only if you can’t work at any job where you’ve been reasonably trained to do the tasks. For example, if you’re working a desk job, you could easily be transferred to a receptionist’s job or some other function within the company that you can now do or is your former position. That could significantly interfere with your recovery time, so consider the benefits and specify “own occupation” coverage.

Elimination period:

Like a deductible in home, health or car insurance, the elimination period is a big cost determinant in disability coverage. Most policies will start paying after 30 days after you’ve been declared disabled. But if you specify an elimination period of 60, 90 or 120 days, your premium will be lower. An important point about the 30-day elimination period:  the benefits don’t start accumulating until you’ve been laid up a month after the ruling date and you won’t get your payment until a month after that. Be very clear with your insurer when you’ll get your first check based on what elimination period you choose, and funnel the money you’ll need in the meantime to your emergency fund.

Partial payments/Residual benefits:

Some policies may offer you ‘residual benefits’ or a partial payment if you’re less than 100 percent disabled, but still can’t perform all the duties of your job.

If you’re thinking about self-employment:

You’ll likely need disability coverage. But the time to buy is while you’re still in your current job. Why? You won’t be able to prove your income once self-employed, so consider obtaining your desired coverage before you leave.

February 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V. Higgins, CFP, CLU, AEP, a local member of FPA.

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A June 2009 article in the American Journal of Medicine reported that medical bills are behind more than 60 percent of U.S. personal bankruptcies, adding that more than 75 percent of these bankrupt families had health insurance but still were overwhelmed by their medical debts.

The article, based on research from Harvard Law School, Harvard Medical School and Ohio University, underscores how a single health crisis can financially destroy both individuals and families. It is information that underscores the need for adequate planning ahead of any health crisis, particularly when known risk factors exist in a family. A financial expert such as a CERTIFIED FINANCIAL PLANNER™ professional can help individuals determine if their insurance and savings options are adequate to handle the possibility of any future health crisis.

If you have time to prepare, most financial planners will advise:

• Creation of an adequate emergency fund to cover several months (usually a minimum of three months and, even better, up to a year) of family expenses if a patient can’t work during their treatment;
• Purchase of separate disability insurance to pay everyday expenses since company-bought disability coverage will likely be limited – the benefits on any individual policy need to be coordinated with the group policy;
• Creation of health care advance directives, health care powers of attorney and financial powers of attorney, health care proxies (each state has a “preferred” document that is accepted; clients need to execute the form for their state of residence) and DNR forms among the examples.
• Building lists of critical phone numbers, major assets and where information on each can be found on investment accounts and other key information in case the person is incapacitated;
• Communicate funeral plans to family members in writing so that wishes can be implemented in the event of death. Even better, complete a personal death awareness document that covers both the practical aspects of death and the interior emotional aspects of death.

But if you’re suddenly faced with a frightening, expensive and potentially life-threatening diagnosis without such preparation, here are some basic steps to take:

Start by realizing it’s not all about the money: If you or someone you love is sick, obtain the best care possible, not what your bank account and health insurance can buy.  A CFP^® professional with experience in dealing with healthcare issues can help you assess your financial situation against various goals for retirement, your expenses, your children’s education and other matters.

Grill the patient’s insurance agent or HR person: If you or family members have bought health insurance through an agent or your employer, insist that they explain exactly what the plan covers and where your deductibles do and don’t apply. Generally, a serious illness will quickly use up the deductible (this is where your emergency fund is important). Pay attention to how much the insurance will pay and how much you’ll pay out of pocket once the deductible is exhausted.

Check on experimental treatment and see how it will affect coverage: If the diagnosis is cancer or some other potentially life-threatening illness, in addition to tried and true treatments, research medical centers offering clinical trials. And, keep in mind that some insurance plans might look askance at certain treatments that could potentially lead to other health issues. Err toward caution in these matters, but if the insurer approves, see if such experimental treatment can get you a break on costs.

Get those directives in order: A health care advance directive is a formal, preferably notarized instruction sheet for doctors to follow in case you or family members are incapacitated. The most commonly known health care directive is a do-not-resuscitate (DNR) order. A health care power of attorney designates a particular individual — a spouse, a friend, an adult child — to carry out your medical wishes if you are incapacitated. Meanwhile, financial powers of attorney designate an individual to handle financial affairs if the sick or deceased are single or did not designate joint tenants for certain assets. Again, each state follows a particular set of documents.

If there isn’t a will or a complete estate plan, make one: A will doesn’t have to be enormously detailed to relieve problems for survivors, but it can create enormous problems if it doesn’t exist. If there is no executed will, the estate is intestate, which means that property is distributed by state laws. Yet it makes even more sense to review all of a patient’s assets to determine if more detailed directives are necessary and most important, to make sure beneficiaries on insurance, retirement accounts and other investments are up to date.

Consider whether you can make monetary support a gift: It’s good to get tax and financial advice on making a one-time gift to support the patient. Would the potential loss of money injure you, and worse, will it injure the relationship? If you don’t think you will be repaid would you be willing to consider it a gift?

Ask for generics and samples: Many physicians are willing to recommend a generic substitute or at least supply you with a few samples of the drug they’re already prescribing. While doctors can’t get away with passing sample drugs to all their patients, always ask. As long as they are prescribing the medication, samples with the proper dosage can provide cost savings to patients.

Begin negotiations before there’s a financial problem: The best time to speak with hospital bean counters isn’t when you’re behind on your payments. Once a diagnosis is made, either you or someone you designate as your agent needs to contact the hospital business office to check on payment schedules and possible discount plans if you are uninsured or fear your insurance may not cover a significant portion of costs. Any creditor appreciates a customer who’s willing to come to the table first.

February 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins, CFP , a local member of FPA.

By Ron Lieber

Annuities: The official retirement vehicle of the Obama administration.

As slogans go, it’s hardly “Keep Hope Alive,” or even “Change We Can Believe In.”

But there were annuities, in a report from the administration’s Middle Class Task Force that came out this week. They are among the tools the administration is promoting as it tries to give Americans a better shot at a more secure retirement.

At its simplest, which is how the White House seems to want to keep it, an annuity is something you buy with a large pile of cash in exchange for a monthly check for the rest of your life.

If the biggest risk in retirement is running out of money, an annuity can help guarantee that you won’t. In effect, it allows you to buy the pension that your employer has probably stopped offering, and it can help pick up where Social Security leaves off.

President Obama did not discuss annuities in his State of the Union address on Wednesday night, probably figuring that viewers had enough problems staying awake. But the mere mention of them by the task force was enough to send executives at the insurance companies that sell the products into paroxysms of glee.

“I never thought I’d have the president as a wholesaler for us,” said Christopher O. Blunt, executive vice president of retirement income security at the New York Life Insurance Company. “This is awesome. I’m trying to see if I can get him to do a big broker meeting for us.”

He’s unlikely to turn up for such an event just yet. After all, the announcement from the White House did make it clear that the administration was looking to promote “annuities and other forms of guaranteed lifetime income.” That suggests the administration is open to other solutions, though there are not many others that are as simple as the basic fixed immediate annuity (also known as a single premium immediate annuity) that delivers a regular check for life.

Still, all of this attention from the president is a stunning turn of events for a rather unloved product. Many consumers reflexively run in fear when salesmen turn up pitching high-cost and complex variable annuities, which evolved from their simpler siblings decades ago. Today, the Securities and Exchange Commission maintains an extensive warning document on its Web site for investors considering the variable variety.

Meanwhile, almost all employees on the precipice of retirement who have access to annuities as a payout option steer clear when their companies offer them. While various surveys show that roughly 15 to 25 percent of corporations offer annuities to workers who are retiring, including big employers like I.B.M., a 2009 Hewitt Associates study reported that just 1 percent of workers actually bought one.

“I joke sometimes that we’re the best ice hockey players in Ecuador,” said Mr. Blunt of New York Life, which sells more fixed annuities than any other company, according to Limra, a research firm that tracks the industry.

So what are these soon-to-be retirees so afraid of? And what makes the White House so sure it can change their minds?

Let’s start with the fears. Early on, the knock on annuities was that once you died, the money was gone. So let’s say a 65-year-old man in Illinois turned over $100,000 in exchange for $632 a month for life, a recent quote from immediateannuities.com. If he died at 67, his heirs would get nothing while he would have collected only about $15,000. (On the other hand, it would take him until age 78 to get $100,000 back, but that doesn’t take inflation into account.)

The industry solved this by coming up with variations on the policy, allowing people to include a spouse in the annuity or guarantee that payouts to beneficiaries would last at least 10 or 20 years. This costs extra, of course, meaning your monthly payment is lower.

Others worried about inflation, so now there are annuities whose payments rise a few percentage points each year or are pegged to the Consumer Price Index. These cost extra, too (often a lot extra).

You see the pattern here. Every time someone had an objection — the need for a bunch of payments at once, a lump sum in an emergency or concern about rising interest rates — the industry created a rider to add to policies to make the concern go away (and make the monthly payment smaller).

Besides, people need to have saved enough to purchase a decent monthly annuity payout in the first place. But plenty of retirees haven’t been saving in a 401(k) or individual retirement account long enough to have a good-size lump sum.

There are also stockbrokers and financial planners standing in the way. Once money goes into an annuity, they can’t earn commissions from trading it anymore and may not be able to charge fees for managing it. Financial advisers have a charming term for this phenomenon — annuicide. You insure, and their revenue dies. So, many of them will try to talk you out of it.

One reasonable point they might make is that insurance companies can die, leaving your annuity worthless. State guaranty agencies exist, but they may cover only $100,000 to $500,000. I’ve linked to a list of the agencies in the Web version of this column so you can see what they insure.

Even if you get over all these mental hurdles, however, the hardest one may be the difficulty of seeing a big number suddenly turn small.

“It’s the wealth illusion, the sense that my 401(k) account balance is the largest wad of dollars I’ll ever see in my lifetime, and I feel pretty good about having that,” said J. Mark Iwry, senior adviser to the secretary and deputy assistant secretary for retirement and health policy for the Treasury Department. “Meanwhile, I feel pretty bad about the seemingly small amount of annuity income that large balance would purchase and about the prospect of handing it over to an entity that will keep it all if I’m hit by the proverbial bus after walking out of their office.” So how might the Obama administration solve this? It could get behind a Senate bill that would require retirement plan administrators to give account holders an annual estimate of what sort of annuity check their savings would buy. That way, people would get used to thinking about their lump sum as a monthly stream.

Tax incentives could help, too. A recent House bill called for waiving 50 percent of the taxes on the first $10,000 in annuity payouts each year. “If this is behavior that the administration is trying to inspire, then it’s not that long of a leap to think that maybe they’ll start to promote some version of these bills,” said Craig Hemke, president of BuyaPension.com, which sells basic annuities (and offers some good educational material for people who are trying to learn about the products).

Mr. Iwry, who is one of the intellectual architects of the administration’s examination of annuities, wouldn’t say much about what might happen next. But one paper he co-wrote two years ago suggests a clue.

As the treatise suggests, the administration could nudge employers into automatically depositing, say, half of new retirees’ lump sums into a basic annuity or other lifetime income product, unless they opt out. Then, they could test the thing out for two years and see how that monthly paycheck felt. If they liked it, they could keep the annuity. If not, they could cancel it without penalty and get the rest of their money back.

Annuities won’t be right for everyone (people in poor health should probably steer clear). And they’re not right for everything because it rarely makes sense to put all of your money in a single product or investment.

You could, for instance, use an annuity to cover the basic expenses that your Social Security check doesn’t cover. You might also use the money to buy long-term care insurance, which would keep nursing home bills from becoming a budget-destroyer.

But the president has one thing right: The basic annuity is almost certainly underused. Sure, you may be able to arrange a better income stream on your own, but not without a lot of help from a financial planner or a lot of time managing it yourself. Then there’s the possibility, however small, that you’ll spend too much in spite of yourself or run into a once-in-a-generation market event that will cause you to run out of money sooner than you expected.

All of that makes basic annuities the ultimate test of risk aversion. If you buy some, you and your heirs may have less money than if you’d kept your retirement savings in investments. Then again, if you guarantee enough of your retirement income, you — and those same heirs — won’t have to worry about how you’re going to meet your basic needs.

Ron Lieber writes the Your Money column, which appears in The Times on Saturdays.
A version of this article appeared in print on January 30, 2010, on page B1 of the New York edition.

One of the most effective financial tools you can give a child is an appreciation for an emergency fund and the advice on how to build it themselves.

An emergency fund should contain 3-6 months worth of money to cover living expenses – its main focus should cover all loss of income, not just a car payment or a refrigerator repair. With parents losing jobs and college expenses continuing to grow, the younger you can get a person started, the better. Some advice:

1. Start by encouraging them to save something, no matter how small the amount: Even if it’s a few cents out of an allowance, a teenager should be encouraged to set up a separate savings or checking account – someplace not easy to access – where they can house the money. Interest-bearing accounts are better. For young children, this is why piggy banks work so well. It’s about setting goals and knowing where the money is.

2. Help them develop a balance between treats and sacrifices: Financial independence requires a balance of risk and reward. Life can’t be all about building reserves, so tell the teen when they hit a certain level for the fund – maybe a midpoint toward the three-month mark – they can treat themselves to clothes or an electronic device. After the purchase, they go right back to saving.

3. Encourage them to direct all change into the emergency fund: No matter how old or young the child, it’s a good idea to take non-essential funds and direct them toward the emergency fund. Change is a great way to get started.

4. Set an example: Can your child see you saving? Do you physically set aside money and talk about goals for that money? Your child hears all of this. While parents can’t be perfect, think about the money behaviors you’re demonstrating in front of the kids, and try to make them positive.

5. Keep them away from credit as long as possible: 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; this will be a strong incentive for the student to keep his credit rating clean for the next four years.

6. Set up money meetings: Whether the child is living at home or off at school, it makes sense for the parent and child to have a few meetings during the year to talk about the range of money issues the child is facing, and during that time, the emergency fund can be up for inspection and discussion.

7. Make them set up a real budget: Budgeting comes with saving. Young kids can do their first budget on paper – they can track what they spend and save over a month or two and then establish what comfortable amounts for both will be. Teenagers and prospective college students might find it useful to have personal finance software to track their everyday expenses, though they should make sure both the computer and the passwords necessary to access their program are secure.  Again, review these details during your money meetings.

8. Get them interested in better-paying, safe savings vehicles: At some point, the piggy bank’s got to go. An emergency fund can eventually gravitate to other interest-bearing accounts that might pay more, but only as long as the money stays liquid. If the emergency fund is healthy, it’s also wise for parents to talk to their children about setting up their first IRAs to get a jump on retirement planning and considerable tax savings.

9. Remind them that today’s emergency fund may not fit next year’s needs: An emergency fund will almost always need to expand in size as the person ages. More years, more expenses, more emergencies – make time to convince your child that emergency funds should change with life circumstances.

10. Train them to start saving tax refunds: If Uncle Sam kicks back a few bucks, then by all means, put it in the emergency fund or other savings vehicles.

January 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V. Higgins, CFP, CLU, AEP,  a local member of FPA.

Valentine’s Day might not be the best time to focus on money, but some married couples are taking the unusual step of re-setting the clock on money issues both good and bad with a legal document called a postnuptial agreement.

A postnuptial agreement is a contract between spouses. It is similar to a prenuptial agreement except it is signed during marriage to protect assets in case of divorce or separation.

Prenuptial agreements get plenty of press when high-profile divorces happen, such as the media frenzy over golfer Tiger Woods and his marital troubles. But postnups can be seen more positively as a reset button to accommodate wealth that’s accumulated since the marriage or as a way to add transparency and correct past money behaviors that were tearing the marriage asunder. In some cases, this kind of “divorce planning” might actually create harmony in a relationship

Under what circumstances are postnups written? Triggers could include:

• One partner — or both – handling money poorly. A postnup might be used to force full disclosure on both sides and establish a new system for managing money responsibly in the future.
• The building of a significant business or other acquisition of sizable assets. A postnup could be part of an overall financial and estate review for a couple that’s worked hard to start a business together or inherited wealth. They might want to set certain protections in place that weren’t in existence when the couple married or started the business.

Postnups can be expensive to arrange. Both sides generally need to engage separate legal counsel to review the legality of the document as well as coordinate with accountants and tax and estate attorneys. They may even delve significantly into business operations as well, requiring an examination of strategy of valuation and succession planning.

If you and your spouse are considering whether a postnuptial agreement is right for you, it makes sense to talk with a trained financial expert first, such as a CERTIFIED FINANCIAL PLANNER™ professional. If the problem is money, it’s best to talk through options with an objective professional who handles financial planning for a living. It might be possible to work out those issues without a need for a document that will take significant expense to produce due to the need for attorneys as well as tax and estate professionals.

Some common questions to ask in preparation of a postnuptial agreement:

What problem are we trying to fix or what behavior are we trying to change? This is the central question when trying to remake a financial life. A CFP^® professional can help a couple determine the root causes for the financial issues they’re facing and determine how much support they really need. A CFP^® professional can help both sides come to the table with disclosure of debt, assets and other business, employment and investment issues of relevance.

What about our families? Minor and adult children are part of any new financial agreements you make during your marriage. If there’s a family business at stake, there needs to be a discussion about how a postnuptial agreement will affect a split of assets that might affect their future inheritance or career options. There may be alimony and other support arrangements already in place for ex-spouses and children from earlier marriages as well as elderly parents to support. All of these financial requirements need to be part of the discussion.

Is there debt? And if so, how much? If one or both sides in the marriage have been hiding this information, disclosure is part of the process. Both sides must be willing to reveal their savings, investments and debt figures – every dime. Both should start the process of talking about how that debt should be paid off – by the person who accrued it, or by both potential spouses. Couples also need to decide how they will handle debt going forward – jointly or separately.

Are there investments? Again, this might be a disclosure issue, particularly if one or both sides are hiding assets or simply have lost track of them. There might also be wide differences on how investments should be managed and even what types of investments are appropriate.

What about the business? If one or both spouses run their own companies or partnerships and there has never been a serious effort at succession or estate planning, all of these efforts need to be linked. If there is a fear that the marriage may fail, both sides may want to have a plan in place for disposition or purchase of the assets. This is particularly necessary if the goal is to keep the company in the hands of the founding family so those assets can be passed on to the next generation.

What about everyday expenses? If one or both sides believe that certain expenses are a burden, it’s time to talk about reallocating responsibilities. This might be as simple as consolidating bank accounts in both names so there’s transparency over everyday finances.

What about insurance? Life, health, home, and disability – all coverage that singles hold separately needs to be reviewed and consolidated to make sure that coverage is adequate going forward.

What about our estates? There should be separate wills and supporting documents on who will get what investments, personal and business assets with updated beneficiaries – particularly when children from first marriages are involved. This new look at finances might benefit from an examination of various trust agreements to protect and direct assets for future generations, particularly for blended families or families that might blend after a breakup.  And no matter how young or old the couple, healthcare directives need to be made.

What about retirement? Retirement discussions go beyond money. Couples should decide how they want to live in retirement, whether they’ll continue to work and how they’ll deal with illness. This is a particularly important discussion if one spouse is significantly older than the other and may retire years ahead.

When done correctly, a postnuptial agreement can benefit both spouses. The very process of working on this arrangement can be a positive exercise for many couples.  Whether or not the marriage ends in a divorce, couples can breathe easier knowing they can protect what they each own.

February 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins,CFP , a local member of FPA.

As lending requirements stay relatively tight for most consumers, the chance of borrowing outside the banking system from family or friends can be attractive. After all, it’s rare to see a parent or sibling demand a credit check or other lengthy documentation.

On the other hand, it could be one of the most dangerous financial transactions you ever make simply because money can drive a wedge between relatives in even the closest of families.

There are good and bad aspects to private loans. The good news first:

• Terms can be significantly friendlier than a borrower would qualify for in the open market. For example, the rate charged on the loan can be higher than the lender would receive in a deposit account but lower than the borrower would pay a commercial lender.
• They can require little or no collateral.
• It’s a way to keep money in the family.
• It’s a way for a borrower to be able to buy a home, a car or other critical assets even if they have a poor credit rating.
• There’s no loss of tax benefits to the borrower or lender if an agreement in the case of a mortgage loan is structured and reported properly.

Now the bad news:

• Unclear agreements can lead to missed payments or default.
• If the borrower dies suddenly, the lender’s investment may be lost if the agreement isn’t structured correctly. A properly executed promissory note is still an obligation of the estate, and may continue to be paid to an heir or other person or entity based on the terms as agreed.
• Jealous relatives could say they weren’t treated fairly.
• Disagreements between borrower and lender could kill an important relationship.

The best arrangements are formal – written in proper legal language, notarized and recorded in the county where the property resides. A financial advisor such as a CERTIFIED FINANCIAL PLANNER™ professional can talk to both parties about what such loans – particularly large loans for real estate or tuition – can mean for their respective finances. It also makes sense for both parties to visit their respective tax professionals to make sure they know the correct ways to document the loan transaction over time for tax purposes.

A detailed document prepared with the help of an attorney or a certified public accountant can also lay out specific scenarios if either the borrower or the lender has to break or alter their agreement. Such trained experts can talk you through the benefits and pitfalls of a private loan arrangement as it affects your particular situation (either as lender or borrower) and specific laws and requirements in your state you have to follow if both borrower and lender are going to derive tax advantages from the agreement.

You should be aware that the IRS governs these interest rates and provides an annually updated table that you can get at http://www.irs.gov/app/picklist/list/federalRates.html – these rates are Applicable Federal Tax Rates (AFR).  You can also forgive a portion of the loan each year up the annual gift exclusion which is $13,000 this year.

Generally, any private loan transaction should include a promissory note that establishes how the debt will be repaid. That’s true for business loans or loans for most types of property. In the case of a business loan, it makes sense for the potential borrower to get specific advice on how lenders in their business will be treated not only in terms of repayment, but default. These agreements are particularly important for tax purposes as well.

In the case of a loan made for real estate, a mortgage or “deed of trust” statement (depending on the state you live in) or an agreement specific to the type of loan that binds the property as collateral for the promissory note will be necessary. It basically says that if you don’t fulfill all the terms in the agreement the lender has the right to foreclose or repossess the property.

Even if a friend or relative makes an offer of help, it’s proper for the borrower to take the initiative to structure the arrangement in a way that’s responsible and beneficial to both. If a relative is drawing income from the loan, special provisions should be made for prepayment and other contingencies.

The most important thing to remember and plan for? When two people who are close to each other enter into such an arrangement, the most valuable thing really isn’t the money. It’s the relationship.

February 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V. Higgins, CFP, CLU, AEP, a local member of FPA.

By Brian Tracy

To deal with change, perhaps the most valuable quality you can develop is flexibility. Form the habit of remaining open-minded and adaptable to new information and circumstances. When things go wrong, as they sometimes will, instead of becoming upset or frustrated, practice looking into the change or reversal for the opportunity or benefit it might contain.

Superior men and women are invariably those who remain calm and keep their wits about them in the midst of unexpected turbulence. They take a deep breath, they relax, and they assess the situation objectively. They keep themselves calm and unemotional by asking questions and seeking information when things don’t work out as they expected. For example, if someone doesn’t fulfill a commitment, or if a sale is canceled, or fails to go through, they keep their minds clear and steady by asking questions, such as “What exactly happened in this situation?” They deal with change by focusing on getting the facts before reacting. They develop the ability to cut through the confusion and ask questions such as “Why did this happen? How did it happen? How serious is it? Now that it has happened, what are the various things we can do?”

The critical issue in dealing with change is the subject of control. Most of your stress and unhappiness comes as a result of feeling out of control in a particular area of your life. If you think about the times or places where you feel the very best about yourself, you will notice that you have a high degree of control in those places. One of the reasons why you like to get home after a trip is that, after you walk through your front door, you feel completely in control of your environment. You know where everything is. You don’t have to answer to anyone. You can relax completely. You are back in control.

Brian Tracy is legendary in the fields of management, leadership, and sales. He has produced more than 300 audio/video programs and has written 28 books, including his just-released book “The Psychology of Selling.” Special offer: To receive your free copy of “Crunch Time!, just visit www.briantracy.com and click on the Crunch Time! icon. He can be reached at (858) 481-2977 or www.briantracy.com.

One of the reasons parents give children allowances is to help them learn how to manage money.

But for it to be a truly effective teaching tool, parents need to spell out what the allowance will cover, how it can be spent, the consequences of overspending, and how much should be saved or given to charity.

Here are some guidelines:

1. Encourage planning. When deciding how much the stipend should be, consider giving enough to encourage saving or charitable giving. But be careful not to give too much. If the kids can buy anything they want, the allowance fails to teach them how to prioritize and set goals.

The estate tax was repealed, at least temporarily, but the news is not all good.

You know the 2001 tax law phased out the estate tax so it would be eliminated for 2010. But in 2011 the old estate tax law is to be reinstated if Congress does not take action. Everyone assumed Congress would act by the end of 2009 to at least extend the 2009 estate tax exemption and tax rates. Instead, Congress did nothing and let repeal of the federal estate tax take effect in 2010. But keep these points in mind:

• Congressional leaders promise to reinstate the estate tax retroactively to Jan. 1, 2010. There is some question of whether a retroactive tax would be constitutional, but it will be enacted.

• I hope you followed our advice over the last few years on how to revise your will. Many people who did not created problems for their spouses if they pass away while the estate tax is repealed. They have standard will clauses that give their children, or a bypass trust for their children, whatever portion of the estate is exempt from the federal estate tax. Well, the entire estate is exempt from the tax now, and that means their spouses receive nothing under their wills.

That’s why we’ve recommended your will have a formula ensuring your children can’t receive the entire estate while your spouse is alive. Your will should limit the children’s share to either a percentage of the estate or a dollar amount, or the lower of the two.

• A little-known clause in the estate tax repeal is the repeal of “stepped up basis” of inherited assets. Under the federal estate tax, people who inherited assets increased the tax basis to the fair market value on the date of the prior owner’s death. No one paid capital gains taxes on appreciation during the deceased’s lifetime. Now, inheritors take the same basis the deceased owner had. When they sell, they owe capital gains taxes on all the appreciation. There are exemptions of the first $3 million inherited by spouses and $1.3 million inherited by non-spouses. Beyond the exemptions, inheritors have to go through the deceased’s records to find the tax basis of the property, or they use a tax basis of zero and pay capital gains taxes on the entire value of the property.

• The generation-skipping transfer tax also is repealed in 2010. The GSTT imposed a 45% tax on assets given directly to grandchildren in 2009 above a $1 million exemption. Right now you can give an unlimited amount directly to grandchildren and pay only a regular 35% gift tax rate. But Congress also is likely to re-impose the GSTT retroactively this year. If it does and you made large gifts to grandchildren, you’ll pay both the regular gift tax and the GSTT.

As always, we’ll keep you ahead of new developments in the estate tax and how you should react to them. For now, be sure your will is drafted according to our previous advice. This should see you through the current chaos and whatever Congress enacts in 2010.

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