Archives For Estate Planning

       If you spend much time reading personal finance advice for Christians (either on Provident Planning or somewhere else), you’ll probably start to realize that it’s not all that different from other personal finance advice. Most of the good advice for Christians applies equally to non-Christians as well. Stick to a budget, spend less than you earn, avoid excessive debt, keep an emergency fund, minimize your taxes, don’t buy insurance you don’t need, save for the future – none of those things are particularly Christian in nature.

       There may be some points in which Christian personal finance and secular personal finance will differ, but, generally speaking, good personal finance advice is the same regardless of your religion. The difference – and this is a major difference – is in the ultimate purpose, the final goal, of following that good advice.

       As far as the world is concerned, it makes sense to make smart personal finance decisions because that’s what is best for you. Good money management will help you meet your goals, maximize your wealth, and get the most out of the money you’ve earned. And according to the world, that’s what you should do with your money. Use it for the things you want. Use it to meet your goals and fulfill your dreams.

       But for Christians, making smart decisions in our finances is not important just so we can maximize our wealth and meet all our desires. Our purpose is not to find fulfillment in this world and the things it offers. Our purpose is to honor and glorify God – to serve Him with our entire being in everything we do. Our goal is to do His will. And part of God’s will for us is to share His love by caring for those in need through generous giving. We don’t try to maximize our wealth for our own use. We try to maximize our wealth for God’s use.

       I want you to remember this as you read the articles I write. Many times there won’t be a Bible verse in a post. Personal finance in the Bible is more about the principles that should govern our decisions – not specific applications (like how to get out of debt). But it’s very important that we remember the purpose of seeking and following good financial advice.

       When I talk about spending less, it’s so we’ll have more to give. When I talk about earning more money, it’s so we’ll have more to give. When I talk about making smart financial choices, it’s so we’ll have more to give. It all comes back to giving – giving motivated by love that flows out of our response to God’s Gift to us.

       Yes, making good financial decisions will have benefits for you personally. But our focus as Christians is on the benefits those decisions will have for the Kingdom. In our efforts to follow good financial advice, let’s keep our eyes focused on Christ and our minds focused on how we can serve Him fully.

       The advice we follow may not be all that different from non-Christians. But the motivation, goals, and results should be very, very different. And that difference will serve as a witness for the power of God’s love working in our lives.

       What do you think makes Christian personal finance different? Let me know in the comments!

Make a Will for Free

Corey —  January 14, 2010

       I’ve talked about essential estate documents before, and I made the point that everyone needs a will (assuming you’re over 18). A will simply ensures that your assets are given to the people you want in the way you want. But I’ve found that we neglect getting a will for two reasons:

  1. We don’t want to deal with thoughts of our own death. Writing a will makes some people feel like they’re planning to die. But this shouldn’t keep you from doing something that’s good for you and your loved ones. You’re going to die someday. Get over it and get a will.
  2.  

  3. We think we can’t afford it. Everyone knows attorneys don’t come cheap. It’s not uncommon to find attorneys who charge $250/hour or more for their work. A complete estate plan can run anywhere from $500 to $5000 or more depending on who you use. But there are alternatives – and that’s what this article is about.

Do Your Own Will

       The cheapest way to get a will is to do it yourself. But the problem is you can easily make mistakes that will invalidate your will – making it completely useless. Or worse, you could end up writing a will that goes against your wishes without realizing it. And if you’re in Louisiana, you shouldn’t even consider doing estate planning without an attorney (they have some strange laws there).

       But if you’re willing to do some research, carefully consider your decisions, and follow instructions exactly, then making your own will can be a viable alternative to using an attorney. Obviously, the preferred method is to use an experienced estate planning attorney, but if the cost is keeping you from making a will at all then going the do-it-yourself route can cover you until you can afford to pay an attorney.

       Luckily, there are some good resources out there to help you make your own will. One website I found, DoYourOwnWill, has a helpful questionnaire with guidance and detailed instructions on how to properly execute (sign and put into effect) your will. If you’re married, you should do this with your spouse and discuss all the questions together.

       Please note I’m not endorsing this as the best solution and I’m not giving you legal advice. I’m not an attorney and using DoYourOwnWill is not a substitute for an attorney. But if you don’t have a will and you’re not going to get a will because of the cost, this is better than nothing.

       You’ll also find several other free estate planning documents like living wills and powers of attorney. Again, they’re still not a substitute for an attorney and you can make some major mistakes by doing it yourself – but if cost is a problem these are free solutions. Additionally, there are inexpensive estate documents you can purchase online through legalzoom.com or nolo.com. You could also look into software like Quicken WillMaker.

Hire an Experienced Attorney As Soon As Possible

       If you decide to make your own will or use other free estate planning documents, please hire an attorney as soon as you can afford it. An experienced estate planning attorney can help you avoid costly mistakes and carefully consider all the decisions you must make. Make sure you shop around. Don’t settle for the first quote you get. Talk to several attorneys, stick with the ones who specialize in estate planning, and ask for referrals from your family and friends. You may also be able to get a good referral from your accountant, financial planner, real estate agent, or banker. The most expensive attorney is not necessarily the best, but do your research before you go with the cheapest option.

       Do you already have your estate documents? If so, how did you get them? If not, what are you going to do? Let me know in the comments!

       Your estate plan can be helped or hurt by the choices you make in your beneficiary designations. Life insurance and retirement accounts are the most common assets that allow beneficiary designations (and thereby avoid probate, an expensive and drawn out court process). Avoid these costly mistakes to make sure your beneficiary designations don’t undermine your estate plan.

Naming Your Estate As Beneficiary (or Not Naming Anyone)

       The advantage of being able to name beneficiaries for your life insurance and retirement accounts is that those assets won’t have to go through probate. But if you name your estate as the beneficiary or you fail to name any beneficiaries at all, then those assets must go through probate. Why’s this a bad thing? First, the assets can become subject to the claim of your creditors or your heirs’ creditors. Second, retirement accounts will be subject to accelerated income taxes and your heirs lose the tax advantages of those accounts. And third, your estate expenses will be higher. Avoid these consequences by naming individuals or trusts as your beneficiaries.

Naming Minors as Beneficiaries

       Depending on state laws, minors can only inherit very limited amounts until they turn 18 or 21. If you name a minor as a beneficiary, the court will appoint a guardian to control and invest the assets until the child reaches the appropriate age. At that time, they get to inherit all of the assets at once, which can create additional problems. All of this means increased costs and less control. If there’s a chance that you’ll have minors for heirs, then set up trusts for the minors. You’ll get to choose the trustee and can include additional terms governing the payout after they reach the age of majority. Then designate the trusts as your beneficiaries.

Misspelling Names and Other Errors

       Simple mistakes can cause huge headaches later on. Make sure you get the spelling of all names correct and use the right Social Security numbers (if necessary). You don’t want your assets going to just anyone.

Assuming Your Will Overrides Your Beneficiary Designations

       Beneficiary designations always trump your will (with one exception). Don’t assume all of your assets will pass according to the terms of your will. Life insurance and retirement accounts pass by beneficiary designation, and jointly owned assets (with rights of survivorship) automatically pass to the joint owner. Make sure your beneficiary designations are in accordance with your wishes.

       The exception I mentioned? By law, spouses are first in line to receive retirement account assets. If you want someone else to inherit those accounts, you must have your spouse sign a written waiver or the beneficiary designation will be deemed invalid at your death.

Failing to Name Secondary Beneficiaries

       If your primary beneficiary is deceased, then the assets would go to your secondary beneficiaries. If you haven’t named any, you’ll end up with the first problem I noted above (no beneficiary named – goes to your estate). Take the time to include secondary beneficiaries when naming your beneficiaries.

Failing to Update Your Beneficiary Designations

       Failing to update your beneficiary designations after major life events can result in unintended distributions. For example, an ex-spouse could end up with your life insurance proceeds. There are other situations that could occur if you don’t update your beneficiary designations for marriage, divorce, loss of a spouse, loss of a child, or other major life changes.

Failing to Review Your Beneficiary Designations

       By reviewing your beneficiary designations annually, you can avoid many of the mistakes mentioned above while ensuring your beneficiary designations are still in alignment with your wishes and overall estate plan. Check with your insurance and investment companies every year to find out the beneficiaries on record for your accounts and update them when necessary.

Stay Tuned for More Money Saving Tips!

       Making sure you have the right beneficiary designations is just one important piece of your total financial plan. Sign up for free updates to Provident Planning if you’re interested in avoiding mistakes in other areas of personal finance as well!

       It seems like a strange question to ask, but it could be important to avoid paying unnecessary taxes or having the money squandered. You’re not required to own the life insurance policy that covers your life, and it may not be a good idea for you to own it. Why does it matter? Because depending on who owns the policy and who the beneficiary is, the insurance proceeds could end up in your estate (possibly incurring estate taxes) or the proceeds could be considered a gift (incurring gift taxes). Here are a few situations to consider:

If You’re Married…

       If your spouse is the beneficiary of your life insurance policy (and they’re still alive when you die), it’s not going to matter if you or your spouse owns the insurance policy. If you own the policy on your life and your spouse is the beneficiary, then the insurance proceeds will be considered part of your estate for tax purposes. However, you get an unlimited marital deduction, which means that you don’t have to pay estate taxes on anything that goes to your spouse. So in this case, it doesn’t really matter (as long as it’s owned by you or your spouse).

       If your spouse’s estate could end up over the estate tax exemption (currently, $3.5 million in 2009) because of the insurance proceeds plus other assets, you may want to consider an irrevocable trust to hold the insurance policy and the proceeds. But if that’s your situation, you should be talking to an attorney or financial planner and not getting free information on the Internet. Your situation is too complex for a do-it-yourself solution.

       For most of us (who don’t have assets plus insurance over $3.5 million) this will never be a problem. It doesn’t really matter if you or your spouse own the policy if your spouse is the beneficiary.

If You’re Single or Widowed…

       If you’re single, it’s generally best for the beneficiary of the policy to be the owner. If you own the policy on your life, then the proceeds will be included in your estate as a taxable asset. Now, if your estate won’t exceed the estate tax exemption (again, $3.5 million in 2009), this doesn’t really matter at all. You won’t owe any estate taxes anyway.

       This logic wouldn’t apply if the beneficiary is a minor because it’s more important to make sure the money will be handled properly. In that case, you’ll want to make the designated guardian the beneficiary and owner of the policy or use an irrevocable trust to own and be the beneficiary of the policy. The trust would then contain provisions for how the proceeds should be distributed to the minor or the minor’s guardian. If that’s your situation, you’ll need to meet with an estate attorney to get advice about your circumstances.

       Finally, you don’t want to have a situation where the owner, insured person, and beneficiary are all different people because of gift tax consequences. For example, if your dad owns the life insurance policy that covers you but your child is the beneficiary, when you die the IRS will consider the insurance proceeds a gift from your dad to your best friend. Your dad would then owe gift taxes on the insurance proceeds. This is not a good thing and these unnecessary taxes can be easily avoided. The solution in this case is to have the child be the owner and the beneficiary. If that child is a minor, read the above paragraph for advice.

       If you have questions about your specific situation, feel free to leave them in the comments and I’ll try to help. But if you have complex circumstances, you should probably meet with an estate attorney to get the help you need. Yes, it will cost money, but it’ll cost much less than a mistake would.

Show Me in the Scriptures…

Corey —  October 27, 2009

       A reader recently left a comment on my post discussing how much you should have in your emergency fund. Frank said:

Could you please show me in Scripture where it says believers are to have an emergency fund?

Thank you.

       I responded to Frank’s question in the comments, but I think this is an important enough issue to address in its own post.

       Not all personal finance advice can be backed up with a specific quote from Scripture. Does that mean it is bad or unchristian? Not in the least. If the advice follows the pattern of teaching and wisdom in the Bible, it can still be considered good advice for Christians despite the lack of a specific Biblical reference.

       For example, is there a specific Bible verse telling you that you should create a will? No. But it’s still a wise thing to do. Is there a specific Bible verse that tells us to update our résumés? Again, the answer is no, but that doesn’t change the validity of the advice.

       This concept doesn’t apply just to personal finance. Is there a Bible verse telling us to buckle our seat belts? Nope. But does that mean you’re trusting your seat belt more than God if you buckle it? What about looking both ways before you cross the street? Do you lack faith because you do this?

       The problem with applying the “show me in the Scriptures” test is that there is not specific advice for every single situation we will encounter in life. There are guiding principles and values that, along with God’s Holy Spirit, will help us discern the wise choices. But you’re not going to find Bible verses telling you to brush your teeth, stop eating at McDonald’s, or to take advantage of an HSA if you’re eligible.

       Scripture does contain many verses teaching us the importance of wisdom in handling our affairs. Here are a couple examples:

       The simple believes everything, but the prudent gives thought to his steps.

Proverbs 14:15 (WEB)

       The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.

Proverbs 21:5 (WEB)

       Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.

Proverbs 21:20 (WEB)

       The prudent sees danger and hides himself, but the simple go on and suffer for it.

Proverbs 22:3 (WEB)

       In fact, the entire book of Proverbs points to the importance of wisdom and its place in the life of those who follow God. But what about all the times Jesus told us not to store up treasures on earth? Or when He taught us not to worry about what we’ll eat and drink and wear?

       Tell me, what did Christ mean when He said do not worry or be anxious? What does it mean to worry or be anxious? Those words mean to be distressed, uneasy, and tormented with care about something (material things in this case). Christ’s solution was for us to “seek first the Kingdom of God”. Instead of being worried about how we’ll meet our material needs, we should be worried about how we’ll meet our spiritual needs – how will we serve God and draw closer to Him.

       You can be worried and anxious about material things whether or not you wisely plan ahead. I can have an emergency fund and still be worried about material things. I can not have one and still be worried about material things. Even if I have an emergency fund, I can stop worrying either because I have that money saved or because I trust in God’s provision. That brings us to the other main teaching of Christ about money.

       When Jesus taught about storing up treasures and serving Money what did He mean? What does it mean to be wealthy or rich or to have treasure? All those words denote an abundance, which means having much more than what is sufficient or needed. Jesus’ warnings about wealth were not to tell us that we should never use money appropriately to meet our needs. Jesus warned us instead of the danger in accumulating more than what we really need. He told us not to become consumed with money and wealth.

       There is a vast difference between being consumed with accumulating an abundance of wealth and planning wisely to have enough to meet our needs. In the same way, there is a huge difference between being occupied with worry and prudently foreseeing needs and dangers and preparing to face those situations. These two teachings that Jesus gave us are so often stretched to mean that we should never save anything at all for the future because that demonstrates a lack of faith. The truth is that Jesus taught us to:

  1. Give God and His Ways priority in our thoughts and lives.
  2.        

  3. Avoid storing up more money than we will need. (That is, not to let becoming rich be our priority in life.)

       Proverbs commends wisdom and many New Testament verses speak to the importance of providing for your own family. We are not taught to make ourselves a burden to others when it is within our power to care for ourselves. Instead, we are taught that if there are any among us who cannot provide for themselves it is our responsibility as fellow Christians to care and provide for those people. Jesus’ teachings combined with the rest of Scripture in no way preclude us from saving for the future, using insurance, or utilizing money in any other wise manner. What is forbidden is making Money our god – giving priority to accumulating more money than we really need instead of serving God.

       The real issue then becomes finding contentment in Christ and determining our true needs. The danger we face is allowing the world to dictate our needs and success (a bigger house, a fancy car, expensive clothes, etc.) instead of learning to live on enough (our daily bread). That is the bigger issue here and the battle all of us Christians face. Once we have submitted to God in our discontentment and covetousness, we will be able to make Money serve us and God’s Kingdom instead of allowing it to be our master. But these are all topics worthy of their own discussion (contentment, defining needs, and avoiding covetousness).

       Please share your thoughts on this topic in the comments. I’m looking forward to hearing from all of you!

Civil War gravestones at Vicksburg by Matito on Flickr       Estate planning is probably the most neglected aspect of personal finance because we don’t like to deal with the reality of our own death. Making decisions about who will get what when we die and medical treatments we do or don’t want while dying are not exactly at the top of our “fun” list. But taking the time to deal with these critical issues can save your family and friends a lot of heartache, stress, and even money. There are four main estate documents you’re likely to need: a will, a durable power of attorney, an advance medical directive or living will, and a health care power of attorney.

Will

       A will simply states who you want to handle your estate (file the paperwork and make sure things are distributed properly) and how you want your property distributed. Everyone should have a will. Without a will, your estate will be distributed according to the laws of your state and the court will appoint someone to administer your estate. The handling and distribution of your estate could cost much more this way and go against your wishes.

       While there are ways to create your own will (like www.nolo.com or Quicken WillMaker), these tools should only be used in very straightforward situations. If your estate exceeds the estate tax exemption amounts, you have a complicated family situation, or you want to distribute your assets in a complex manner, you should consult with an estate attorney. If you even think you have a complicated situation, you should meet with an estate attorney to talk about it.

Durable Power of Attorney

       A durable power of attorney gives someone else the power to act on your behalf in a legal or business matter. That person is called your “attorney-in-fact”, and they are required by law to act in your best interest at all times. However, you must still be careful whom you choose for this position as any action they take will be treated as if you had done it yourself. The “durable” part simply means that it remains in effect even if you are incapacitated (e.g., in a coma). This document is useful when you are unable to act on legal or business matters for yourself either because you’re incapacitated or you’re just not available (e.g., out of the country).

       It’s a good idea to have a durable power of attorney regardless of your situation. This enables your attorney-in-fact to handle your affairs and sign on your behalf. Having one will make difficult situations a little easier to deal with. These documents can give very broad ranging powers to your attorney-in-fact, so you’ll want to consult an attorney before signing one and carefully consider who you will appoint as your attorney-in-fact.

Advance Medical Directive or Living Will and a Health Care Power of Attorney

       All of these documents deal with the health care decisions that must be made when you are unable to make them for yourself. If you’re in a coma or too sick to respond, these documents can guide your family members and physicians in determining your wishes.

       An advance medical directive or living will (depending on where you live) will provide specific instructions about the health care treatments you want or don’t want when you’re facing a terminal illness or condition. These can be very specific or very general, depending on what you include. However, they don’t usually address all possible situations and may not be clear enough to provide guidance for critical decisions. They do not give anyone the power to make decisions for you. They just make your wishes known.

       A health care power of attorney works just like a durable power of attorney except it is only for health care decisions. You appoint an attorney-in-fact and give them the power to make health card decisions on your behalf. You can include your wishes in this document as well, but unless you’re clear you can run into the same problems as the living will. While this won’t eliminate all possible problems (like family disputes), it does make clear who you want to have the final say about your health care decisions.

       The best strategy is to have both of these documents in place. This way you provide some guidance on your wishes but you also give someone else the power to make decisions in scenarios you may not have considered. Be as clear and straightforward as possible so there is no question about your desires.

       Again, you can use do-it-yourself tools to accomplish this, but you must be careful to ensure that your documents will comply with state laws. The counsel of an estate attorney will help you consider all possible scenarios. Some states provide free example documents you can use. Pennsylvania offers a combined living will and health care power of attorney that you can fill out. Search for similar resources for your own state.

Review and Update!

       The nice thing about getting your estate documents drafted and signed is that you don’t have to do it every year. Once you’ve completed them, you’ll just need to get them reviewed and updated as your situation or state laws change. If you get married, divorced, have children, or experience other major changes, you’ll want to meet with your estate attorney to review and update your documents. Don’t neglect this or you (or your family) could end up regretting it!

       Again, if you’re going to use an estate attorney, shop around. Don’t settle for the first quote you get. Talk to several attorneys, stick with the ones who specialize in estate planning, and ask for referrals from your family and friends. You may also be able to get a good referral from your accountant, financial planner, real estate agent, or banker. The most expensive attorney is not necessarily the best, but do your research before you go with the cheapest option.

       Finally, don’t put off this important but very unexciting task! It doesn’t sound like fun, but it is essential to having an organized and efficient financial plan. It will also help to ease the stress your family will endure during those painful situations. So get to work and get those estate documents ASAP!