Like auto insurance coverage, it is sometimes difficult to see the true value of life insurance coverage until you actually need it. In the meantime, the only way you will feel comfortable with your life insurance policy is if you understand, and agree with, the reasons you bought it in the first place.
There are many reasons for an individual to own life insurance coverage. Perhaps the most compelling reason is to purchase a death benefit which will provide for the financial needs of their survivors.
Determining how much life insurance coverage you need is a four step process:
1. Determine total short term needs in the event of your untimely death
2. Determine total long term needs in the event of your untimely death
3. Determine total resources available to family members
4. Provide insurance coverage for any remaining shortfall
Determining Your Total Short Term Needs
Short term needs are financial obligations and/or expenses arising within six months of death. Examples of short term needs include expenses you pay now such as:
1. loan balances (automobile loans, etc)
2. outstanding credit balances (credit cards, revolving lines of credit, etc)
3. mortgages (first mortgage, second mortgage, equity loans)
Add to these current expenses any death-related expenses which must be paid in the short term:
1. funeral expenses
2. final medical costs
3. estate settlement costs
4. estate taxes due
5. charitable bequests you would like to make at death
And if you don’t already have one, your survivors should be left with a liquid emergency fund sufficient to get them through any unexpected financial needs, perhaps six months worth of living expenses.
Determining Your Total Long Term Needs
In addition to covering your survivors’ short term needs, some level of monthly income will be needed to maintain their standard of living and meet financial goals you have made together. These long term income needs include:
1. a future income stream to cover standard of living items (we recommend that you identify several time periods with unique needs such as while kids are in home, when kids are gone, and your spouse’s retirement years.)
2. college expenses that you would like to cover for your dependents
3. elderly care expenses you plan on contributing for relatives
4. monetary support for a disabled dependent
5. mortgages (first mortgage, second mortgage, equity loans)
6. child care costs if your spouse will work after your death
The value of these future obligations is discounted back to present value amounts. This gives us a single dollar amount which, if invested, could provide funds for all of your long term goals.
Calculating Your Total Available Resources
At this point, we have a pretty good idea of what your total cash need would be in the event of your untimely death. With any luck, you have already begun to set money aside to cover some of these costs, and the government has a plan to help you as well.
1. Estimated earned income of your survivor(s)
2. Survivor Social Security benefit (continues while you have children under the age of 17)
3. Retirement Social Security benefit (begins approximately when your spouse turns 65)
4. Survivor benefits from your pension plan
The value of these future resources is discounted back to present value amounts. This gives us a single dollar amount which we can use to offset your total needs.
Providing Funds To Cover A Shortfall
When we compare our total needs to our total resources, most of us will find a shortfall. A shortfall situation means that our survivors will be left with the choice of either finding additional resources that we have not been able to identify, or do without many of the financial needs that you hope to cover.
Life insurance is uniquely suited for covering such a shortfall. It is a means of sharing the financial risk of premature death with many, many others who have similar concerns.
You pay a relatively small premium to an insurance company in exchange for their promise to pay your beneficiaries a specified death benefit in the event of your death. A financial need that arises from your death can be eliminated by a financial resource that is created upon your death.
Factors To Consider When Selecting Life Insurance
In an ideal world, we would each carry sufficient life insurance to continue to provide a lifestyle for our survivors similar to what they enjoy now, with us here. We cannot always afford to fully cover our survivor needs, particularly in our early years.
However, life insurance comes in many shapes and sizes. By carefully considering the type and amount of life insurance that best meets your needs you can ensure that you have provided for your family’s monetary needs, even if you are not here to do the providing.

If you purchased your home paying less than 20% down, chances are you had to purchase “mortgage insurance” in order to qualify for your loan. A mortgage insurance policy protects the bank in the event they are forced to repossess your house and sell it at a loss. As with most other types of insurance, you pay a monthly premium on top of your monthly mortgage payment for this policy. A mortgage insurance policy provides the means for purchasing a house you may otherwise be unable to afford, due to a limited down payment.

Once you own a significant portion of your home, usually around 20%, this insurance policy can, and should, be eliminated. Recently enacted federal law made it a little bit easier to rid yourself of your monthly mortgage insurance premium by requiring your lender to automatically eliminate your mortgage insurance, once you own 22% of your personal residence. Unfortunately the 22% equity is based on the value of your loan compared to the home’s purchase price so the lender is not taking into account appreciation on your home – just the gradual paydown of your mortgage.

In addition, these new laws did not take effect until July of 1999. If your mortgage was taken out prior to this date, you will need to check with your lending institution to find out how to eliminate the monthly mortgage insurance premium.

Budgeting is the systematic allocation of one’s limited resources (income) to a potentially unlimited number of needs and wants (expenses.) Budgeting your income, though oftentimes tedious and difficult to maintain, can help you better control how your income is being spent.

Some form of budgeting is a necessity if you hope to meet long-term financial goals. One’s ability to control debt is often a good measure of the success of their budgeting methods. For some, a budget is a detailed process of tracking each source and use of their money. For others, it is as simple as setting aside their savings first, then using the remainder for day-to-day living expenses.

If I Just Had Another 10 Percent!

For years, studies have been undertaken by all manner of institutions to find out if people feel like they are able to live within their means. Virtually every study has shown that in our society we not only are not comfortable living within our means, but that the vast majority of us feels that we would need just 10% more income to do so. If we just had that extra 10% we would save for our children’s college, we would save for retirement, we would prepare for tomorrow. Perhaps the most interesting revelation from these studies is that how much money we make does not impact the results of the surveys. The person earning $10,000 per year feels they need just 10% more, the person earning $100,000 feels they need just 10% more. The key is not in how much we earn, it is in how we use it.

Defining the Target

Our money is like arrows that we can shoot at targets. We pick the targets we shoot at, then decide afterwards whether or not we picked the right targets. Hopefully, over time, we begin to get a good feel for which targets we would like to hit with our arrows. The sooner that we learn that we have a limited number of arrows, the better we learn to select meaningful and lasting targets. Short term targets like expensive clothes, cars and vacations must be balanced against long term targets like college funding for our kids, an emergency fund, and retirement saving.

As our stage in life changes, our targets should change as well. No one can tell you which targets are right for you, but there are several principles that should be followed by every wise individual. Principles like:

• Preparing for a rainy day by establishing and funding an emergency fund.
• Preparing for an emergency by securing appropriate and adequate insurances.
• Paying yourself first by setting aside a portion of your income every month for long term objectives.

Reasons People Miss the Mark

Everyone knows what it feels like to spend unwisely. Our feelings of regret are strangely absent when we first make the unwise purchase, or the investment we don’t understand. But we soon know with a certainty that our hard earned resources would have been so much better used elsewhere.

Once you have decided to try to sell your home, the next big decision you will face is whether you want to sell it yourself of go through a real estate broker. The broker usually charges 5% to 7% of the selling price for her services. However, realtors know the local market, can help you determine a reasonable selling price, and save you a lot of the hassle involved if you sell it yourself.

In selecting a broker, invite several real estate brokers to tell you what they would deem to be a
fair selling price and explain their commissions and fees. They’ll probably do this for free. You will also want to ask about their past experience in the area.

Nearly 90% of all home sales are through agents and brokers. But if the market is a “sellers market”, if your home is sharp, perhaps you will want to try selling it yourself.

Is Fix-Up Necessary Before Listing?

It doesn’t hurt to do minor repairs and cosmetic touch-ups prior to showing your home to potential buyers. We hear a lot about “curb appeal” — how a house appears from the street. Is it attractive enough for a buyer to even want to come in and look? If there are major repair problems, you may have to lower your price in the end. Maybe what you think is important to do to fix up the house will not appeal to the buyer — she’d rather do it to suit her own taste.

How Much Should You Charge?

By definition, the value of any asset is whatever a buyer and seller can agree upon when both parties have access to all the relevant facts. With homes there are several ways to get a “starting point” from which to begin this process.

A good first step is to see what similar houses in similar locations in your community have sold for in the recent past. A local real estate agent will also have a lot of information about recent sales in your area. Don’t be overly impressed by the “asking price” of comparable homes, look to actual “sales prices” as your best guides. You may also want to enlist the help of a professional home appraiser — for a cost of between $200 and $400 an appraiser will prepare a detailed evaluation of the estimated value of your home.

What If Nothing Happens?

If it is the economy — national or local — you can’t do much about it. If no one is expressing any interest in your home, or it simply does not sell, you could consider the following:

• Lower your asking price.
• Make some obvious repairs or upgrades.
• Change real estate agents.
• Try selling the house yourself.
• Offer to finance all or part of the purchase price yourself.

Selling your home may take time and patience, but it deserves your most detailed attention as it is one of the largest transactions you will undertake in your financial life.

Often it is necessary to borrow money in order to make large purchases like cars, home improvements, college expenses and emergency purchases. Fortunately, our financial institutions make such loans readily available, and fairly easy to get. However, such loans can be fairly complex financial transactions. The more you know before going into a loan, the better prepared you will be to select the loan that best meets your objectives.
Structure Your Loan Carefully
How your loan is structured helps the lending institution determine how much risk they are assuming, and, in turn, what interest rate they will charge. There are three basic loan features that define your loan; whether the loan is paid back in installment payments or as a lump sum, whether the loan is secured or unsecured, and whether the interest rate on the debt is variable or fixed.
Installment Loans vs. Lump Sum Payment
When you take out a loan, you promise to repay the loan, plus interest, based on a contractual agreement. When you choose an installment loan, you borrow a lump sum of money, then pay back a fraction of what you borrowed at regular intervals over an extended period of time. In this manner you pay back both the loan principal and interest gradually. If you prefer, you may choose to borrow a lump sum of money, then pay back the entire loan principal and all accrued interest in a single payment at some future date in a single, lump sum payment.
Secured vs. Unsecured Loans
When a lending institution analyzes the risk they associate with a debt, one of the first things they look at is whether the loan is secured or unsecured. A secured loan is a loan based on your ability to provide collateral of similar value to the amount being loaned to you. In the event of a default, the bank can sell the collateral and recoup most, if not all, of the amount loaned. A home loan is the best example of a secured loan – the bank will loan the majority of the purchase price of the home, but retains a lien against the home for as long as the loan is outstanding.

In contrast, an unsecured loan is based solely on a promise of repayment. Because the lender holds no collateral, unsecured loans hold significantly more risk for the lender. This added risk is usually reflected in a higher interest rate being charged on the funds borrowed.
Fixed vs. Variable Interest Rate
The interest rate you pay on a loan is based on many factors including your credit rating, your payment history, and whether your loan is based on a fixed or a variable interest rate. Fixed interest rate loans carry a rate attached to them that does not change over the period of the loan – it is the same rate the last day of the loan as it was the first. Because the lender cannot change the rate as market conditions change, they usually have higher interest rates to begin with than a variable interest rate loan.

The variable interest rate loan, in contrast, begins slightly lower than the fixed rate, but it is “adjusted” from time to time to reflect current economic factors. If rates drop, the variable loan rate will normally drop. If rates rise, the variable loan rate will normally rise. Because of the initially lower interest rate, the monthly payment on a variable rate loan is lower than it’s fixed counterpart. This lower payment often allows you to qualify for a higher loan balance.
Required Lender Disclosure
Lenders are required to tell you exactly what a loan will actually cost per year, expressed as an annual percentage rate (APR). Some lenders charge lower interest but add high fees; others do the reverse. The APR — annual percentage rate — allows you to compare them on equal terms. It combines the fees with a year of interest charges to give you the true annual interest rate. If the lender quotes you a periodic interest rate, this won’t be the true interest rate because it does not include the fees he may charge you.
Every lender is required to provide a total cost disclosure before a loan is made. It will tell you exactly what the loan will actually cost you in dollars and cents if you make all payments to the lender as you’ve agreed.

As most people have heard, trusts are perhaps the most useful tool in estate planning. They help manage assets during life and long after we are gone.

When you place assets in a trust, the trust gets legal title to the assets. But, who pays income tax on interest, dividends, gains and other income generated from the assets when they are in the trust? This depends on the type of trust.

For income tax purposes, there are generally two types of trusts, “grantor” trusts and “non-grantor” trusts. With a grantor trust, all of the income and deductions flows to the income tax return of the creator of the trust, the “grantor.” In fact, a grantor trust typically uses the social security number of the grantor as its taxpayer identification number.

A revocable living trust, the most common type, is a grantor trust while the grantor is alive. Certain powers held by the creator of the trust, such as the power to revoke the trust, cause the trust to be a grantor trust. Other technical administrative powers also can cause a trust to be a grantor trust.

If a trust is a not a grantor trust, it is a non-grantor trust. With a non-grantor trust, the trust has a separate taxpayer identification number, which is like the trust’s own social security number.

The trust’s income and deductions go on its own return. While an individual files a Form 1040, a non-grantor trust files a Form 1041. If such a trust makes distributions to a beneficiary, in general those distributions carry any taxable income the trust has to the beneficiary, up to the amount of the distribution. So, if the trust earns $1,000 of income and distributes $400 to a beneficiary, $400 of income is taxed to the beneficiary and the trust gets an offsetting deduction, so that $600 is taxed to the trust itself.

If the trust has the same income and distributes $3,000, the full income of $1,000 is taxed to the beneficiary and nothing is taxed to the trust. The additional $2,000 is considered a distribution of principal and is not taxed to the beneficiary.

Of course, if you are a trustee, it is important to consider the income tax brackets of the beneficiaries and of the trust itself when deciding on when and to whom distributions should be made. An attorney specializing in tax and estate planning can help you plan or administer a trust in a manner that maximizes tax savings while minimizing headaches.

Mr. Nathan T. McIntyre is the founder of McIntyre Law Group and is a member of the American Academy of Estate Planning Attorneys. For more information on the issues discussed in this article or to attend an upcoming seminar, call (714) 893-9993 or click here to learn more.

Only 14% of California households can now afford the median price home.  Both buyers and sellers need to know about the Free Way to buy real estate – Free Way RE.

Free Way RE is a Realtor company that also owns a mortgage brokering company to offer their clients a Free Purchase Loan and Up To $18,750 Free Cash to purchase a home of their choice.

The key to buying or selling real estate is the financing.  This is obvious for buyers because the cheaper the financing, the more home that they can afford.  The financing could determine their ability to buy a home at all.

In this market, sellers must realize that buyers are not going to drive up with a trunk full of cash to pay for their home – the cheaper the financing the more potential buyers.

This new approach to home buying is clearly the smartest way also.  Nobody would go out to purchase a car without any idea of what the car payments would be – most people decide before hand if they want monthly payments for a Rolls Royce or a Toyota.

Buying a home can be a simple three step process:

1.      Get the financing – specially a Free Purchase Loan.
2.      Choose a home – with the assistance of Free Way RE
3.      Get Up To $18,750 Free Cash through escrow and move in.

There is a little known estate planning technique that wealthy clients are lining up to hear about. It works well in a low interest rate environment, especially when stocks are down in value. It is called a Grantor Retained Annuity Trust or “GRAT.”

With a GRAT, you set up a trust that pays you an income stream for a set period of time. At the end of that time, what is left in the trust goes to your descendants or other beneficiaries or to a trust for their future benefit. The intriguing thing about the GRAT is that you can make a gift without making a gift. If the value of what you are receiving is calculated to be worth the full value of the property you put into the trust, the value going to the beneficiaries is presumed to be zero—even though they may end up getting a great deal of money. Does this sound too good to be true? The technique was pioneered by one of Sam Walton’s heirs, Audrey Walton. Audrey set up two GRATs like this and contributed a considerable amount of Wal-Mart stock to each GRAT, a cool $100,000,000 worth to each GRAT to be precise. The IRS challenged this technique, but lost in court.

Let’s look at an example. You contribute $100,000 to a trust that pays you an annuity of $22,500 each year for five years. If the government-set interest rate during the month of contribution were 4%, the value of the interest going to your beneficiaries would be zero. Simply, if you invested the $100,000 at 4%, you would just have enough to pay yourself the $22,500 each year for five years and then the trust would be exhausted.

So, what is the benefit? If you can make more than the assumed interest rate, the growth of the trust goes gift tax-free to the beneficiaries. If in our example the assets earned 7%, the balance at the end of the five-year term would be $11,000, gift tax-free to the beneficiaries.

In order to leverage this idea, you can contribute interests in your closely-held business. Minority interests can qualify for significant valuation discounts. As an example, assume your business earns 7% annually and is worth $1,000,000. What is a 20% share of your business worth? It may be worth only $100,000 because a 20% share has no control. If you contribute 20% of the business into the trust, it really generates the equivalent of a 14% return. How is that possible? The entire business grows at 7% annually, or $70,000. 20% of $70,000 is $14,000, which is 14% of the $100,000 value placed on the asset upon contribution. In this example, the value going to the beneficiaries at the end of the five-year term would be $44,000, again entirely gift tax-free to the beneficiaries.

Better yet, what if you owned a $100,000 asset you thought might double or triple in value over the next five years? You could contribute it to a GRAT and you would receive back $112,500 in payments over five years. The remaining growth, $87,800 in the case of a doubling in value, or $187,500 in the case of a tripling, would go gift tax-free to the beneficiaries of the GRAT.

What if the assets under-perform the assumed interest rate? You would simply get all the assets back as though you had never created the trust.

This is just one of many advanced estate planning techniques available. An attorney specializing in estate planning can help you choose a plan that works for you, from a tax perspective and from a personal perspective.

Mr. Nathan T. McIntyre is the founder of McIntyre Law Group and is a member of the American Academy of Estate Planning Attorneys. For more information on the issues discussed in this article or to attend an upcoming seminar, call (714) 893-9993 or click here to learn more.

Shakespeare may have asked “to be or not to be” in Hamlet, Act III, Scene One, but today, the more pertinent question is “to Roth or not to Roth.”

Back in 1997, Congress enacted what became known as the “Roth IRA” after it’s main supporter, the late Senator Philip Roth. With an ordinary IRA, you make tax-deductible contributions to your retirement account. The earnings on the account are tax-deferred. When you take distributions, the entire amount is taxable as ordinary income. You must start taking distributions beginning shortly after you reach age 70 ½. The distributions are taken over your life expectancy.

By contrast, with the Roth IRA, the contributions to the account are not tax-deductible. While this may not seem to be such a great deal, withdrawals from the account are tax-free. In fact, even the earnings on the account are tax-free, not just tax-deferred. To make things even better, even after you reach age 70 ½, you are not required to start taking distributions like you must from traditional IRAs and other retirement plans. After your death, the distributions your beneficiaries are required to take each year are the same as with a regular IRA, but they are not taxable even to your beneficiaries.

In order to make a full Roth IRA contribution, you must have income under $95,000 if single or $150,000 if married filing jointly. There is a phase out of the contribution above that income level and if your income is above $110,000 if single or $160,000 if married filing jointly, no Roth IRA contribution is allowed. Contribution limits are the same for both types of IRAs, $4,000 in 2006 and 2007 and $5,000 thereafter. Further, if you are age 50 or above, you may make an additional $1,000 “catch up” contribution.

Congress expanded the Roth idea to 401(k) plans. Now, if your employer’s plan allows for it, you may designate part of your 401(k) contribution for the year as a “Roth 401(k)” contribution. The maximum contribution to a 401(k) in 2006 and thereafter is $15,000. If you are age 50 or above, you may make an additional “catch up” contribution of $5,000. These limits apply to both regular and Roth 401(k) plans.

You may convert from a regular IRA to a Roth IRA if you have income below $100,000. In the conversion process, you would pay income tax on the balance of the regular IRA, but then would never pay tax on the converted IRA or its earnings upon withdrawal. In 2010, there is no income limit for doing conversions to Roth IRAs. This would make Roth IRAs even more attractive to those with higher incomes and greater ability to pay the tax upon conversion. Even before 2010, you may be able to manipulate your income by moving income and expenses over which you have control. For example, you could change your investments so that you make less income in a particular year and more income in a subsequent year. In the year of lower income, you would Roth the IRA.

Conversion can be very powerful. For example: Let’s say you are age 70 and convert your $250,000 IRA to a Roth IRA. Now, rather than having to take distributions that will drain the IRA over your life expectancy, no distributions would be required until after your death. If you earn 8% on the funds and live 18 more years, your assets will increase to $1,000,000. When your beneficiaries withdraw the assets over their life expectancies, the distributions will be tax-free to them.

A qualified estate planning attorney can help you plan for your retirement plan assets so that you and your beneficiaries can make the most of them.

Mr. Nathan T. McIntyre is the founder of McIntyre Law Group and is a member of the American Academy of Estate Planning Attorneys. For more information on the issues discussed in this article or to attend an upcoming seminar, call (714) 893-9993 or click here to learn more.

Americans today are living longer and longer. However, this can be a double-edged sword. An increasing number of Americans are living long enough to suffer from mental incapacity. Over 4 million Americans suffer from Alzheimer’s Disease alone. In fact, according to the National Institute on Aging, half of those over age 85 have Alzheimer’s Disease. Of course, Alzheimer’s is only one cause for mental incapacity.

How do you tell if someone has mental capacity? Legal capacity has slightly different standards depending upon the context. In estate planning, there are two standards which may be applied, depending upon the circumstances: “testamentary capacity” and “contractual capacity”. Both require that the individual has attained a minimum age, typically eighteen. However, they diverge significantly after that.

Testamentary capacity is that level of mental acuity necessary to make a will. Generally, in order for a will to be valid, the person must understand they are signing a document that will affect the disposition of their assets, they must understand the nature and extent of their property, and they must recognize who their “natural objects of bounty” are. A person’s natural objects of bounty would be their family, close friends, etc. Of course, a person can recognize their natural objects of bounty and choose to leave assets elsewhere, such as to charity.

States require a higher level of mental capacity in order to execute a contract. Typically, you need to understand that you are entering a contract, the rights and duties under the contract, etc.

Interestingly, in the estate planning process some documents require testamentary capacity while others require contractual capacity. A will requires testamentary capacity. A trust technically is a contract between the grantor and the trustee and would require contractual capacity. However, many states have recognized the nonsensical distinction and now apply a testamentary capacity requirement to a trust. Life insurance and retirement accounts are contracts. In most states these would require contractual capacity.

As a result of these differences, you could end up in an awkward position of being able to change your will but not your beneficiary designation. Agnes Marquis found herself in that situation. In November 2000, Ms. Marquis changed her life insurance beneficiary designation form, naming her nephew. At the time, Mrs. Marquis thought that someone was talking to her through the television, that her dog nursed her back to health, that she was going to marry Jesus, and that unidentified Quakers were going to break into her house at night. Not surprisingly, a dispute regarding her capacity ensued at her death. The Maine Supreme Court held that the beneficiary designation change required contractual capacity which she lacked.

It is important to plan ahead to anticipate potential incapacity. A qualified estate planning attorney can help you draft your estate plan so that someone can make changes for you if you become incapacitated. Further, such an attorney can help you minimize the risk that your documents will be challenged due to lack of capacity.

Mr. Nathan T. McIntyre is the founder of McIntyre Law Group and is a member of the American Academy of Estate Planning Attorneys. For more information on the issues discussed in this article or to attend an upcoming seminar, call (714) 893-9993 or click here to learn more.