Why do so many parents lack life insurance and wills?

Kelli B. Grant | @kelligrant

Wednesday, 8 Jul 2015 | 7:30 AM ET

CNBC.com

Chris Ryan | Getty Images

 

Parents juggling work-life balance may be dropping the ball in an important area—financial planning.

More than a third of parents with kids younger than 18 (37 percent, to be exact) don't have life insurance, according to a new survey from Bankrate.com of 1,000 adults.
Of those who are insured, half have less than $100,000 in coverage—which isn't enough for common life insurance aims of replacing the deceased parent's income, paying off the mortgage or funding the kids' college education, said Doug Whiteman, an insurance analyst at Bankrate. "We found it rather unsettling," he said.

"This should be a wake up," said Whiteman. "You really do need to sit down and think, what if something were to happen to me?"

Apparently that's a question most of us don't want to think about—or not very often, anyway.
Earlier this year, a survey from Caring.com found that only a little more than half of parents have a will and, of those, 60 percent haven't updated it within the last five years.
"Oftentimes young parents are transitioning into this role of greater responsibility," said Frank Paré, a certified financial planner and president of PF Wealth Management Group in Oakland, California. It's a shift to plan financially for dependents, from previously worrying about just your own financial future. "Managing that, things can get lost," he said.

Life insurance is one of the first things parents should put in place. The rule of thumb is to have an amount equivalent to seven to 10 times your income, said Whiteman, but the details of how much and what kind of insurance will depend on your family's needs and future goals.
Next up: Draft, or revisit your will. That's important not just to make sure assets pass to your kids, but also to name a guardian to care for them if both you and your spouse were to pass away, said Karin Maloney Stifler, a certified financial planner in Solon, Ohio. "Without a will, the parents are basically giving their state the power to decide who raises their kids," she said. "I don't know a parent who would feel good about that."


While you're at it, update beneficiaries on assets that transfer automatically when you die, like life insurance policies, many retirement plans and annuity contracts. Beneficiaries listed there trump even your will, so an out-of-date designation (say, an ex-spouse, or your sibling) would mean your kids aren't in line to get that cash, if that's what you'd prefer.
It's not all worst-case scenario planning. Parents should also revisit their budget. "Cash flow is king," said Paré. "Once the child comes, you have all these new expenses." Consider where you can shift funds to maintain retirement goals, and incorporate new aims such as child-rearing expenses and college savings. "You need to have those goals set to make sure you're on track," he said.

Kelli B. Grant 

Personal Finance and Consumer Spending Reporter

Unpaid costs of caregiving rival Walmart sales

Kelli B. Grant | @kelligrant

Thursday, 16 Jul 2015 | 1:01 PM ET

 CNBC.com

Family caregiving takes its toll—not just on families, but on the economy.
In 2013, an estimated 40 million family caregivers provided $470 billion in unpaid care, according to a new study from AARP. That's up from $450 billion in 2009.

To put the figure in perspective, the report notes, $470 billion is nearly as much as Walmart sales for that year and surpasses annual spending of both Medicaid and out-of-pocket health care costs. Yet, "it's a conservative estimate," said Susan Reinhard, senior vice president and director of AARP's Public Policy Institute. The figure is based on caregivers providing an average 18 hours of care weekly, valued at an average hourly rate of $12.51 (calculated using data on median home health aide wages).

Part of the increased value of unpaid care stems from family members undertaking more complicated tasks, particularly medical care, said Reinhard, who is also a registered nurse. "We expect family caregivers to do things that make nursing students tremble," she said—like give injections, care for wounds or operate medical equipment such as ventilators. A 2013 AARP survey found that 46 percent of caregivers were performing such complex tasks.

Almost two-thirds of caregivers work full- or part-time jobs in addition to caring for a loved one, which generates additional strain, according to the study. A little more than half say they're overwhelmed by the amount of care provided, and 38 percent report some level of financial strain.


Early planning conversations are one of the best ways for families to prepare, although not the easiest, said Carolyn McClanahan, a certified financial planner in Jacksonville, Florida. "The problem is people refuse to talk about what their aging years are going to look like," she said. Or they may insist they never want to go into a nursing home.


Have frank discussions about what preparations, if any, your parent or loved one has made for care, including insurance, savings and other resources, said McClanahan. Discuss any advance health-care directives. If family caregiving is an option, set out a contract detailing which sibling or other member can help with what, including hands-on care and financial support, she said.
It's also important for potential caregivers to consider technology and resources that could lighten the load. Apps can help remote caregivers monitor their loved one's medication usage and health records, said Dr. Davis Liu, a family physician and the author of "The Thrifty Patient." You can also investigate whether your workplace offers family leave options, flexible hours, telecommuting or unpaid leave.


"Now is the time to prepare for this," said Reinhard.

Kelli B. Grant 

Personal Finance and Consumer Spending Reporter

For millions, 401(k) plans have fallen short

Kelley Holland | @KKelleyHolland

Monday, 23 Mar 2015 | 7:00 AM ET

 

You need to know this number: $18,433.

That's the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute. Almost 40 percent of employees have less than $10,000, even as the proportion of companies offering alternatives like defined benefit pensions continues to drop.
Older workers do tend to have more savings. At Vanguard, for example, the median for savers aged 55 to 64 in 2013 was $76,381. But even at that level, millions of workers nearing retirement are on track to leave the workforce with savings that do not even approach what they will need for health care, let alone daily living. Not surprisingly, retirement is now Americans' top financial worry, according to a recent Gallup poll. 
 
To be sure, tax-advantaged 401(k) plans have provided a means for millions of retirement savers to build a nest egg. More than three-quarters of employers use such defined contribution plans as the main retirement income plan option for employees, and the vast majority of them offer matching contribution programs, which further enhance employees' ability to accumulate wealth.
But shifting the responsibility for growing retirement income from employers to individuals has proved problematic for many American workers, particularly in the face of wage stagnation and a lack of investment expertise. For them, the grand 401(k) experiment has been a failure.
"In America, when we had disability and defined benefit plans, you actually had an equality of retirement period. Now the rich can retire and workers have to work until they die," said Teresa Ghilarducci, a labor economist at the New School for Social Research who has proposed eliminating the tax breaks for 401(k)s and using the money saved to create government-run retirement plans.

A historical accident?

It wasn't supposed to work out this way.

The 401(k) account came into being quietly, as a clause in the Revenue Act of 1978. The clause said employees could choose to defer some compensation until retirement, and they would not be taxed until that time. (Companies had long offered deferred compensation arrangements, but employers and the IRS had been going back and forth about their tax treatment.)
"401(k)s were never designed as the nation's primary retirement system," said Anthony Webb, a research economist at the Center for Retirement Research. "They came to be that as a historical accident."

History has it that a benefits consultant named Ted Benna realized the provision could be used as a retirement savings vehicle for all employees. In 1981, the IRS clarified that 401(k) plan participants could defer regular wages, not just bonuses, and the plans began to proliferate.

By 1985, there were 30,000 401(k) plans in existence, and 10 years later that figure topped 200,000. As of 2013, there were 638,000 plans in place with 89 million participants, according to the Investment Company Institute. And assets in defined contribution plans totaled $6.6 trillion as of the third quarter of 2014, $4.5 trillion of which was held in 401(k) plans.
"Nobody thought they were going to take over the world," said Daniel Halperin, a professor at Harvard Law School. who was a senior official at the Treasury Department when 401(k) accounts came into being.

Rise of defined contributions

But a funny thing happened as 401(k) plans began to multiply: defined benefit plans started disappearing. In 1985, the year there were 30,000 401(k) plans, defined benefit plans numbered 170,000, according to the Investment Company Institute. By 2005, there were just 41,000 defined benefit plans–and 417,000 401(k) plans.

The reasons for the shift are complex, but Ghilarducci argued that in the early years, "workers overvalued the promise of a 401(k)" and the prospect of amassing investment wealth, so they accepted the change. Meanwhile, companies found that providing a defined contribution, or DC, plan cost them less. (Ghilarducci studied 700 companies' plans over 17 years and found that when employers allocated a larger share of their pension expenditures to defined contribution plans, their overall spending on pension plans went down.)
 
But the new plans had two key differences. Participation in 401(k) plans is optional and, while pensions provided lifetime income, 401(k) plans offer no such certainty.
"I'm not saying defined benefit plans are flawless, but they certainly didn't put as much of the risk and responsibility on the individual," said Terrance Odean, a professor of finance at the University of California, Berkeley's Haas School of Business.

Early signs of trouble

That concept may not have been in the forefront of employees' minds at the start, but problems with 401(k)s surfaced early.
For one thing, employee participation in 401(k) plans never became anywhere near universal, despite aggressive marketing by investment firms and exhortations by employers and consumer associations to save more. A 2011 report by the Government Accountability Office found that "the percentage of workers participating in employer-sponsored plans has peaked at about 50 percent of the private sector workforce for most of the past two decades."
The employees who did participate tended to be better paid, since those people could defer income more easily. The GAO report found that most of the people contributing as much as they were allowed tended to have incomes of $126,000 or more.



In part, that is because the ascent of 401(k) plans came as college costs started their steep rise, hitting many employees in their prime earning years. Stagnating middle-class wages also made it hard for people to save.
Fees have been another problem. Webb has studied 401(k) fees, and he concluded that "as a result of high fees, fund balances in defined contribution plans are about 20 percent less than they need otherwise be."
The Department of Labor in 2012 established new rules requiring more disclosure of fees, but it faced strong industry opposition, including a 17-page comment from the Investment Company Institute.

Failure of choice

Most employees also turned out to be less than terrific investors, making mistakes like selling low and buying high or shying away from optimal asset classes at the wrong time.
Berkeley's Odean and others have studied the effect of investment choice on 401(k) savers, and found that when investors choose their asset class allocation, a retirement income shortfall is more likely. If they can also choose their stock investments, the odds of a shortfall rise further.
"401(k)'s changed two things: you could choose not to participate, and you chose your own investments, which a lot of people, I think, screw up," Halperin said.


Benna, who is often called the father of the 401(k), has argued that many plans offer far too many choices. " If I were starting over from scratch today with what we know, I'd blow up the existing structure and start over," he said in a 2013 interview.
Another problem is that when 401(k) savers retire, they often opt to take their savings in a lump sum and roll the money into IRAs, which may entail higher fees and expose them to conflicted investment advice. A recent report by the Council of Economic Advisors found that savers receiving such advice, which may be suitable for them but not optimal, see investment returns reduced by a full percentage point, on average. Overall, the report found that conflicted investment advice costs savers $17 billion every year.

The result of all these shortcomings? Some 52 percent of American households were at risk of being unable to maintain their standard of living as of 2013, a figure barely changed from a year earlier—even though a strong bull market should have pushed savings higher and the government gives up billions in tax revenue to subsidize the plans.
In a hearing last September on retirement security, Sen. Ron Wyden, D-Ore., declared that "something is out of whack. The American taxpayer delivers $140 billion each year to subsidize retirement accounts, but still millions of Americans nearing retirement have little or nothing saved."

Retirement worries rise

As problems mount with 401(k)s, Americans' worries about retirement security are intensifying.
A 2014 Harris poll found that 74 percent of Americans were worried about having enough income in retirement, and in a survey published recently by the National Institute on Retirement Security, 86 percent of respondents agree that the country is facing a retirement crisis, with that opinion strongest among high earners.

Changes may come, but for now, 401(k) plans and their ilk remain Americans' predominant workplace retirement savings vehicle. They may be a historical accident, but for the millions of people now facing a potentially impoverished retirement, the fallout is grave indeed.

As a former Treasury official, Halperin witnessed the creation of 401(k) accounts, But, "on balance, I don't think it was a big plus" that the accounts were created, he said. "I don't take credit for it. I try to avoid the blame."

Kelley Holland 

Special to CNBC

Why catch-up contributions don't work for many savers

Kelley Holland | @KKelleyHolland

Friday, 10 Jul 2015 | 8:00 AM ET

 CNBC.com

When policymakers came up with a plan to help older workers boost their retirement savings by allowing "catch-up" contributions, it probably seemed like the perfect fix. After all, who wouldn't want to sock away more tax-deferred money for later in life?

Plenty of people, it turns out. Researchers at Boston College's Center for Retirement Research studied the effect of allowing those 50 years and older to make higher 401(k) contributions. They found that they're used almost entirely by a small minority of the millions of people saving through the retirement plans—and they are not the people who need it most. 
 
The catch-up contribution, which allows employees over the age of 50 to contribute an extra amount to their 401(k) beyond the standard limit, came into being as part of the Economic Growth and Tax Relief Reconciliation Act of 2001. Employers are not required to offer this feature to employees, but some 97 percent of them do, according to the Plan Sponsor Council of America. In 2015, every employee is allowed to contribute up to $18,000 to a 401(k), but employees over age 50 can contribute another $6,000, or 33 percent more.

For people who can afford to make catch-up contributions, the effect can be powerful. Jean Young, a senior research analyst at the Vanguard Center for Retirement Research who has studied this retirement plan feature, found that 42 percent of people earning $100,000 or more are taking advantage of it. Even for someone earning $150,000, that amounts to a 16 percent savings rate.
But the Boston College center found that just 9 percent of participants in 401(k) plans contribute within 10 percent of the maximum. And not surprisingly, they are better off: Their average income and net worth were $163,000 and $439,000, respectively, while mean income for 401(k) savers overall was $57,000 and net worth was $200,000.


"Further tinkering with the contribution limit for 401(k)s would likely affect only a very small group of people; it does not offer a broad-based solution for low saving rates in the United States," the researchers concluded.

Jose Luis Pelaez Inc. | Blend Images | Getty Images

 

Employers are trying other ways to encourage employees to save for retirement, like automatically enrolling new employees in 401(k) plans. Vanguard has studied this approach, and it found that participation among new hires was 91 percent when they were automatically enrolled, compared with 42 percent when they had to enroll voluntarily.

Other companies are automatically escalating the amount employees contribute. And some are doing both.

These automatic features can be powerful. Yet too often, the way they are designed falls short of the mark, according to Young. For example, half the plans she studied that offered automatic enrollment had a default contribution rate of just 3 percent, and employees are highly likely to stick with whatever the default rate is: just 10 percent tend to opt out even at default rates as high as 6 percent.
"At the end of the day, for over half of these participants, the design the sponsor chooses is the design they have three years later," she said.

Because people stick with default contribution levels, low rates may actually limit what people are saving. And in fact, Vanguard's research has shown that savings rates are lower in plans with automatic enrollment.

As for how 401(k) participants responded to automatic escalation, Young found that they were also likely to stick with default rates and levels. But employees participating in plans without automatic escalation were more likely to "override" the plan design and increase their contribution rate than were employees in plans that had some automatic escalation, she said. As with automatic enrollment plans, the default levels were key to how much people actually contributed.
Young is hopeful that features like automatic enrollment (at higher default levels) will ultimately move the dial on retirement savings. They clearly affect participation, she said.
"The structure of automatic enrollment is really powerful, but we need to get the levels right," she said.

Kelley HollandSpecial to CNBC

How to talk with your partner about money

Landon Dowdy | @LandonDowdyCNBC

Wednesday, 1 Jul 2015 | 9:16 AM ET 

CNBC.com

You've unpacked the gifts and said your "I do's" this wedding season, but before you get settled into your newly married life after the honeymoon, it's a good idea to talk about your finances.
Whether you're about to get married, just married or have been married for years, it's important to sit down and have the money talk with your significant other. Sure it may seem like a no-brainer, but you'd be surprised by how many couples aren't on the same page with their finances. According to a new survey from Fidelity, 43 percent of the people could not say how much their partner earned and 10 percent of that group were off by $25,000 or more.



Having regular money talks that are transparent is key to financial success as a couple. Communication and honesty are the "most important things," said Victoria Fillet, a certified financial planner and founder of Blueprint Financial Planning in Hoboken, New Jersey.
Here's a strategy on how to have the talk.

Know your credit scores

If you're like most couples, money is one of the main reasons you argue. So as newlyweds, you want to get off to a good start with your finances. Experts suggest both getting your credit reports and talking through them. Now that you're married, your credit score affects the other person. If you want to get a loan for a house or car, your partner's bad credit could affect that. Forty-five percent of millennials acknowledge bringing credit card debt into the relationship, according to a recent study by NerdWallet.

If one partners' credit isn't as good as the other's, it is important "not to burden the other person," Fillet said. Figure out a plan where you pull together a joint account for the household expenses and necessities and separate accounts for the extra money after that. Then that person can use the extra money to pay off his or her debt. This helps put a fair and equitable plan in place for both of you.
Read MoreYour partner might be hiding debt from you

Take a look at your credit score, your credit history, your debts and assets so that you know exactly what you are working with. "The most important things is that nobody be surprised and you both work on it together because your married," said David Mendels, a certified financial planner at Creative Financial Concepts in New York City.

Budget together

Being a couple, it's going to be an adjustment thinking in terms of "my finances" to "our finances." A good way to plan together as a couple is to make a budget. Figure out what you each bring in, then try making a list of your monthly income and expenses. That includes your expenses that are a must, like your rent or mortgage, utilities and insurance. Then maybe grab a glass of wine and figure out what extra spending is most important to each of you, such as your gym membership or her manicures.
Once you've got a budget, it's time figure out your accounts. Do you want a joint account, separate accounts, or a combination of both? Financial planners say this depends solely on the couple.
Read MoreHow much should you actually save for emergencies?

For some couples, being together means one unit now, so they want to have one pot of money to budget and spend from. Figure out the logistics of a merge. If you have drastically different spending habits, like one is a big spender and the other is a penny pincher, then it might be a good idea to have a joint account for shared expenses and separate accounts for personal expenses.
Also, set a threshold to discuss big spending items. For example, if you spend $50, it may not be a big deal, but you spend $1,500 you should talk about it and decide about that purchase together.
"Couples do not necessarily need to make all financial decisions together, but for the bigger ones, they should confer and agree. To do that well, couples need transparency to know what is happening with all the money," said Dan Moisand, certified financial planner at Moisand Fitzgerald Tamayo in Melbourne, Florida.

Plan for the future

You've promised til death do you part and for richer or poorer, but have you really thought what goes into all of it? Now that you have talked about your financial history and your budget, it's time to start planning for your long-term goals. If you've already saved up for a home (good for you), think about what else you both are working toward. It's never too early to start planning for children or retirement.
Read MoreHow to stop losing sleep over money
When it comes to your budget, financial planners suggest you save 20 percent of your take-home pay and put 10 percent toward savings and the other 10 percent toward retirement. If you have debt, aim to live on 70 percent of your take-home pay. Almost every married couple didn't know what they were doing with their finances when they got married, Mendels said, and many wished they'd saved more.
"The sooner you start the easier it is to get control," he said.

Money skills your teen needs for college

Kelley Holland | @KKelleyHolland

Wednesday, 1 Jul 2015 | 3:24 PM ET 

CNBC.com

Parents sending a kid off to college this fall have lengthy shopping lists, from those extra-long sheets for dorm beds to notebooks and flash drives. Your teen also needs to land on campus with some money smarts.

Many teens are clueless about managing their finances. In a study of college students' financial behavior by the National Endowment for Financial Education, 73 percent of the students reported engaging in some kind of risky financial behavior in the past six months, from paying bills late to maxing out credit cards. If you haven't started teaching your teen about money, this summer is go time.


"Kids go from not paying any bills to all of a sudden having student loans and rent and eating out and groceries, so it's all on them at once," said Vince Shorb, CEO of the National Financial Educators Council.

Luckily, financial literacy experts have myriad suggestions for teaching your teen about money. Even if you have only a couple of months, they believe you can impart a lot of essential information.


Learning about credit is crucial, according to Laura Levine, president and CEO of the Jump$tart Coalition for Personal Financial Literacy. "We want people to understand credit, not just how to use a credit card but how credit works," she said. Too often, teens grow up watching their parents pull out a plastic card to pay for everything, and they may not understand that using credit creates a payment obligation. But in reality, "you can't skip a month" when you owe money without a cost.

Some parents believe that a debit card is a form of training for a credit card, but Levine said that is not so: One taps a bank account and perhaps lets a parent see where a teen is spending money, while a credit card can give much more free rein to seriously mess up their credit rating.

Another element of credit is simply keeping a credit card safe, Levine said. "Young consumers are notorious for not being careful enough with what they do with their credit cards." A case in point: the teen who leaves a credit card sitting out in a dorm room. The roommate may be trustworthy, Levine said, but "what happens with the roommate has friends in the room?"

Shorb recommends that parents do all they can to help teens "build those financial muscles," ideally by gradually increasing their responsibility for money decisions. Without that, he said, they will be susceptible to all sorts of money pitfalls.

"Money is such an emotional subject," Shorb said. "If your buddies are going out to dinner and you are going ot be home alone, there is pressure to go."
Shorb recommends that before a teen moves out, he or she should have responsibility for paying some of their expenses, be it clothing or "rent" to the parents. And before they get to college, they should have a bank account established and ready, and automated bill payment in place if that's applicable. Apart from that, Short said it is important for parents to step back and refrain from rescuing a student who makes poor financial choices.



One obvious risk is that students spend too much money too early. Peer pressure can contribute to that, as does the fact that many student IDs double as prepaid cards onto which colleges load student aid funds at the beginning of a term.
If a student does run out of money, Shorb said, parents can consider it a teaching moment. "Instead of sending money, send a grocery story gift certificate" or some other form of money that can only be used for the purpose parents intend, and make it a loan with interest. "We need to start associating some pain with some bad decisions," he said.

Ted Beck, president and CEO of the National Endowment for Financial Education, said there are three major predictors of a student's success with money in college: parental involvement, as in parents who have communicated money lessons; financial education; and the experience of having a part-time job.

Plenty of money pitfalls lie ahead for a soon-to-be college freshman, he said, from peer pressure to spend to unexpectedly high costs for things such as textbooks. The College Board estimates that on average, each student spends $1,200 a year on books and supplies.


Ideally, parents start financial education well before a teen is heading to college, he said. (Beck's organization actually publishes a booklet containing money management tips for students, which could be used to start a discussion.) But even if early conversations do not take place, the summer before college is a great time for parents to have a serious money talk with their teen.


"This is your first time to sit down, probably, and have an adult discussion with your now adult child. They are going off. This discussion is critical. It's not a lecture. It's not a threat," he said. "This is your chance to treat them like an adult." After all, he added, "You want them to behave like an adult."
Apart from the financial minutiae of campus life, Beck said, it is important to talk to your teen about completing college. Going over budget for a month is one thing, but leaving college after a year with thousands of dollars in debt is quite another. When it comes to student loans, he said, "the kids that we worry about the most are the people who don't finish."

Levine does not yet have a college-age child, but she does have a clear checklist for what she wants her child to know.



"What I would want is for my college-age child to have a basic understanding of things like credit cards and banking and some basic financial stuff. They don't have to learn how to manage a portfolio," she said. "Boil it down to financial tools like credit cards, debit cards, how a bank account works, understand that. And then they have to understand how to manage their money."
If a teen can develop the discipline to get all that under control, landing a spot on the dean's list should be a cakewalk.

Kelley Holland

Stop your grown kids from ruining your retirement

Sharon Epperson | Judy Gee

Thursday, 2 Jul 2015 | 7:30 AM ETCNBC.com

If you are in your 50s or 60s and are still caring for your kids financially, you really need to start caring for yourself—or you may never be able to afford to retire.

A recent study found more than half of parents who are supporting adult children are "extremely concerned" about saving enough for retirement.

They should be.

Baby boomers are often providing financial assistance to grown kids when they are in the later stage of their own careers during their prime earning years. When you're 50 or older, you have the opportunity to turbocharge your retirement savings with additional contributions to IRAs and 401(k)s.

The maximum contribution to a 401(k) in 2015 is $18,000 plus a $6,000 "catch-up" contribution if you're 50 or older. You can contribute up to $5,500 in 2015 to an IRA or $6,500 if you're 50 or older.
But many boomer parents may not have the money to fully fund their retirement accounts when their kids are living with them.

Say you spend $500 a month on gas, groceries and the phone bill for your 23-year-old son or daughter. Over 12 months, that will amount to $6,000 that could have gone into your 401(k), IRA, or another retirement savings account. If you're 50, putting an extra $6,000 in your 401(k) account this year could grow that balance to nearly $12,500 by the time you're 65, assuming a 5 percent annual return. Use Bankrate's 401(k) calculator to run the numbers yourself.

To get your kid off your couch—and on their own two feet—financial advisors say you should do three things now:
 
Set a time limit. You don't want your children living with you indefinitely. Let them know how long they'll be able to stay at home rent-free, when they're expected to find a job and when they'll need to contribute financially to the household.

Spell out expectations. You're not running a bed and breakfast. Come up with a list of household chores your son or daughter is expected to do, even if they can't afford to pay rent.

Create a financial plan. Maybe you never talked about finances with your child. Maybe you don't have a budget yourself. You both need one. Your child should design a road map to become financially independent and your top goal as a parent should be to secure your own financial future.

Wealthy suffer from 'estate-planning fatigue'

Shelly Schwartz, special to CNBC.com

Monday, 29 Jun 2015 | 8:00 AM ET

 CNBC.com

Despite their wealth and business savvy, more than one-third of high-net-worth families have not taken the most basic steps to protect and provide for their loved ones when they die, according to a recent survey by CNBC.com.

The CNBC Millionaire Survey found 38 percent of those with investable assets of $1 million or more have not used a financial expert to establish an estate plan, while 62 percent have.

Tetra Images | Getty Images

 

Individuals with $5 million or more (68 percent) were more likely to do so, compared to those with $1 million to $5 million in assets (61 percent), according to the survey, conducted by Spectrem Group for CNBC, which polled 750 millionaires.

Republicans (68 percent) were also more likely to use a financial advisor to establish an estate plan than Democrats (61 percent) or independents (58 percent).
The numbers don't surprise Mitch Drossman, national director of wealth-planning strategies for U.S. Trust, who said the constant changes to the federal estate-tax law for nearly a decade (until it was made permanent in 2013) resulted in "estate-planning fatigue."

"We have had an incredible amount of uncertainty with respect to estate taxes, and every change led advisors to reach out to their clients to explain these changes and be sure their documents were up to date and reflective of those changes," he said. "Clients finally said, 'Enough already.'"
The higher federal estate-tax exemption amount, which now stands at $5.43 million per person due to annual inflation adjustments, has also rendered estate planning a lesser priority for many wealthy families, said David Mendels, a certified financial planner and director of planning for Creative Financial Concepts.

Married couples can combine their exemptions to give away $10.86 million tax-free in 2015.
"I think people tend to think of estate planning as being primarily a means to reduce estate taxes, and therefore, if they don't have to pay estate tax, they may feel they don't have to do any planning," said Mendels.

But 15 states, including New York, Connecticut and Massachusetts, as well as the District of Columbia, levy their own estate taxes, which kick in at much lower thresholds. New Jersey's exemption, for example, is $675,000, Rhode Island's is $921,655, and Maryland's is $1 million. "Depending on where you live, estate taxes may still be a factor," said Mendels.
Estate planning, however, is about much more than the size of one's taxable estate, he said.

It's a series of documents that protect your assets, provide for your children and delineate your wishes regarding end-of-life decisions. Absent specific instructions, family members are left to guess at what you would have wanted, causing unnecessary stress and infighting.

"Estate planning is not necessarily synonymous with tax planning," said Drossman at U.S. Trust. "There are still many valid reasons to do non-tax estate planning to address property management, to protect assets and to address exactly where you stand on issues you may confront later in life, like cognitive decline or disability.


"That's going to be a bigger issue with longer life expectancies, better medical care and the aging population," he added.
For families with minor children, a last will and testament is the most critical estate-planning document they can have, said Mendels at Creative Financial Concepts.

"If you have young children, you need a will," he said. "It's not about the money. You need to name a guardian for your children, in case something happens to you and your spouse."
It can also be used to set up trusts for any property your child will inherit and to name a trustee to handle the property until your child reaches the age you specify.

Thy will be done

Failure to do so means the courts would have to decide who is best suited to care for your children if tragedy should strike. A medical power of attorney is another important weapon in your estate-planning arsenal, authorizing an individual to make health-care decisions on your behalf in the event of physical injury or cognitive impairment.
If you're married, that's typically your spouse, but if he or she dies first, you'll need a backup—ideally, someone who is geographically nearby who can communicate in person with your health-care providers, said estate-planning attorney and CFP Austin Frye, founder and president of Frye Financial Center.

"If, God forbid, you are put in a situation from which you are not going to recover, you want to keep control over what happens to you," said Frye.

Such documents are often created alongside an advanced medical directive for physicians, also called a living will, which clarify your wishes regarding end-of-life medical treatment, including resuscitation and organ donation. (Make sure you have a HIPAA form attached, which grants your power of attorney the right to access your medical records, which are protected under privacy laws.)
A durable financial power of attorney document is also necessary, as it identifies the person you'd like to manage your money if you are unable to make decisions for yourself, said Frye. Such legal documents grant that person legal authority to pay taxes on your behalf, borrow money, pay your bills, invest and handle bank transactions.

With higher income-tax rates in effect, tools and techniques that help minimize the income-tax hit to your estate—and your heirs—are playing a far bigger role in estate planning today, said Mendels at Creative Financial Concepts.

Indeed, the top marginal tax rate for wealthy taxpayers now stands at 39.6 percent. Those with higher incomes also face a higher capital gains rate of 20 percent instead of 15 percent, a 0.9 percent tax on earned income (wages) and a 3.8 percent Medicare surtax on net investment income, plus the phaseout of personal exemptions and deductions.
"As estate taxes have come down, the income-tax consequences are much more important," said Mendels.

For example, trusts remain a valuable tool for protecting assets from creditors, legal claims and offspring with poor money-management skills, but due to recent tax-law changes, they could also leave your heirs with less.

Effective in 2013, trusts that accumulate income are now hit with the 3.8 percent Obamacare tax that applies to net investment income. The beneficiaries are also subject to the highest income-tax rate of 39.6 percent and the top capital gains rate of 20 percent on any income received from the trust in excess of $12,150.

By comparison, the top income-tax rate for individual taxpayers kicks in at $400,000 for single filers and $450,000 for married couples filing jointly.
"Trusts are very versatile, and they can do a lot of things, but these are things that need to be thought through," said Mendels. "Your heirs may end up paying much more income tax by leaving property to them in trust than if you just gave it to them outright."

Drossman at U.S. Trust said income-tax implications, as a component of estate planning, have taken center stage at his firm, too. That, and what he calls "reverse estate planning."
"In some cases we're helping clients unwind or reverse some of the estate planning they had done in the past, because it may no longer be needed, given the significant estate-tax exemption or because it would add to their income-tax cost," he said.

"The probability of something happening may not be high, but if it does and you haven't planned, anything is possible, including litigation, higher taxes and complete chaos." -Austin Frye, founder and president of Frye Financial Center

Some families, for example, are taking assets out of trust and giving them outright to their heirs, since they now fall below the estate-tax exemption line. Others created LLCs or family partnerships years ago to facilitate a discounting of assets, but new rules in some cases prevent assets held in such structures to take full of advantage of the step-up in basis.


Remember: Those who inherit appreciated property, including real estate and stocks, receive a step-up in cost basis for tax purposes based on the current market value on the date of the benefactor's death. Thus, the beneficiary could sell the property immediately without incurring a capital gain, or sell it years from now and only owe gains based on its price appreciation from the day they inherited it.
"If held in a discounted entity, they're not stepped up as high as they would have been had they been held outside that entity," said Drossman. "They may no longer want that in place if they don't benefit from any estate-tax savings, and they get a lower basis."

It's never pleasant to contemplate one's own mortality. But high-net-worth families who fail to plan—and there are many—risk exposing their kids' inheritance to creditors, predators and bitter ex-spouses.

Worse, they leave life's most important decisions—such as who will care for their kids and whether their spouse should pull the plug—in the hands of the courts.
"You have to plan for the worst and hope for the best," said Frye of Frye Financial Center. "The probability of something happening may not be high, but if it does and you haven't planned, anything is possible, including litigation, higher taxes and complete chaos."

—By Shelly Schwartz, special to CNBC.com