400 words finance due in 5 hours

Anyone can earn a dollar, but it takes a wise man to keep it.” - -- Russell Sage

In this module, we will examine the basics of retirement and estate planning, including making a will and how to pass on your assets to your heirs. I realize if you are a young student, you probably don’t think much about retirement, let alone, passing along your assets to your loved ones and favorite charities or causes. Right now, you are probably more interested in making money and spending it, than giving it away. But, you must face the reality of these cold facts, based on a recent 2010 study of Retirement Readiness Rating:

First, nearly half (47%) of all near-retirement “baby boomers” (in their early sixties) are likely to run out of money . That is they will- not have enough cash to meet basic expenses to live up to their expected standard of living, or to finance nursing home expenses if necessary. Social Security checks plus their pension plans won’t be enough to live comfortable into their sunset years. 

Second, over half (57%) of adult Americans do not have a valid will and last testament . That means that when they die, a local judge will create a will for the deceased, and it probably won’t represent the will of the dead when it comes to distributing the proceeds of the estate to their heirs and favorite charities or causes. 

Fortunately, modern technology has created easy ways to develop a retirement plan and an up- to -date will and last testament. 

Retirement and “The Number”

Let’s first talk about your retirement. How much do you need to retire on to maintain a comfortable life-style? To live where you want to live, to have the means to visit your family and friends, to go on vacation, and to pursue your interests and avocations? 

Specialists call this “The Number.” Financial planner, Lee Eisenberg, wrote a book about retirement planning called “The Number,” the size of the nest egg needed to support a desired retirement lifestyle. Is it $1 million, $2 million, what? 

ING, the insurance company, will ask for your age, current income, your expected future income needed at retirement, and life expectancy; and instantly, it will provide you with a minimum net worth (“The Number”) to retire on. 

Decide what “The Number” is for you by going to:  

www. ingyournumber.com

Also take a look at the Employee Benefit Research Institute’s ballpark estimator to gain some perspective concerning your likely social security check when you reach that retirement age.

www.choosetosave.org/ballpark

A Rich Man’s Pearl of Wisdom

“I make money while I sleep.”

To encourage you to reach “The Number” necessary to retire on, let me tell you a story. 

A group of visitors came to see a famous wealthy man, anxious to learn how he had become financially independent. The group was ushered into the great hall to meet this well-to-do figure, who was dressed in a colorful bedroom robe. 

One of the visitors stepped forward and asked, “Sir, tell us how you became so wealthy, while the rest of us remain so poor?”

The rich man smiled, and then said, “I’ll tell you my little secret to success on one condition -- you must promise never to tell a soul.” They all agreed.

He walked over to a couch and sat down, making himself comfortable. He poured a drink and then, in a solemn whisper, he said, “Here’s the secret: I make money while I sleep!” 

The crowd of listeners looked perplexed, so the millionaire explained. 

“All of you work hard for a living and make money while you are awake, do you not?” he asked. They all nodded. “But the secret to financial success,” said the man “is to make money while you are asleep.”

“But how can we make money while we’re asleep -- that’s impossible,” one curious visitor responded. 

“It’s very simple,” said the rich man. “You must search and find some who will pay you while you sleep, when you are not working! All of you are used to paying others for the things you want in life. All you have to do now is find someone willing to pay something in return.”

“But we don’t know anyone like that,” said another visitor. “Who in their right mind would do such a foolish thing?”

“You are right,” continued the wealthy man, sipping his drink. “Most people won’t do it. The grocer won’t pay you for sleeping. Neither will your landlord. Nor will your boss at work. But, fortunately, there are a few persons who will pay you while you sleep.” 

“Who? Who?” the audience demanded impatiently. 

“Well,” the millionaire responded, leaning back in his recliner. “There is the banker downtown. He pays me interest while I sleep. There is the president of the local utility company; he pays me a dividend check every quarter. There are the legal offices that lease my building on Second Avenue; they pay rent to me every month. There is the CEO of a gold mining company that I own shares in, he pays me capital gains while I sleep. Why, just today, I received a considerable sum of money from these sources, all sent through the mail last night, while I slept.”

“And you did nothing in return?” asked someone.

“That’s right,” declared the independent man. “I didn’t work one minute for any of them. All I did was lend them some of my surplus wealth, or I invested in one of their companies, or I leased them one of my buildings, and in return they pay me for the privilege of using my money or my building. I am therefore making money all the time, not just during the day.”

“Tell us,” a visitor asked inquisitively. “How can we be like you?” 

“It’s very simple,” answered the man. “All you need to do is lend these institutions some of your hard-earned income and savings, or invest your money in a building or rental property, and it won’t be long before you too will be making money while you sleep.”

Then, he rose from his chair. The interview was over. He gave one word of warning. “But, remember, if you spend all your income, or go into debt, you won’t have any money to lend and invest, and you’ll never make money while you sleep. Consequently, you will never be financially independent.”

Estate Planning: Creating a Will

The third part of getting your financial life in order is the creation of a will. You need to make sure your estate and your family are secure, no matter what happens to you.  

In Week 5, we discussed the importance of peace of mind that comes from being properly insured against an uncertain future. We discussed auto, medical, and life insurance and how to get the right amount of coverage at a reasonable price. Writing a will is simply another form of insurance, ensuring that your heirs will be protected after your death. 

Millions of Americans die each year “intestate,” or without a valid will. 

Many celebrities have died without a will, including Michael Jackson, Picasso, Howard Hughes, Abe Lincoln, James Dean, and Martin Luther King, Jr., creating undue trouble and money for their heirs. If you don’t have a will, the state where you live will use its genetic will to distribute your estate. Often that means giving your children two-thirds of your estate and your spouse only one-third. Even worse, if you and your spouse die at the same time leaving minor children, they may become wards of the state temporarily until a judge decides who should raise them. This provision alone should give you the incentive you need to start your will today.

A will can be very simple. You simply write a statement declaring who gets what when you die, have it notarized with witnesses, and put it in a safe place where your heirs will find it. There are books available to tell you how to prepare a will, but with the Internet, you can do it all online. Here are two reliable low-cost sources: http://www.legalzoom.com/legal-wills/wills-overeview.html

http://www.doyourownwill.com 

When your estate is just beginning, this is a properly fine approach to estate planning, but as you become more successful, you will find the skills, knowledge and wisdom of an experienced estate attorney very valuable. Attorneys are knowledgeable of the constant changes occurring to estate law and taxation and can make sure that your “will” is actually done the way you envisioned it.

Living Trusts, Charitable Trusts, Insurance And Other Estate Planning Tools

Other important aspects of estate planning need to be discussed. For instance, you may want to have a professional estate planner help you with other areas, so you can avoid probate and estate/inheritance taxes as much as possible. Generally, I recommend estate planning beyond the writing of a simple will for anyone whose estate exceeds half a million dollars. 

If you estate is complicated, such as involving several heirs, or real estate in more than one state, multiple marriages, or charitable beneficiaries, your property could be tied up for more than a year in court. Legal fees can mount up, swallowing as much as 25% and sometimes even 50% of the estate.

Probate is the cause of these expensive delays, even if you have a valid will. Your will must be probated in a court to transfer ownership from your estate to your heirs. 

If your assets are all co-owned by your spouse, your probate may be simple and inexpensive. But what happens if you both die at the same time? 

Living Trusts

· A living trust avoids most forms of probate because it continues to live on after your death. You die technically penniless, while your trust, the owner of your assets, continues to live on. At the time of the owner’s death, the executors of the estate follow the instructions of the trust and distribute the assets in a way the deceased wanted them to be distribution. No lengthy probate proceedings and expenses are involved. 

 For more information on living trust go to:

www.legalzoom.com/living-trusts/living-trusts-overview.html  

Minimizing Estate and Inheritance Taxes

· Large multi-million dollar estates may be subject to federal estate taxes (federal taxes on the value of an estate) and state inheritance taxes (state taxes on the value of an estate inherited by the heirs). In 2011, estates valued at $5 million or less are exempt from the federal estate tax, but estates worth more than $5 million are taxed at a 35% rate.   Estate planners and estate lawyers should be consulted on the best way to minimize these taxes.

· Wealthy investors such as the Rockefellers and the Carnegies are famous for setting up foundations and trusts as a way to avoid these estate and inheritance taxes. 

· Life insurance is a common method of adding instant liquidity (cash) to your estate in order to pay federal taxes or to give money to heirs. The cheapest policies for this purpose are second-to-die term insurance. The insurance proceeds aren’t paid to the estate until after the spouse dies. As a result, annual premiums are extremely low, and cash is injected into the state when federal taxes are due. 

· Charitable remainder trusts (discussed in Module 5) and foundations are a powerful way to eliminate federal estate liabilities entirely. You give part of your estate to your favorite church, alma mater, free-market think tank, or other good cause. You can also set up an annuity that pays you income for the rest of your life. 

· Don’t overlook the transferring of assets, such as stocks, bonds, real estate, coins and art work, over to your heirs while you are living. You can take advantage of the annual gift tax exemption ($13,000 per person/$26,000 per couple). If you exceed this amount, you can still avoid the gift tax using the “unified credit,” which allows you give away $5 million during your lifetime without paying a gift tax. 

Read more here: 2010-2011 estate tax and gift tax amounts  http://www.bankrate.com/finance/taxes/estate-tax-and-gift-tax-amounts.aspx#