Financial Literacy Month: Are All of Your Financial Ducks in a Row?

In March 2004, the Senate passed Resolution 316, which officially recognized April as National Financial Literacy Month. Both Houses of Congress have passed similar resolutions since then designed to encourage financial literacy so that individuals are better prepared to manage their money, credit, and debt. Nevertheless, in the fourth quarter of 2019, U.S. household debt, which includes student debt, credit card debt, auto debt, mortgages, home equity loans, and other debts, exceeded $14 trillion for the first time ever.[1] In addition, forty percent of the respondents of one recent survey indicated that it would be very difficult for them to meet their current financial obligations if their next paycheck were delayed for one week, and another thirty-four percent said it would be somewhat difficult.[2] The COVID-19 pandemic has, unfortunately, made this potential difficulty a scary reality for many Americans.

Whether or not you are indeed struggling financially, it is important to do a realistic assessment of your financial situation and how prepared you and your family are for the future. Creating or updating your estate plan is an important part of exercising control over your finances, and ensuring that proper plans are in place can provide substantial peace of mind and security for you and your family.

Take an Inventory

One of the first steps in creating an estate plan is to take an inventory of your money and property. Regardless of whether you are wealthy or just getting by, everything that you own is part of your estate and should be listed–or at least accounted for– in your inventory. This inventory should include the following:

• The value of all of your real estate, including your home

• Tangible personal property, i.e., cars, heirlooms, artwork, jewelry, furniture, etc.

• All accounts (e.g., bank, investment, retirement accounts) and their balances, using the most recent statements

• The contents of all safety deposit boxes (and note where they are located)

• The cash value and death benefits of all insurance policies

• All liabilities, i.e., mortgages, lines of credit, notes, other debts

• All business interests

As you and your estate planning attorney evaluate your inventory, there are several questions you should ask yourself.

Am I saving adequately for retirement? Clearly, the answer to this question will vary for different individuals and circumstances, but many financial advisors recommend saving ten to fifteen percent of your pre-tax income during the entire span of your entire working years. If you have not been saving adequately, consider increasing your contributions to your retirement accounts.

Are sufficient funds available to provide for my spouse and dependents if I pass away? If the answer is no, consider purchasing a life insurance policy large enough to replace your income, as well as pay off any outstanding debts, college for your children, final expenses, and other important expenses, e.g., the cost of your child’s wedding or their first car.

Do I have a lot of debt? If you have substantial debt, your family members generally will not be responsible for paying it if you pass away. However, your estate will have to pay off your creditors before your beneficiaries receive anything. Life insurance can help in this situation as well: You can either purchase life insurance sufficient to pay your debt or you can make family members or loved ones the beneficiaries of your policy (or a trust for their benefit), as the proceeds of the policy never become part of your estate but are transferred directly the beneficiaries of the policy. Similarly, retirement, investment, and brokerage accounts allow you to name one or more beneficiaries, keeping those funds outside of your estate. Real estate or accounts owned jointly will also pass directly to the surviving owner when permitted by state law.

An even better course of action, however, would be to meet with a financial planner who can help you create a budget enabling you to decrease or eliminate your debt so that your loved ones will receive all the money and property you would like them to have.

Protect Your Assets

If you transfer money and property you would like to preserve for your beneficiaries into an irrevocable trust, that is, a trust that cannot be amended, modified, or revoked (except under limited circumstances), those assets will be protected from any of your future creditors or judgments (with time limits). Because the money and property used to fund the trust is no longer yours and you have no control over it, it is not available to pay your creditors. Your family members and loved ones can be named as the beneficiaries of the trust. This strategy can be particularly helpful for individuals working in professions that are at a high risk of lawsuits, e.g., doctors, lawyers, etc.

Warning: An irrevocable trust will not protect money and property from creditors having a claim at the time the trust is created. Courts can rescind transfers to trusts if they are determined to have been made with the intention to defraud current creditors.

Consider the Needs of Your Beneficiaries

Protect their inheritance from their creditors. Even if you take all the steps necessary to ensure that your beneficiaries receive a nice nest egg when you pass away, it can disappear quickly once it is in their hands unless your estate plan is designed to avoid this possibility. Fortunately, you can create a trust with terms that will protect your beneficiaries’ inheritance against claims arising from their creditors, divorcing spouses, or lawsuits. There are a variety of different types of trusts that can protect the money and property from such claims, but the following are among the most commonly used.

• A fully discretionary trust gives a trustee absolute and complete discretion regarding the amount and timing of distributions to your beneficiaries; in fact, the trustee is not required to make any distributions to them at all. In this case, the beneficiaries’ creditors will not be able to reach the funds held by the trust because the beneficiary does not have an enforceable right to receive any distributions from the trust.

• A beneficiary-controlled trust gives a beneficiary who is also a trustee the discretion to make distributions to him or herself for their “health, education, maintenance and support.” An independent co-trustee has the authority to make discretionary distributions for other purposes. Thus, the beneficiary has some degree of control over the trust funds, but the money and property held in the trust, with restrictions on distribution, may still be protected from creditor’s claims.

Create a trust for a specific purpose(s). You can include terms in your trust authorizing the trustee to make distributions for your children or other loved ones for specific purposes so that even after you have passed away, you are still able to help the trust beneficiaries make certain important purchases or pay for special care. 

• A trust can authorize distributions for certain important expenses. For example, you would likely want to help your child pay for a wedding, make a down payment on a home, or start a business while you are alive, so you may want to create a trust authorizing distributions for those purposes so that they will be covered even after your death. Like other types of discretionary trusts, the money and property held by the trust cannot be reached by the beneficiaries’ creditors. Once the money has been distributed to the beneficiary, though, the creditors will be able to reach it.

• If you have a special needs child or grandchild, a special needs trust may be an appropriate consideration. This type of trust, which must be carefully drafted, allows you to provide for someone with special needs without causing them to become disqualified for government benefits for which they are otherwise eligible.

Let Us Help You and Your Family Move Toward a Secure Future

Celebrate Financial Literacy Month by taking steps to get your financial house in order. Estate planning is an essential part of this process, as it is all about providing you and your family with the peace of mind that comes with knowing that even if the unexpected happens, the future is secure. Please call us today to set up a meeting so we can create an estate plan that meets all of your needs and goals.

[2] American Payroll Association, “Getting Paid in America Survey,” last modified September 10, 2019, https://www.nationalpayrollweek.com/wp-content/uploads/2019GettingPaidInAmericaSurveyResults.pdf