Thursday, January 22, 2009

Risks to Young Professionals Who Ignore Estate Planning

Encouraging anyone to complete their estate planning can be difficult. Statistics suggest that less than 25% of all adults have created a Will or Powers of Attorney. The numbers are even more alarming for young professionals.

Young professionals who do not complete their estate planning assume some serious risks and I'll discuss those in this article. Here are four (among others not discussed here) risks that you should beware of:

1. Assuming that your wishes will be followed since you have discussed them with family or friends.

2. Failing to name decision makers in appropriate documents dealing with disability or death.

3. Failing to name proper beneficiaries for 401(k) plans, IRA's, savings plans and insurance policies.

4. Failing to take any steps to protect a domestic partner.

Let's explore each of these in the context of the following cases.

The first case involves Jack W. a young designer living in Denver. Jack had conversations with his parents about his assets and told them where his records were before leaving on a ski trip to Utah. He was seriously injured in Utah and later passed away. His parents discovered that Jack had not created a Will or left any instructions for them.

Jack created the following problems for his parents:

1. Which one of his parents should be named as Jack's Personal Representative?
2. What if his parents disagree on the disposition of Jack's dogs and other personal belongings?
3. Since Jack was unmarried and had no children, his entire estate passes to his parents, even though he had discussed leaving money to the Dumb Friends League.
4. Prior to his death, his parents struggled to speak with his doctors due to Jack's failure to name them as HIPAA Personal Representatives for the purpose of receiving his protected health information.
5. His parents were uncertain about Jack's wishes for his funeral and burial.

All these problems could have been solved if Jack had created a Will and Durable Powers of Attorney.

Our next case involves Marie and Stephie, one an interior designer and the other a nurse at a local hospital. Marie and Stephie were domestic partners. They had no Wills, Powers of Attorney, or any other written documents concerning their wishes. Stephie died tragically in a car accident. Marie faced the following problems:

1. First, Marie learned that she would not inherit from Stephie since Stephie died without a Will. As a domestic partner, Marie is not recognized as Stephie's heir.

2. Marie learned that Stephie had not completed the beneficiary designations for her 401(k); IRA and insurance policies. This meant that those benefits were paid to Stephie's estate in which Marie could not share.

Marie was devastated by these consequences and they were all avoidable with proper estate planning. Stephie could have named Marie as the beneficiary for her plans. Stephie could have created a Will which named Marie as the beneficiary of Stephie's estate and also named Marie as the Personal Representative of Stephie's estate. In addition, Stephie could have named Marie as her agent in Durable Financial and Health Care Powers of Attorney eliminating any disputes about who would make decisions for Marie prior to her death.

These cases illustrate how serious the risk of not planning in advance can be. Please take the cases of Jack and Stephie to heart as you consider the risks that you create for you loved ones and family by not completing your estate planning.

Feel free to contact with questions or comments. We can discuss with you how to minimize risks in your situation. We urge everyone to consider making a Will; Durable Powers of Attorney and Living Will so your wishes can be carried out. In some cases, additional planning considerations are analyzed. Make sure that you don't leave your loved ones and family with these problems.

Friday, January 16, 2009

Returning to Core Values Through Estate Planning

I had originally titled this post as: "Chasing Returns", but decided on this title instead because it is more in keeping with the theme of this topic.

We have witnessed an almost unprecedented financial meltdown over the past year. Only those who lived through the great depression have seen something similar. The causes of this phenomenon and the reasons we as a society value an 18 year old's basketball skills over a teacher's is beyond this article.

Suffice it to say that current events suggest that we should be concentrating on some core issues. I submit one of those should be a return to core values. In fact, I suggest that had we all been focused on core values over the past few years, a significant cushion to recent financial times would have existed.

The current financial mess obviously has many root causes. Even the best and brightest of our financial minds were swept away in chasing returns, creating millions out of nothing of value and signing up with the Madoff group. So the mess was not the result of a lack of brains. In fact, you could say the mess was more the result of too much smarts and not enough sense.

For core values, I suggest taking care of our families as our first priority, not the last. Protecting one's family should always start by protecting against the downside risks. If you think of any financial plan or play, the thrust is the time line for making that plan work. Let's take a very simple example of a college savings fund.

The college savings fund works only if the parent lives long enough, or works long enough to contribute the desired amounts over time. This is what I mean by the time line for the plan. However, the plan cannot work if the parent or parents do not survive or work for the length of the time line. This is so obvious that I am surprised how few people recognize that the time line assumptions are only assumptions and only bear resemblance to reality by coincidence.

This is why financial planning is usually upside down and backwards. Any good plan must include fail safes to allow the plan to work, if the time line assumptions do not happen. In our example of the college savings plan, what is missing? The plan will only work, if the parents also include elements to take care of the time line not happening.

This time line not happening is what I refer to as the down side risk. If you don't live long enough, or don't work long enough due to illness or disability, what happens. The "what" is what estate planning is all about. Another way to say this is to say that every financial plan has to begin with the estate plan, not end with estate planning. Since the down side risk is always to the time line not happening, then we always start with that down side in designing the estate plan.

While this is frustrating to financial planners who are emotionally tied to their forecast time lines working, it is fundamental to properly protecting your family. And we have seen that even the best financial plan will collapse under certain market conditions.

So where should you begin? Begin at the beginning and build a sound financial foundation for yourself and your family. A sound foundation always begins with your estate planning. Estate planning always begins with the questions about how you want things to be if your time lines are cut short due to an unplanned death, illness or disability.

I will explore this more as we discuss the elements necessary to build your foundation. Please let me know your thoughts and if you have any questions. You can reach me at: with your thoughts or you can leave comments here.