Estate Planning: The Big Disconnect Between the Rich and Poor

    Estate Planning -The Disconnect between the rich and poor.  Like many things in life the lines between the “haves and the have nots” has been clearly defined for many years, decades; well, since the beginning of time.  Society is not structured for everyone to be wealth and prosperous, at least not at the same time.  The United States is no different than other nations around the world when it comes to class warfare.  The rich continue to get richer and the poor continue to get poorer in the ever-increasing divide.  The effective use of Estate Planning and financial education could be one of many answers to bridging that gap.

     Yes, becoming educated about Estate Planning and finances sounds like a simple answer to a very complicated situation.  Regardless of your political persuasion, the answers to help narrow the ever-increasing wealth gap do not lie solely with the government.  Are there inequities in the system in regard to taxes and income distribution? Yes.  Can the government be part of the solution? Absolutely.

     Topics such as Life Insurance, Probate, Wills, Trust, and Powers of Attorney are not totally foreign to most people.  In fact, most people are aware of these terms and have had some dealing with them in the past.  Rich and more well-to-do families are introduced to these topics at much earlier ages and generally have teams of professionals that have assisted their families for generations.

     On the other hand, most working-class people are primarily familiar with Life Insurance and the need for it.  Life Insurance is often available through one’s employer.  However, the amount of insurance provided is normally enough to cover burial expenses and incidentals.   How much insurance should they actually have?

     Let’s say we have a family of four, husband, wife, and two children under the age of 10.  The family has a new home valued at $175,000 with a combined income of $80,000 per year, which comes to $3,333 per person before taxes.  Let’s assume that their total monthly expenditures equal $5000.00.  This leaves the family with $1666.00 per month for savings and miscellaneous expenses.  Sadly, the husband dies.  How much insurance should each have on their lives?

     The answer may surprise you.  The goal of life insurance is to replace what’s lost.  The sudden death of the husband leaves the family with $40,000 less in income per year.  A $1.4 million dollar policy received tax-free and invested to earn 3% per year would yield $42,000 per year before taxes on the income.    So, the family would need this amount of coverage on both husband and wife to provide the minimum amount of coverage and income replacement.  Future educational cost and inflation will actually require additional coverage.  There are many variables to consider and this is just one approach and insurance may be utilized in different ways.

     This is just one small example of how a little bit of information can go a long way.  The same is true in regard to knowing the differences between Wills and Trusts; how to fund a trust; how to name beneficiaries, how to avoid creditors and so on.  These are all questions and decision that can make a tremendous difference in terms of what you leave to your children.

     Everyone needs some sort of Estate Plan.  Of course, some plans will undoubtedly be more complicated than others.   And the cost for planning is much more reasonable than most people think.  An Estate plan can run from as little as $200 dollars to as much as $5000 dollars depending on the amount of time and work that goes into preparing the plan.

     It’s easy to think at 22 or 23 years of age that you have plenty of time to prepare your estate.  But Estate Plans are not just about money and who gets what when you die.  An Estate plan also answers very important questions such as, who’s going to make medical decisions for me when or if I can’t? Who’s going to pay my bills?  Who’s going to take care of my small children? Court appointed crazy Aunt Sally? Or responsible, loving Cousin Jane?  These are all items that can and should be addressed in a comprehensive Estate Plan.  This is only the tip of the iceberg.  This short article doesn’t even discuss accounting and financial services needs.

     Yes, there is a tremendous divide between the haves and the have nots.  Money plays a tremendous role in why this division exists.  However, the phrase, “A fool and his money shall soon part” holds very true.  There are many people who start out wealthy and don’t end up that way.  Look no further than some professional athletes.

    Estate Planning -The Disconnect between the rich and poor.  Knowledge is the key to helping solve this great divide.  Surround yourselves with a team of professionals and let’s start to teach our child the value of planning.  Without knowledge the mistakes of the past will be the same mistakes in the future.

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Theo L. Morson, JD, LLM

Estate Planning Specialist

T.L. Morson and Associates, PLLC

Choose Your Life Insurance Beneficiaries Wisely

One of the most import estate planning decisions that one makes is choosing Life Insurance beneficiaries.  Naming who should get money after you die sounds like a simple and easy task; however, Life Insurance mistakes are common and can have devastating results.

Let’s examine several common mistakes made in regard to Life Insurance:

Naming a minor child

Life Insurance companies will not make direct payment of Life Insurance to minors until age 18.

Failing to plan in advance could be costly and time consuming once the courts get involved.

Beneficiary Designation Trumps a Will

It’s important, however, to know that regardless of what your Will says, the life insurance money will be paid to the beneficiary listed on the life insurance policy. That’s why it’s important to contact your insurer to change your beneficiary, if needed.

Always Name Contingent Beneficiaries

Life Insurance Beneficiaries often predecease the insured.  Failing to name a contingent beneficiary could lead to complications. 

  • Heirs could face delays is getting the money.
  • The life insurance proceeds, which normally would be protected from creditors, can now be open to creditors’ claims.

Making a Dependent Ineligible for Government Benefits

Federal law sets guidelines limiting the amount of gifts and inheritance that a recipient may receive.  Naming a lifelong dependent, such as a child with special needs, as beneficiary puts the loved one at risk for losing eligibility for government assistance. 

Establishing a special needs trust and naming the trust as beneficiary could be the answer.  Contact our office to see if a special needs trust is an appropriate solution for your situation.

Update, Update, and Update

You should review your policy every year and after major life events, such as marriage, having children or divorce. Change your Life Insurance beneficiaries when circumstances change.

Unfortunately, many people forget to do so. These are only a few of the common mistakes that clients make in regard to Life Insurance.  Don’t wait until it’s too late.  Estate Planning is not for you, it’s for the ones you leave behind.  Help protect the ones you love the most.

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