Today it's time for a change in topics. With the economy the way it is, bankruptcies are soaring in the United States. So we'll look at the different types of bankruptcy relief.
There are two types of bankruptcies avaialbe for individuals. The first is Chapter 7. This is also called a straight bankruptcy. In a Chapter 7, a trustee is appointed to take over all of the person's assets, sell them, and use the money to pay creditors. In reality, most Chapter 7s are what are called "no asset" cases, meaning there are no unencumbered assets for the trustee to sell. The trustee won't sell a house, for example, if it is worth less than the mortgage that is owed. Before a trustee can take any of the money he gets from selling assets, he first has to pay any secured creditors, those creditors, such as banks that hold mortgages, or credit unions that hold the title to a car, who have taken a pledge of property from the borrower. Only after secured creditors are paid can the trustee use any excess funds to pay other creditors. In most Chapter 7s, the trustee concludes that he can't get any funds to pay creditors other than those secured by the property, so he abandons the property and doesn't sell it.
In a Chapter 13, also called a wage earner plan, the debtor (person filing bankruptcy) pays his or her disposable income (that portion of income left after paying housing costs such as rent, food, utilities and other normal living expenses) to the Chapter 13 trustee, who then doles the money out to the creditors. A Chapter 13 plan goes on for as long as five years. At the end, the debtor gets a discharge from any debts that haven't been paid through the Chapter 13 (with some exceptions).
Tuesday, February 10, 2009
Friday, January 16, 2009
What's Happening with 401(k)s?
Starbucks has announced that it is no longer matching employee contributions to their 401k plan. Fed Ex and Motorola have said they'll do the same. Smaller companies have or will follow suit. The reason, of course, is the economy. Employers are no different from individuals; in lean times they have to cut costs and cutting contributions to the 401(k) retirement plan is an easy call.
So what should you do? For starters, you SHOULD be contributing to a 401(k). If your employer is matching, contribute at least up to what the employer will match. You're doubling your money instantly. If you don't have a 401(k), shame on you. Start NOW. True, the market is down and the value of your 401(k) is also down, but unless you expect the end of the world, the market will rebound eventually. It always has. Contributions now mean you're buying cheap stock.
Secondly, watch how your employer matches your contribution. Remember Enron? Enron matched employees' contributions with Enron stock. When Enron tanked and the stock became worthless, so did thousands of 401(k) accounts. Diversify your investments. Most 401(k) sponsors have a menu of different investment options that mix what your contributions purchase based on your tolerance for risk. A simple 10-minute quiz created by the sponsor often points you to the right option.
Finally, watch out for vesting. At some employers, you must be employed a certain time, a year, five years, before their matching contributions "vest" (in other words, before you become entitled to them).
So what should you do? For starters, you SHOULD be contributing to a 401(k). If your employer is matching, contribute at least up to what the employer will match. You're doubling your money instantly. If you don't have a 401(k), shame on you. Start NOW. True, the market is down and the value of your 401(k) is also down, but unless you expect the end of the world, the market will rebound eventually. It always has. Contributions now mean you're buying cheap stock.
Secondly, watch how your employer matches your contribution. Remember Enron? Enron matched employees' contributions with Enron stock. When Enron tanked and the stock became worthless, so did thousands of 401(k) accounts. Diversify your investments. Most 401(k) sponsors have a menu of different investment options that mix what your contributions purchase based on your tolerance for risk. A simple 10-minute quiz created by the sponsor often points you to the right option.
Finally, watch out for vesting. At some employers, you must be employed a certain time, a year, five years, before their matching contributions "vest" (in other words, before you become entitled to them).
Tuesday, January 13, 2009
Estate Tax to Continue
President-elect Barack Obama announced recently that he intends to continue the estate tax (dubbed the "Death Tax" by opponents) instead of letting it expire in 2010 as originally planned by the new Bush administration in 2001. Under the current provisions of the estate tax, estates over $3.5 million are taxed at 45%. Estates under $3.5 million ($7 million for married couples) are exempt from the tax. However, there is no guarantee the Obama administration will maintain the estate tax at this level. During President Clinton's administration, estates over $1 million were taxed at a 55% rate; President Bush increased the exemption gradually, with a proposed phase out completely next year.
The estate tax has been criticized as restricting a business owner's ability to pass on the fruits of a lifetime. The most common example given is of a family farmer who is "land rich and cash poor". Imposing a 45% tax on the value of the farm likely means the farm will have to be sold to pay Uncle Sam.
While most people will not have to worry about the estate tax in their estate planning, everyone should be aware of its existence and now of its permanence.
The estate tax has been criticized as restricting a business owner's ability to pass on the fruits of a lifetime. The most common example given is of a family farmer who is "land rich and cash poor". Imposing a 45% tax on the value of the farm likely means the farm will have to be sold to pay Uncle Sam.
While most people will not have to worry about the estate tax in their estate planning, everyone should be aware of its existence and now of its permanence.
Friday, December 5, 2008
Elder Law
What is Elder Law and how does it differ from estate planning? Elder law is a field of law that deals with legal issues unique to the elderly, such as Medicare and Medicaid, powers of attorney, living wills, medical directives and "end of life" issues that no one wants to talk about. It can include estate planning, but often it does not.
We all have family or friends who are affected by elder law issues, whether they be parents, aunts, uncles, neighbors, or, as we grow older, ourselves. It's a rewarding but difficult area of the law. We often deal with people who are used to being in charge, but find themselves incapable of caring for themselves, let alone others they've nurtured for years. Just last week I took my father, who is 91, to visit his brother, who is 95 and in a nursing home in Idaho. It was sad because my uncle is now to the point of not recognizing me, my father or even his own daughter. Elder law helps people like my uncle.
We all have family or friends who are affected by elder law issues, whether they be parents, aunts, uncles, neighbors, or, as we grow older, ourselves. It's a rewarding but difficult area of the law. We often deal with people who are used to being in charge, but find themselves incapable of caring for themselves, let alone others they've nurtured for years. Just last week I took my father, who is 91, to visit his brother, who is 95 and in a nursing home in Idaho. It was sad because my uncle is now to the point of not recognizing me, my father or even his own daughter. Elder law helps people like my uncle.
Tuesday, September 30, 2008
Estate Planning Traps
Now that you' ve signed your will, trust, durable powers of attorney and medical directives, you're done with estate planning, right?
Wrong. There still is lots to do. If you created one or more trusts, you may have to fund the trusts, that is, transfer any assets into them that need to be put there. A trust is like a basket. When you first buy the basket, it's empty. Only when you put things into the basket does it do what it was meant to do. It may be that your trust is designed to remain unfunded (empty) until death, in which case you don't need to transfer anything to it. But if it was meant to be funded, you still have work to do.
Every year review your estate plan to make sure the beneficiary designations are correct and everything is as you want. Every three years you should sit down with your estate planning professionals (accountant, attorney, financial planner, etc.) and review your entire plan. If your situation changes drastically, such as a divorce, new child, sale of home, change of job, meet as soon as that occurs.
By doing these things, you can avoid the trap that your estate plan doesn't do what you intended it to do.
Wrong. There still is lots to do. If you created one or more trusts, you may have to fund the trusts, that is, transfer any assets into them that need to be put there. A trust is like a basket. When you first buy the basket, it's empty. Only when you put things into the basket does it do what it was meant to do. It may be that your trust is designed to remain unfunded (empty) until death, in which case you don't need to transfer anything to it. But if it was meant to be funded, you still have work to do.
Every year review your estate plan to make sure the beneficiary designations are correct and everything is as you want. Every three years you should sit down with your estate planning professionals (accountant, attorney, financial planner, etc.) and review your entire plan. If your situation changes drastically, such as a divorce, new child, sale of home, change of job, meet as soon as that occurs.
By doing these things, you can avoid the trap that your estate plan doesn't do what you intended it to do.
Wednesday, September 17, 2008
The Estate Planning Team
Estate planning isn't the sole province of lawyers or financial advisors or accountants or any one person. To create a solid estate plan, you need advice from people with training in the law, finance, taxes, and insurance, to name a few. For example, a lawyer can set up a trust, but a trust is just an empty basket into which you put things. Those things are financial assets. To know what things to put into the basket, you need help from financial planners (or you need to feel comfortable that you can do it yourself). What you put in the basket might have tax consequences, either now or when you die, which is why you might need an accountant or tax professional. You might also decide to make the trust the beneficiary of a life insurance policy, so you would need to talk to an insurance specialist. Don't make the mistake of thinking you can do it all yourself or even with the help of one or two advisors. If one of your advisors tells you he or she can do it all, maybe it's time for a new advisor.
Monday, September 8, 2008
What is Estate Planning?
Most people have heard the term "estate planning", but what does that mean? Is it only for the ultra-rich who need to protect their assets from the IRS? Does the average person need estate planning?
Estate planning is often defined as the process by which the assets that one has accumulated over his or her life are disposed of, either at death or during their lives, in a manner consistent with their wishes and in such as way as to minimize taxes, if any.
Everyone has an estate plan. If they don't have a will or a trust, the state has made a will for them. It's called the intestacy laws. "Intestacy" or "intestate" means simply "without a writing". A person who dies intestate has died without a writing (will) that disposes of his or her property. In that case, the laws of every state specify where the property goes. Sometimes, that might be to a place or person other than the person would have chosen. So everyone who owns anything should have a will.
A will is a writing document that conforms to certain legal requirements, such as being signed and witnessed and having the signer's and witnesses' signatures notarized. The laws vary from state to state. In the document, the person sets out how he or she wants her property to be divided. A will is effective only upon death and can be revoked at any time before death. After death, the will has to be probated, which is a legal process that determines what the person owned at death, who the person owed money to at death, and who is entitled to what remains after the debts are paid.
Many people want to avoid probate, which can be done by a variety of techniques. In later posts we'll consider some ways to avoid probate.
Estate planning is often defined as the process by which the assets that one has accumulated over his or her life are disposed of, either at death or during their lives, in a manner consistent with their wishes and in such as way as to minimize taxes, if any.
Everyone has an estate plan. If they don't have a will or a trust, the state has made a will for them. It's called the intestacy laws. "Intestacy" or "intestate" means simply "without a writing". A person who dies intestate has died without a writing (will) that disposes of his or her property. In that case, the laws of every state specify where the property goes. Sometimes, that might be to a place or person other than the person would have chosen. So everyone who owns anything should have a will.
A will is a writing document that conforms to certain legal requirements, such as being signed and witnessed and having the signer's and witnesses' signatures notarized. The laws vary from state to state. In the document, the person sets out how he or she wants her property to be divided. A will is effective only upon death and can be revoked at any time before death. After death, the will has to be probated, which is a legal process that determines what the person owned at death, who the person owed money to at death, and who is entitled to what remains after the debts are paid.
Many people want to avoid probate, which can be done by a variety of techniques. In later posts we'll consider some ways to avoid probate.
Subscribe to:
Comments (Atom)