401k or Roth IRA

Traditional wisdom is that you should max out your 401k before contributing to anything else. That depends on whether you believe taxes will go up or down in the future. In a 401k or traditional IRA, the contributions go in tax free (are deducted from your income) but come out and are taxed at whatever rate you are then subject to. In a Roth IRA, contributions are taxed at your normal rate, but withdrawals are tax free. The arguments for tax free contributions are (1) you're probably at a higher rate now than you will be after retirement; and (2) you'll be paying with future dollars that will likely be devalued due to inflation.

But think of this. Suppose you contribute $150,000 over your lifetime, $500 a month for 25 years. That $150,000 is deductible from your income taxes. When you retire, that $150,000 may have grown to $500,000 or more, depending on the success of your investments. Now instead of taxing only the $150,000 you contributed, Uncle Sam will collect taxes on the full $500,000. And you can't do anything about how much you withdraw, because the tax code requires certain minimum withdrawals beginning at age 70-1/2, regardless of how much you actually need.

Contributing to a 401k still makes sense in order to get your employer's match, assuming your employer still matches contributions. A match doubles your money up to the amount of the match. So be sure to contribute enough to get the full matching employer contribution. Beyond that, it might make sense to contribute the rest to a Roth IRA if you think taxes will go up in the future.

The King's Estate

Now that Michael Jackson's funeral is over, speculation is rising over what kind of estate he left and who will get it. Both questions may take years to answer.

A figure widely bandied about is that the King of Pop owed upwards of $400 million at the time of his death. Add to that estate and inheritance taxes that will likely be due, and there might not be much left for his heirs, whoever they may be. On the other hand, he supposedly had some lucrative interests in record labels that could spin off money for years to come. One thing is certain: There will be litigation that could last for years. Jimi Hendrix, who died in 1970, left an estate that was in court for 35 years.

There was an interesting post on www.taxgirl.com asking the question whether Michael Jackson's funeral expenses are deductible to his estate. Rather than answer the question outright, the Taxgirl referred readers to another estate planning blog by David Shulman, a Florida attorney www.sofloridaestateplanning.com. Mr. Shulman's answer, in a nutshell, is "maybe".

America Leads the World in Bankruptcies

In 2005, Congress revamped the Bankruptcy Code, the most significant overhaul in nearly 30 years, since the last big revision in 1979. One of the main purposes was to make filing more difficult. The number of filings dropped dramatically -- for two years. By 2007, Americans were filing at a rate nearly twice as great as that in Great Britain, the United States' closest competitor among industrialized nations.

America's public attitude toward bankruptcy, especially in this economic environment, is not as lenient as its laws, however. Most people still resent the fact that some debtors, most of whom were just plain irresponsible by taking on more debt than they could handle, get a free walk. "It isn't fair," people claim. And it isn't. But by the time people have reached the stage of bankruptcy, the time for fairness is past. Bankruptcy is a recognition that a company's or an individual's controls and ability to manage its affairs are beyond repair. Our system sets aside notions of fairness in these extreme circumstances for the benefit of all of us, by attempting to minimze the costs and maximize the potential recovery.

Don't Forget the Passwords

Every estate plan should include a list of critical information that is easily accessible in the event of death or incapacity. This list should have on it a list of bank accounts, safe deposit boxes (and the location of the keys), other financial accounts (stocks and bonds, online accounts, etc.), the location of your estate planning documents and the like. While you're making it up, don't forget to include the passwords to your online presence, be that eBay, Amazon, Yahoo, LinkedIn, Facebook, everywhere you visit in cyberspace.

Death and Taxes

To many people, estate planning is all about avoiding the estate and inheritance tax. That's why a lot of people give little thought to estate planning, because, as we've discussed, they don't consider themselves wealthy enough to have to worry about estate taxes. We discussed why estate planning is important even aside from taxes, but today we are discussing estate taxes.

There is a lifetime exemption amount for estate taxes. It's a combined estate and gift tax exemption, so to the extent that the exemption is used to give gifts tax free during life, it isn't available at death. But putting that aside, right now (2009) the estate tax exemption is $3.5 million. In 2010, the estate tax is slated to go away altogether. But Congress will probably renew it in 2011 and later, and there is talk that the exemption will be scaled back to the $1 million it was under the Clinton Administration.

Everything that you own at your death is included in your estate. This means all land (houses, rental properties, vacant land, vacation homes, etc.), bank accounts, CDs, stocks, bonds, vehicles, computers, everything down to your china and silverware. Even in today's depressed market, if you have a home, with everything else included, you could be bumping up against the $1 million mark. If that's the case, keep a close eye on the estate tax debates. And if you're up over $1 million, you definitely need to talk to an estate planning attorney.

Of course, everyone should have basic estate planning documents: will, durable power of attorney, and living will (medical directive).

Do It Yourself Bankruptcy

Congress, in its wisdom, requires lawyers to tell potential clients that they (the clients) don't need an attorney to file bankruptcy. That is true; anyone can represent him or herself in any court in the nation. Making that statement, however, doesn't answer the question SHOULD you do it yourself.

Bankruptcy is a very technical area of the law. It's not an area that attorneys dabble in. They either are in it virtually full time or they don't touch it. And these are people who went to law school and have practiced law for years. Knowing that, the question I would ask is, why would anyone try to do it themselves when what they are talking about is their financial future? In the old days (pre-BAPCPA), if a bankruptcy got dismissed, it could be refiled, usually without penalty. So if someone tried a do it yourself bankruptcy and screwed things up, they could find an attorney the next time around. Now there are serious penalties that attach to second and third filings. If you mess up the first one, there might not be a second one.

A Trust as an Estate Planning Tool

Many people think that because they are not wealthy, a trust isn't for them. In fact, a trust can be an effective estate planning tool, especially for families with younger children. A testamentary trust (see last week's post) can allow the trustee the flexibility to provide for the needs of the young children should something happen to the parents. Without a trust, any money (such as life insurance proceeds) would pass to the children. However, because they are minors, a guardianship would have to be established. The guardian's role is to preserve the money until the children reach the age of majority. This means a guardian lacks the ability to provide anything more than basic necessities. For example, if a child shows exceptional musical talent, a guardian may not be able to tap into the money to provide for private lessons. A trustee, on the other hand, given appropriate instructions and flexibility by the trustors, could do that very thing.

Don't assume that just because you aren't "wealthy" a trust isn't for you.