DO YOU KNOW WHERE YOUR IRA BENEFICIARY FORMS ARE? - May 2005 Newsletter

Do you know where the beneficiary forms are to your individual retirement accounts? For that matter, do you know who are your IRA beneficiaries?

You may think you know, but when was the last time you checked? Has it been years? Did you even fill out the beneficiary form provided by the financial institution where you opened the IRA? The oversight could cost your heirs a lot of money and a lot of heartache.

Have you named your beneficiaries? Many IRA owners leave their beneficiary forms blank because they mistakenly assume the IRA custodian named the proper beneficiaries when the owner opened the account or it didn’t need to be filled out because owners assumed the IRA would be properly distributed according to their will.

While some IRA owners may have sound reasons for naming a trust or a charity as a beneficiary to an IRA, most will want to name a “designated beneficiary”—living persons such as a spouse, children, other relatives, or friends. In most cases, they should avoid naming their estate as beneficiary, because then the IRA must pass through probate to the heirs designated in the will. That needlessly delays distribution of the IRA’s funds, and the funds may not end up in the hands of the heirs you intended.

This also undermines the IRA’s inherent tax deferral advantages, potentially costing heirs thousands or even millions of dollars in tax-deferred growth. Depending on the age of the owner at death, the contents of an IRA passing to the estate must be distributed within either five years or what would have been the remaining life expectancy of the deceased owner. But designated beneficiaries receiving IRAs directly can “stretch” their required distributions out over the lifetime of the heirs, which can be especially profitable to younger heirs.

Leaving the beneficiary form blank produces the same consequences as naming the estate as beneficiary, though some custodians name the spouse as beneficiary by default if the form is left blank.
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Can you find your beneficiary forms? If your heirs can’t find the proper beneficiary form following your death, the IRA will likely pass to your estate and they’ll lose the ability to stretch the IRA. In theory, the financial institution should have the form, but paperwork gets lost as institutions change hands, move, and so on.

Locate your forms, or fill out new ones if you can’t, and retain a documented copy. Be sure the IRA account holder and perhaps your beneficiaries have a copy, and ask your financial planner to hold a copy.

Is the form up to date? Did you find the form but had to blow dust off of it? Read it carefully. The beneficiary, such as a spouse, may have died since being named. Or perhaps other changes in your life—a marriage, divorce, the birth or adoption of a child—call for a revision of the form.

IRA owners can make beneficiary changes up to the owner’s death, even if the owner has already started distributions.

Are primary and contingent beneficiaries named? The form should not only indicate the primary beneficiary, but in the case of multiple heirs, such as children or grandchildren, how you want the account’s assets distributed, such as equally or in a certain percentage. You also need to make clear whether in the event a designated heir dies before the account owner dies that heir’s share of the IRA goes to the other heirs (per capital) or to the designated heir’s descendents (per stirpes).

It’s also important to name a contingent beneficiary to step forward should a primary beneficiary die before the IRA owner dies or should the primary beneficiary decide to “disclaim” his or her inheritance so it passes directly to the contingent heir.

Are the forms in agreement? Verify that your up-to-date form matches the form held by the institution. You don’t want confusion, or worse, a court fight over which form is the most recent.

Also, a review of the beneficiary form may turn up custodial restrictions on how your IRA can pass. For example, some institutions don’t allow a “per stirpes” designation, and a few custodians don’t even allow “stretch” IRAs. If such restrictions apply, you may need to move the IRA to another financial institution.

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May 2005— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bold Financial Planning, LLC , a local member of the FPA.

CLIMB A 'BOND LADDER' AS INTEREST RATES RISE - May 2005 Newsletter

For bond and certificate-of-deposit investors, today’s rising interest rates are good news/bad news. One strategy many financial planners have long recommended for handling rising interest rates is the bond ladder.

To understand why a bond ladder works, think of a seesaw. When interest rates rise, the value or price of a bond falls below its par or face value (assuming the current owner bought it new). That’s because other investors aren’t willing to pay the face value of the bond when they can invest the same amount of money in a similar new bond paying higher interest.

The reverse happens in a falling interest-rate environment. Investors are willing to pay more for an existing bond that hasn’t reached its maturity in order to hang onto higher interest rates. The longer the maturity of a bond, the faster the price of the bond falls or rises in relationship to changing interest rates. Of course, if you hold onto individual bonds until they mature, you should receive their face value (unless there’s a default) regardless of any price changes during the holding period.

That’s why rising interest rates are good news/bad news for investors. On the one hand, they like the idea of earning more interest on their bonds, especially in the wake of such low rates for so many years. Between the summer of 2004 and April 2005, the Federal Reserve raised short-term rates from 1 percent to 2.75 percent, and most observers expect the Fed to continue to raise rates for a while.

But that’s where the bad news comes in. Investors are reluctant to buy anything but short-term bonds and CDs because they don’t want their money tied up long term should interest rates continue to rise. They also don’t want to risk being in longer-term bonds and watching the prices be punished should rates climb (the price of a CD you already own won’t change when general interest rates change).

Yet longer-term securities usually pay more interest than shorter-term securities. That’s where the bond ladder can help, because it reduces the risk of interest-rate changes while allowing you to take advantage of higher rates. Here’s how it works.

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You buy individual bonds or CDs with a mix of maturities For example, you might buy roughly equal dollar amounts of various U.S. Treasury securities, with each maturity date representing a different rung on the ladder. In April, the yield on three-month Treasury bills was approximately 2.8 percent, six-month bills yielded 3.1 percent, two-year notes yielded 3.5 percent, five-year notes yielded 3.9 percent, and ten-year Treasury notes brought 4.2 percent.

When the shortest-term security matures on the bottom rung of the ladder, reinvest the proceeds in the best-returning rung, which usually is the top rung of securities with the longest maturity. In time, the shorter-maturity, lower-paying rungs will be gradually replaced by higher-paying, longer-maturity securities.

Why not just buy the higher-paying, longest-maturity securities in the first place? Because by using the ladder approach you always have some securities maturing every few months or every year, depending on how you construct your ladder. This enables you to reinvest matured securities at the highest available rate, or cash them in without risk of loss of principal should you need the funds.

You can build ladders out of most types of securities, such as Treasuries, corporate bonds, CDs, and municipal bonds, depending on what’s appropriate for you and what level of risk you’re willing to take. You also can build your ladder only as far out in maturity as you feel comfortable or that you need. Perhaps you only want to go out five or seven years instead of ten or longer.

The general advice is that you need a minimum of $100,000 in order to cost-effectively buy sufficient numbers of individual bonds to build an effective ladder (transaction costs are not an issue for CDs).

If you don’t have enough to invest in a ladder of individual securities, it’s possible but more difficult to build a ladder out of bond mutual funds. The problem with funds is that they usually have no definite maturity date and individual investors can’t control redemptions. But some funds focus on bonds with certain maturities, such as ultra-short, short, intermediate, or long-term bonds, so you could build a rough version of a bond ladder.

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May 2005— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bold Financial Planning, LLC , a local member of the FPA.

FAMILY MEETINGS CAN HELP PASS ON FAMILY ASSETS - May 2005 Newsletter

Passing on the family wealth from one generation to the next—whether involving a network of businesses and philanthropic organizations or simply the family home and prized heirlooms—is never easy. But periodically holding family meetings can go a long way in making that transition smoother, more effective, and less painful for the head of the family and their heirs.

The wealthy have long held family meetings to discuss the family enterprises and philanthropic endeavors. Some meetings are multi-day retreats in luxurious settings involving hired facilitators and advisors. But even for families whose “meeting” is held around the kitchen table at home, the benefits can be immeasurable.

Family meetings can help the head of the family, among other things,

· Refine his or her estate plan, and clarify its components for the benefit of the entire family

· Overcome the reluctance to talk about family money or difficult estate planning issues such as wills and long-term care

· Allay concerns or anxiety among heirs often engendered by being kept “out of the loop”

· Reduce the potential for family feuds over inheritances

· Convey the family’s money history and promote money values

· Increase the likelihood the family business or other family wealth will endure through subsequent generations

· Craft or instill a family mission statement

While these and similar issues may be discussed informally, if discussed at all, a more formal family meeting improves the odds that critical issues will be thoroughly aired.

Determine the main purpose for the meeting. For families of modest means, the meeting might focus on the content of the parents’ will and which heirs might like which heirlooms. Talking about this now, while the parents are alive, can reduce battles among the heirs after the parents
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die. The parents might discuss their living wills and who will be their health care power of attorney so the family doesn’t go through a Terri Schiavo-like court battle. They might detail their funeral arrangements and living arrangements should they need long-term care.

For families with a business, family meetings present an ongoing opportunity to report on the state of the family business, as well as to wrestle with such issues as succession planning. The same applies to families with philanthropic endeavors.

Determine who to invite. The more “inclusive” the family meeting, the better. Typically, you’ll want to involve not just children but grandchildren(if they’re old enough), spouses (who may heavily influence your heirs), other relatives, sometimes key employees and financial advisors for meetings involving a family business or philanthropy, or others who may be intimately involved in your financial life.

Choose a comfortable place to meet. Yes, some families can hold the family meeting around the kitchen table. But it’s usually best if you can go somewhere neutral, particularly the more people you include. It doesn’t have to be an expensive “retreat,” but by making the location special, everyone is more apt to treat the meeting as special.

Structure it. Advisors for family businesses commonly recommend three components: (1) the business portion, (2) an education component where you can educate heirs about the running of the family business or philanthropy, or managing money in general, and (3) a social component. Don’t overlook the latter. Important issues can be resolved through the social setting.

How to conduct it. Usually the head of the family can handle such meetings themselves. But hiring a professional such as your financial planner to facilitate may be appropriate where the estate is complex or involves many people.

Listen. While family meetings are not democracies, they are an excellent opportunity for the head of the family to hear feedback. Who really wants to be in the family business, who doesn’t need as large an inheritance as someone else, or who wants their inheritance structured in a particular way? Many heads of family have refined their estate plan following family meetings.

How often do you hold a family meeting? For the average family, every few years will be fine, or as circumstances warrant. For those with businesses or philanthropies, annual meetings are more appropriate.

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May 2005— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bold Financial Planning, LLC a local member of the FPA.