Preparing Financially for Disaster

Disasters – be it hurricanes, earthquakes, terrorist attacks, or wildfires – are sadly an inevitable fact of life. And just as you might protect in advance your house and personal belongings from disasters, so too you must prepare your personal and financial information.

 

But what does that entail? What is the near equivalent of boarding up your windows for your personal and financial information? In short, it simply means that you need to backup, document and record all of your personal and financial information to go along with those records (photos, videos, or otherwise) you keep for insurance claims substantiation purposes. These records could be photocopies, electronic images, computer files burned onto a CD-ROM or an online backup service.

 

Though not completely exhaustive, a person will need to make copies of their personal and financial documents, including their birth, death and marriage certificates; social security cards; passports; credit card numbers; medical records; identification, including your driver’s license; recent bank and brokerage accounts, house deeds, mortgage and home equity notes; car title; insurance policies and agent contact numbers; credit and debit cards; tax returns for the past three years; the location of wills, trusts and powers of attorney; names and contact numbers for executors, trustees and guardians; a list of financial advisers and their contact information; and a list of user IDs and passwords for online accounts.

 

Individuals also need to complete and create a copy of their household inventory. An individual could, for instance, take and store photographs or a video of personal belongings, jewelry and furniture and the like. Regardless of the method used to document personal belongings, individuals need to write a brief description of each item, including the cost, age, manufacturer, and model and serial number for each item. Copies of receipts or appraisals are necessary for any expensive items, including jewelry, art work and collectibles.

 

Why does someone need to copy all this information? In essence, heirs, professional advisers and individuals doing the disaster preparation need this information to rebuild a financial life in the wake of a disaster.

 

 

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In some cases, individuals might consider storing originals of such information in one place, such as a safe deposit box or a fireproof safe in your home. In many cases, however, experts recommend that people planning for disaster mail a copy of their records to a relative, friend, or professional adviser in another part of the country.

 

The reason? Disasters, such as hurricanes or tornadoes, often affect whole regions or parts of the country, crippling communication systems and the like. If copies of your important documents are in another part of the country, you’ll be able to rebuild your financial life much more quickly than if you had to wait for cell phone towers to be repaired or electricity to be restored, or the safe in your home to be found. It is also important to tell the person to whom such information is being sent what to do if disaster strikes and original documents are destroyed.  And it is equally important that the copies be stored in a safe place.

 

Still others suggest using a belt-and-suspender approach to backing up personal and financial data. For instance, some say it is a good idea not only to make photocopies of important financial and personal information, but also to use what the digital world has to offer these days. For instance, individuals should consider e-mailing attachments that contain personal or financial information to themselves or trusted advisers, family or friends. In addition, some even suggest using secure online backup services that store personal information for a fee. Two firms that offer such services include iBackup (costs $100 to $150 per year to store 4GB) or Xdrive. Some financial planners and law firms now offer similar services for important documents, including family photos. 

 

Why use an online backup service? Easy access is the big reason. Individuals can access their files from anywhere in the world. Documents can also be shared (on a password protected basis) with advisers in different parts of the country.  In addition, it is easy to update such information so individuals do not have to worry about which version is the most recent or most up-to-date.

 

Individuals need to back up other aspects of their financial life. For instance, many individuals select an executor, trustee and guardian who live in the same state or in close proximity. However, a disaster could affect executors, trustees and guardians as well. That’s why experts always recommend that individuals have contingency plans (individuals from other states or parts of the country) for those responsibilities should the primary named individual be incapable or unwilling to serve in that capacity, if asked.

 

Likewise, selection of health care and financial decision designee’s might require the same considerations. As with executors and the like, experts often recommend naming friends or family members who live in other parts of the country as successors if the original people chosen are affected by a disaster.

 

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August 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 Loudoun County Virginia member of the FPA. 

PROS AND CONS OF PREPAYING YOUR FUNERAL

Preplanning your own funeral, while difficult for most of us, can help ease the emotional and financial burden for your survivors at a stressful time. But should you pay in advance for your funeral?

 

Prepaying for a cemetery plot, for the funeral service, for funeral merchandise such as a casket or headstone—what the funeral industry refers to as “pre-need” planning—has its benefits. But as with many financial purchases, one should explore the options carefully before deciding.

 

Prepaying can provide peace of mind for you and your loved ones. It also generally ensures that you get what you want, such as the casket or type of service. This is especially true of a cemetery plot. The location you desire today might not be available 10 or 20 years from now if you wait until death to buy it.

 

Experts also say that arranging and paying for a funeral in advance tends to result in lower cost, versus waiting until death when family emotions may drive decisions. You’re also paying for tomorrow’s funeral at today’s prices.

 

Prepaying can be beneficial for those who someday may need to qualify for government services, such as Medicaid for long-term nursing home care. That’s because prepaid funeral expenses usually don’t count against the person’s estate when the government determines financial eligibility.

 

But prepaying carries its risks. There have been incidents of funeral service directors going bankrupt or embezzling escrowed funds set aside to pay for funerals. So you’ll want to find out what consumer protection your state provides in this area.

 

What if you move and want to be buried somewhere else, or you decide later to go with another funeral home? Does the plan allow for a full refund or can the funds be transferred to another funeral home? Often you will have to pay an administrative or penalty fee for the right to transfer or cancel a funeral contract.

 

Prepaying doesn’t always guarantee that all future funeral expenses will be covered. For example, inflation for some funeral expenses not controlled by the funeral home, such as

 

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flowers or obituaries, may outstrip the earnings of the prepaid plan. Thus, your loved ones either pay the difference or substitute something less expensive.

 

Another drawback is that you are tying up funds that you might need between now and then for emergency purposes.

 

If you decide to prepay, you may have several options to choose from. First, the funeral home may have established with a financial institution a trust designed to hold funds for future funerals (and the cemetery plot if they provide that). These usually are state-regulated irrevocable trusts in which all or most of the advance payment is invested (some states allow funeral homes to retain ten percent of the payment for current use).

 

Ideally, you should know the financial institution administering the trust and receive an annual statement to ensure that the funds are being handled according to the contract. Also, find out what happens to the interest earned by the trust. Some funeral homes take that interest for administrative costs.

 

A second arrangement is a permanent life insurance or annuity contract. The funeral home may be named as beneficiary, though not in all cases. But it might be cheaper and easier to simply boost the coverage on your own current insurance policy.

 

A third option is a payable-on-death Totten trust. In this case, you would set up this POD account at a financial institution such as a bank, often with the funeral home named as the beneficiary, though it’s not required. The funds are designated for funeral expenses and transfer without going through probate.

 

Another option is to simply set up your own investment account that you earmark for funeral expenses. Price current expenses for the funeral you want (detail the service for your loved ones) and invest that amount. Inflation of funeral expenses typically has followed the general rate of inflation, so adequate investing should give your loved ones enough funds at the time to arrange for the type of funeral you’ve preplanned.

 

This arrangement gives you more flexibility should you move or change plans; however, it can’t guarantee, as do the other options, that your loved ones will spend the money as you wish.

 

August 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 Loudoun County Virginia member of the FPA. 

Investment Policy Statements for Trusts

Foundations, trusts and retirement plans are required to have an investment policy statement.  Wealthy individuals, as well as anyone with money earmarked for goals such as retirement or college education, should have an investment policy statement. Often referred to as an IPS, the investment policy statement is the basic building block in an intentional investment process, according to Creating an Investment Policy Statement by Norman M. Boone, M.B.A., CFP®, and Linda S. Lubitz, CFP®.

 

With an IPS, an adviser and a client agree upon all the essential issues surrounding how and why the money is to be managed. This step usually is handled after the adviser has assessed the current situation of the trust by reviewing the applicable trust documents, tax returns, and other financial documents. The adviser must manage the trust portfolio such that it complies with the purposes, terms, distribution requirements and other circumstances of the trust, according to The New Fiduciary Standard, by Tim Hatton, CFP®, CIMA, AIF, written in conjunction with the Foundation for Fiduciary Studies.

 

In addition, The New Fiduciary Standard says it’s important that advisers determine whether the trust documents identify trustees and named fiduciaries in writing; if there is sufficient detail identifying selection criteria, duties, and responsibilities of investment committee members; if the trust documents allow for fiduciaries to delegate prudently investment decisions to others.

 

In many cases, the process for creating an IPS for a trust is the same as it is for a retirement plan or a foundation. An adviser must:

·         identify a client’s goals

·         identify a target rate of return

·         understand the time horizon

·         understand the client’s risk tolerance

·         identify acceptable investment categories and vehicles

·         establish an acceptable allocation of asset categories

·         write an IPS

·         select the specific investments that fit the allocation model

·         monitor and adjust the portfolio as appropriate.

 

On the surface, this process seems simple enough. The tricky part, however, comes when you have to adjust the IPS to meet the requirements of the trust document.  For example, the beneficiaries might be minors (typically 18, but 21 in some states), or the beneficiaries may be adult children receiving regular distributions for college funding, or the trust may call for distributions to beneficiaries at preset ages, such as 25, 30, and 35. Each of these scenarios might call for a different asset allocation to assure the appropriate liquidity at the appropriate time.

 

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When advisers create an IPS for a trust, special attention must be paid to the timing of planned cash inflows and outflows, and that an investment time horizon has been identified.  Knowing the investment time horizon determines which asset classes will be considered, what the mix among asset classes will be, what sub-asset classes will be considered, and which mangers or funds will be selected.

 

With respect to timing, an adviser must make sure there are enough liquid assets to meet distributions when due.  The trust may call for distributions to pay specific expenses of the beneficiary, like college tuition. Likewise, there must be enough liquid assets to meet distributions tied to specified ages such as when a trust beneficiary turns age 25 or 30.  These distributions are known well in advance and cash can be set aside for them. The adviser must also make sure there are enough liquid assets to pay other liabilities of the trust such as advisory fees or taxes when they come due.

 

To do this, the adviser should prepare a schedule of the portfolio’s anticipated cash inflows and outflows for at least the coming five-year period. A  time horizon in which a distribution must be made within five years would be considered short-term and a time horizon in which a distribution must be made after five years would be considered long-term. If short-term distributions exceed the inflow of cash over a given period, assets will have to be earmarked to cover the shortfall. Generally, though not always, assets earmarked for short-term time horizons would be invested in cash and short-term fixed-income securities with liquidity and preservation of capital often being the primary investment objective. And assets earmarked for long-term time horizons could be placed in a wider variety of asset classes, including stocks, bonds and cash or even real estate and alternative investments. The cash flow schedule also helps the adviser rebalance a portfolio, by using deposits to add to under-represented asset categories and by liquidating holdings that have grown too large in order to fund planned withdrawals.

 

Advisers often will take one of two approaches to allocating assets within a trust. In one case, the adviser might separate the money that must be distributed within five years from the money that must be distributed after five years, maybe even using separate accounts for each time horizon.  The shorter-term money would likely be allocated to investments that provide safety of principal – cash and short-term fixed-income securities, for instance. The adviser would then invest the remaining portion of funds in assets typical of a portfolio with a long-term time horizon, stocks and bonds, for instance. 

 

Alternatively, the adviser might invest all of the assets together, allocating assets among stocks, bonds and cash in one account, and use strategic or annual rebalancing of the portfolio to produce the funds for required distributions.

 

Along with preparing for partial distributions of the trust corpus, the IPS and the investments must also align with the eventual liquidation of the trust.  Trusts have a finite life and must be liquidated at some point.  Depending on the terms of the trust, this liquidation may be a short-term distribution (within five years) or a long-term distribution (five years or longer).  The IPS and the investments must reflect that time period in the asset allocation.

 

The Investment Policy Statement is a lot like a blueprint for the management of a portfolio.  It should spell out all the roles of the various parties related to the trust, including the adviser, client, and other parties, and especially the process by which the account is to be managed and monitored.  A good IPS helps foster communication between adviser and client, and helps everyone to understand their responsibilities and duties as they work together to administer and manage the trust to carry out its purposes in the lives of the trust’s beneficiaries.

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August 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 Loudoun County Virginia member of the FPA.