beneficiaries

How to Solve These 6 Problems Your Heirs Could Have With Your Estate

Emily Guy Birken — Wed, 23 May 2018 08:30:40 +0000

Fifty-eight percent of Americans have no will, according to a 2017 Caring.com survey. That means state laws, rather than the wishes of their loved ones, will determine what happens to the property and assets of the deceased.

But before the 42 percent of Americans who do have a will start congratulating themselves on helping their heirs avoid such challenging situations, it's important to remember that even well-planned estates can cause problems for those who inherit. Here are the potential issues your heirs may face, and how you can make sure your final wishes are followed.

1. Your heirs don't know where to find your estate plan

You may have very specific wishes regarding everything from your burial instructions to who will get your mint condition Cal Ripken rookie baseball card — but those intentions can't be followed if your heirs don't know where to find your will and other estate planning paperwork.

Unfortunately, this is a relatively common situation, since many people consider talking about inheritance to be taboo or uncomfortable. Even if your heirs know that you have a safety deposit box in the bank, they may not know which bank, or which branch, or where to find the key.

This is why it's important to discuss your estate plan with your family. Introduce your kids to your attorney so they know whom to call in the event of your death. It's also a good idea to create an "in case of emergency" folder that provides your loved ones with the information they will need about where to find your estate documents, as well as the information necessary to handle your banking, taxes, bills, and other issues if you become incapacitated or pass away. (See also: 9 End-of-Life Cost Savings Your Survivors Will Thank You For)

2. Your will is too vague

There are number of ways that a vaguely-written will can cause your heirs problems. The classic example would be if the deceased simply states that her jewelry is to be divided among her children. This kind of imprecise language can end up causing a rift among siblings if more than one wants the same brooch — or if anyone feels slighted as to how the jewels are distributed. It is best to make sure valuable items are specifically distributed in your will to ensure that your wishes are followed without causing family strife.

But a vague will can have bigger consequences than hurt feelings for heirs. For instance, sometimes a will specifies that one family member is to inherit all of the money because the deceased had a verbal agreement with that heir to share the money with another family member. (You may remember this as the beginning of the plot of Sense and Sensibility.) Without specific language in place, there is no guarantee that your heir will do what you asked.

These sorts of informal agreements are often created in order to protect assets for minors or other individuals who cannot directly inherit — such as special needs adults who rely on government assistance and would lose it if they were to come into a large sum of money. Since a verbal arrangement can be disregarded, it is far preferable to create a trust to ensure the money goes to the person you want it to. There are a number of different types of trusts that can make sure your wishes are followed, can protect the government assistance of the family member in question, and will allow for no confusion or misunderstanding. (See also: The Fair Way to Split Up Your Family's Estate)

3. Your beneficiaries don't match your will

If you put together a well thought out estate plan in your will, but forget to update your beneficiaries on your assets, then it doesn't matter how detailed your estate plan may be — your assets will be distributed according to the beneficiary designation rather than your will.

This is a common issue for many estates, since relationships often change and account holders don't think to update their beneficiary designations. Everyone should review their beneficiary designations every few years to make sure they are not leaving unintended money to ex-spouses, estranged siblings, or other family members who have drifted out of their lives.

4. You name the estate as a beneficiary

A common error in estate planning is if you name your estate as the beneficiary of your IRA, 401(k), or life insurance. If instead you name a person as your beneficiary on these sorts of products, the assets can pass to your beneficiary without having to go through probate. That means the individual beneficiary will receive their money, no matter how many creditors have claims on your estate. But if your whole estate is your beneficiary, the money must go through probate — and your heirs will get only what is left after creditors have been paid.

In addition, if your estate is the beneficiary of your IRA or 401(k), your heirs must liquidate the investments within five years of your death, and pay the required taxes. If instead an heir is named as a direct beneficiary, they may have the option of delaying the required minimum distributions until they reach age 70½, allowing the money to grow tax-free until then. (See also: 6 Times You Need to Update Your Will)

5. Your non-spouse heir cannot roll over a retirement account

Even if you name an individual as the beneficiary of your IRA or 401(k), if the beneficiary is anyone other than your spouse, there are still some pretty big tax pitfalls that could affect your heir's inheritance. Non-spouse beneficiaries of tax-deferred retirement accounts cannot roll IRA or 401(k) money directly into their own retirement accounts without triggering a major tax bill. That's because a rollover would cause the entire amount to be considered taxable income. For that reason, it's preferable for non-spouse heirs of IRA and 401(k) accounts to take the money as required minimum distributions (RMDs) over a lifetime to minimize the tax bite. This is known as the "stretch" option.

Unfortunately, stretch RMDs are not without pitfalls. If your heirs do not take the correct required amount, there is a tax penalty of 50 percent of whatever they were supposed to take, plus whatever their ordinary income tax rate would be on the amount. To avoid this problem, you can direct your IRA or 401(k) custodian to administer inherited IRAs and automatically take care of any required minimum distributions.

6. Your annuity can push your heirs into a higher tax bracket

Passing on an annuity can be a good way of providing regular income to your heirs after you die. However, annuities also come with a potential tax problem since these products are also tax-deferred. An inherited annuity has untaxed growth, and the insurance company holding your policy will issue a Form 1099 for that untaxed growth to your heir, which means it will be included in the heir's gross income for the year. Depending how much growth there is, this could push your heir into a higher tax bracket, and the annuity payments they receive during the first year may end up being swallowed up by the increase in that year's taxes.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Estate Planning Questions Everyone Should Ask

Dan Rafter — Mon, 05 Mar 2018 09:00:07 +0000

There are no guarantees when it comes to the number of years everyone gets on this earth. You may plan to live well into your 90s, but circumstances — and your health — can change very quickly. This is why it's important not to put off the uncomfortable but necessary work of planning your estate.

Not sure where to start? Ask yourself these five key estate planning questions.

1. Why haven't I created a will?

You might not be rich, or even old, but that doesn't mean you don't need a will. A will is for anyone who wants to leave behind assets to loved ones or specify who should raise their children if they die.

That last point is especially important. If you are a parent of young children, you need to spell out in a will who should take guardianship of your sons or daughters should you unexpectedly pass away. If you don't, the courts will make that decision for you. Don't leave this up to chance. Draft a will and include these instructions. If you already have a will but you've had a major life change since you wrote it, it's probably time to update your will.

It's best to work with a legal professional when drafting your will. A professional can help you list clearly who gets what assets. If you want to leave your home to a loved one after you die, you might need to take the extra step to create a trust, too. This can get complicated, so again, it's best to work with an attorney. (See also: Here's What Happens If You Don't Leave a Will)

2. Do I have enough life insurance?

Life insurance is a necessary financial protection for your loved ones. If you should pass away unexpectedly, would your spouse be able to afford the monthly mortgage payments? Would your children be able to remain in the home in which they've grown up?

Life insurance can help ensure that your loved ones don't have to worry about paying their bills after you die. Upon your death, your life insurance will give an agreed-upon payment to your beneficiary, who can use that money to cover anything from mortgage payments to college tuition.

There are two main types of life insurance: term and whole. Term life insurance is less expensive but still provides solid coverage. With this type of insurance, you pay a premium for a certain number of years, perhaps 20 or 30. If you die during this time, your policy pays out. Once that term expires, you'll need to buy a new policy if you want to maintain life insurance coverage.

Whole life insurance is usually more expensive, but you don't have to worry about renewing after a term ends. Instead, you pay a premium every month — or every year — for the rest of your life. There is no end limit on the premium. The policy will pay out when you die.

How much life insurance do you need? That depends on your situation. Do you have young children dependent on your income? Does your spouse work? Are all your children young adults who are earning livings of their own? You'll want more life insurance coverage the younger and more dependent on your income your loved ones are. Your life insurance payout should at least cover the debt you owe for your mortgage, car, credit cards, and education. (See also: Term vs Whole Life Insurance: Here's How to Choose)

3. What do I want to do with my home?

One of the biggest assets you might have is your home. A home, though, can be a problem after you die.

If you've paid off your home and own it, you'll have to determine what you want your survivors to do with that residence. Do you want to leave your home to a child? That can be a tough decision if you have more than one child. Or do you want your children to sell the home and split the proceeds? Make sure you specify in your will what your preference is for dealing with your home. This can help prevent tension among your survivors.

If you haven't finished paying off your house, your options may be more limited. Funds from your estate may be used to pay off the debt you owe to your mortgage lender. But if your estate doesn't have enough money to cover this, your home might have to be sold, especially if none of your survivors want to take on your remaining mortgage payments. (See also: Why You May Need a Revocable Living Trust)

4. Will anyone know how to find my key documents?

Where do you keep your most important financial documents? Do you have a designated place for everything, from your will, to your tax returns and bank statements, to instructions for your funeral?

Wherever that place is, you need to make sure that your loved ones know where to find these important papers. Having a will doesn't help if no one can find it. And making sure that your next of kin know exactly where your checkbook, bank account statements, and past tax returns are stored can ease the burden they'll face when trying to move on from your death. (See also: 9 End-of-Life Cost Savings Your Survivors Will Thank You For)

5. Who will care for your pets?

Do you share your home with a beloved pooch, cat, or parakeet? What would happen to these companions if you should pass away?

If you want to make sure that your pets are cared for after you pass, leave instructions. You can include this information in a will, especially if you are going to leave your pets to a family member. You might want to also set up a savings account or leave a sum of money that will help cover the costs of caring for your pets, as a way to ease any burden on family members.

If you have no one to care for your pets after you die, you might specify in your will that you'd like your animals donated to a pet-care organization. (See also: 6 Reasons You Need to Include Pets in Your Will)

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why You May Need a Revocable Living Trust

Carrie Kirby — Mon, 15 Jan 2018 09:30:09 +0000

If you are named the executor of someone's will, be prepared for a hassle. In most states, you will have to go through the probate process, which includes filing court documents and possibly attending hearings. Or, you could get lucky: If the deceased set up a revocable living trust, the process of executing their estate will be much easier.

When I handled a relative's estate this year, the revocable living trust she had set up years earlier made the process so smooth that all I had to do was meet with an attorney and sign checks to the beneficiaries. It was less hassle than getting a mortgage or buying a car. (See also: 6 Things You'll Encounter When Taking Over a Loved One's Finances)

But what is this mysterious document that makes the estate process so much easier for those left behind? Let's look at the details.

What is a revocable living trust?

A revocable living trust is an estate planning tool that people can set up to make the transfer of responsibility seamless both in incapacity and after death. They are "revocable" because you can revise them as your wishes or circumstances change.

When you set up a trust, you designate someone close to you as your successor trustee, giving this person the authority to manage your finances if you become incapacitated or die. You transfer all or some of your property into the trust. You also list your wishes for how to distribute this property after your death, much like you would with a will.

If you become incapacitated or die, the trustee simply needs to provide each of your banks or investment brokerages with a copy of the trust and their identification, and they will have the ability to write checks, sell investments, and make any other financial decisions as if they were you.

Why would I set up a revocable living trust?

When you die, the trustee will have the freedom to carry out the wishes you wrote in your trust without court supervision. This makes the process a lot less onerous. It also preserves the privacy of your heirs, since unlike with court proceedings, the amounts you bequeath and who you leave them to are generally private. In a way, setting up a living trust is a favor you do for your executor and for those you wish to leave bequests to.

But a living trust can also help you while you are among the living. For instance, if you have a stroke and are unable to manage your finances for six months, the trustee could step in and make sure your mortgage payments and other bills get paid out of your checking account. Once you recover, you could take control once again.

If you don't recover and end up passing away, your trustee will already have their name on your accounts, making the process of writing checks to beneficiaries easy.

How would I set up a revocable living trust?

The first thing you would do is visit an attorney, preferably one who specializes in estate planning. The attorney can write the trust document, and walk you through the process of transferring your assets into the trust. You'll also have to choose who you want as your successor trustee, plus a backup in case they can't do it when the time comes, and notify those people. If you don't want to name someone you know as trustee, you could turn to a company to carry this out for you.

Your attorney can advise you on which assets should go in the trust and which should not. For instance, placing an IRA or 401(k) account in a trust can cause problems and/or confusion with what taxes are owed.

Will having my assets in a trust be a hassle?

You won't notice any difference in your day-to-day financial life once your financial assets are transferred to your trust. It's all still your property. Since you are the trustee, you can write checks, sell stock, or make any other financial moves you would have previously done.

Some other assets, however, might be more trouble to add to a trust. Some attorneys advise against adding your home and car to the trust, especially if you think you will sell these and buy new ones during the course of your life. If you do end up adding such assets, you might have to occasionally provide a copy of the trust or fill out extra paperwork.

When do I need to worry about this?

Of course, you never know when life will end, but most people are advised to start thinking about a living trust after the age of 55. If you start one before then, and hypothetically live another 50 years before your successor trustee takes over, you may end up wanting to change your trustee. Estate laws and the size of your estate may change so much that your trust doesn't make sense anymore.

Even if you wait until you are older, the process, which does take some money and effort, may not be for everyone. If your estate is small or you plan to leave all of your assets to your spouse, it may not be necessary.

What if I change my mind?

As stated earlier, "revocable" means you can always change your mind. If you decide you don't want your assets in a trust anymore, or want to create a different kind of trust, you can transfer ownership of all the assets in the trust back to your own name. Once the trust is empty, you create a dissolution document stating that the trust no longer exists.

Will a living trust shelter my assets from nursing home bills?

If you need long-term nursing care, you might be surprised to learn that Medicare will generally not cover it. You will be expected to liquidate your assets and pay for your own care. And only when your own assets have been exhausted will you qualify to have Medicaid pick up future bills.

If your assets are in a revocable trust, you are still expected to use them to pay nursing home bills. There is another kind of trust that can shelter assets from these expenses, called an irrevocable trust; however, this is a complicated strategy and requires careful consideration and consulting with an attorney who specializes in such planning.

Once I have set up a trust, is my estate planning done?

You may be surprised to learn that even after detailing how you want your assets to be distributed in the trust, you will still need to create a will. This is generally called a "pour-over will," and the point of it is to cover any assets that you may have neglected to transfer to the trust.

It's also important that parents with minor children have a will, since this is where you appoint guardians to raise your kids in your place if you die. (See also: 6 Times You Need to Update Your Will)

Estate planning can also involve decisions such as purchasing insurance policies and naming beneficiaries for those policies and for your retirement accounts. Some people also include prepaying funeral expenses in their estate plan; planning the funeral in advance is certainly a big favor you can do your heirs. (See also: 9 End-of-Life Cost Savings Your Survivors Will Thank You For)

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This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

When Dropping Your Life Insurance Is the Right Decision

Dan Rafter — Tue, 14 Nov 2017 09:31:05 +0000

Life insurance is a crucial way to protect your family if you should suddenly pass away. The payout from a life insurance policy can help your loved ones continue to pay a mortgage and other large bills they may not otherwise be able to afford.

Life insurance is so important that few people ever decide to terminate their policies. But are there times when canceling a life insurance policy actually makes sense?

The surprising answer? Sure. It all depends on who continues to rely on your income and who doesn't.

Your children

When deciding whether to cancel a life insurance policy, don't focus solely on your age. Yes, the odds are higher that once you get older (past retirement age), you won't have as many people relying on the money you are making today. With fewer people depending on you financially, it might make sense to cancel your life insurance policy and save the money you are spending on premiums.

Life insurance is most important when you are worried about providing your children with a financial safety net. When your children are young, they need the financial protection that a life insurance policy provides. After all, they won't be working or generating their own income.

But when your children become adults, they might no longer need the payout that your life insurance would provide them if you should die. Canceling a policy designed to protect your kids is usually a sound financial move once these children become adults who are working and providing for themselves.

Your spouse

What if your life insurance policy is also a form of protection for your spouse or partner? That might change your decision to cancel, even as you get older.

Say you die at the age of 65. Would a payout from a life insurance policy provide that extra bit of financial protection to your spouse or partner? Would it help ensure that this person won't struggle with finances after you die?

If the answer is yes, canceling your life insurance policy may not be the right move. You may want to hold onto that policy, even as you inch closer to retirement age. (See also: When Should Single People Get Life Insurance?)

Getting a better plan

There are other reasons to cancel your life insurance. Say you are no longer happy with your current plan; maybe the monthly premiums seem too high.

If you shop around and can find a plan that provides enough coverage at a lower price, canceling your existing policy is not only OK, it ranks as a smart financial move.

Just be sure to compare your existing policy with your potential new one carefully. Yes, a new policy might be cheaper — but it might also not provide the same amount of coverage. Make sure to do your research before canceling any life insurance policy.

You've already paid for your biggest expenses

Life insurance is supposed to be a financial safety net for your loved ones in case you suddenly die. But what if you've already paid off your mortgage? Your spouse or partner won't need a payout from your life insurance policy to cover that bill. What if you've already paid for sending your children to college? Life insurance isn't necessary to help cover this big expense, either. So why not cancel your policy if those big expenses are already in your past?

You can take the money you were spending on life insurance premiums and save it for retirement, add it to your emergency fund savings, or invest in the stock market.

Of course, this type of plan only works if you actually will take the money you were spending and do something financially savvy with it. But canceling a life insurance policy when the big bills are paid can be an effective way of putting your dollars to better use.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Don't Make These 5 Common Mistakes When Writing a Will

Christa Avampato — Tue, 19 Sep 2017 08:30:10 +0000

It's a task no one likes to think about: With everything going on in our lives, do we really want to add our own mortality to the list of our concerns? As unpleasant as it may be to consider, having a will is a critical way to take care of your family should you pass away. It will also ensure that your wishes are carried out in a way that aligns with your values. (See also: What You Need to Know About Writing a Will)

For most of us, it's a fairly straightforward process. We have the options of free online kits, using a service like LegalZoom, or consulting with an attorney. No matter which option you choose, here are some common mistakes to avoid when creating a will.

1. Not giving anyone responsibility

When a will is executed, there must be a person assigned to settle the will when the time comes. This person is known as an executor, and that person makes sure that your wishes are carried out exactly as you intended. It's very important for you to select a responsible person you trust, and get that person's permission to name them as the executor. This is not something you want to be a surprise.

Also, you may want to strongly consider naming a second executor in the event that something happens to the first person you name, or if he or she is unable to serve as executor for any reason. (See also: The Fair Way to Split Up Your Family's Estate)

2. Not taking care of the kids

If you have children, it's critical that you select who will become their guardian(s) and communicate that to the named guardians as well as to other family members. I have seen this become a bone of contention before and after someone's passing, and it's a heartbreaking ordeal for everyone involved. Unfortunately, the people who suffer most in the battle are the children. It can be a difficult thing to communicate these wishes to your family, but it is far easier to deal with that difficulty now than to have a potential custody battle unfold after you're gone.

You must also consider how to give your assets to your children if they are still minors. This is a very complicated financial and legal issue, though there are a number of different options that you can put in place to properly take care of it. Creating trusts or accounts under what's known as the Uniform Transfers to Minors Act (UTMA) are avenues worth exploring.

3. Not knowing your state laws

Wills are state-specific and different states have different laws for them. The state that executes your will should be the state where you claim legal residence even if you have homes or spend significant amounts of time in different states. FindLaw provides a clear overview of laws that govern wills in the different states.

4. Not signing the will or having a witness

You've done all of the work to create a will. Make sure to sign it and have a witness sign it in accordance with your state's specific laws. If a will is left unsigned by you or a witness, there is a high risk that it won't be honored. Also bear in mind that you must be of sound mind and body, and you must create this will without being threatened or pressured by someone else to do so. If either of these points could be disputed, a legal battle could ensue before the will is executed.

5. Not making it accessible

Make sure your completed and signed will is easily accessible when the time comes, particularly by your executor. There are a few options for this. You can keep it in a secure location such as a safe in your home or a safe-deposit box. You may also choose to provide a copy of your will to your attorney, accountant, or financial adviser if you feel comfortable doing so. Though you are not required to file your will with the court or place it into public record, some courts may provide the option to store it for you. This last possibility is a good option if the court in your local jurisdiction allows it.

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This article is from Christa Avampato of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's How You Should Budget Your Social Security Checks

Dan Rafter — Wed, 23 Aug 2017 08:30:05 +0000

The average retired worker earns a monthly Social Security check of $1,360, according to the U.S. Social Security Administration. And for most retirees, Social Security benefits are just one source of income, with many supplementing their checks with money that they've saved in 401(k) plans, IRAs, and other savings vehicles.

This doesn't mean, though, that these Social Security dollars aren't important. The administration says that Social Security benefits represent about 34 percent of the income of the elderly. That's why it's so important for retirees to create a budget for their Social Security benefits and determine the best way to spend such a significant portion of their monthly earnings. (See also: 6 Smart Ways to Boost Your Social Security Payout Before Retirement)

There's always a need for a budget

The first step in determining how to best spend Social Security benefits is to calculate your monthly income from all sources. Then, determine how much of this income comes from Social Security benefits alone. If Social Security accounts for 70 percent of your monthly income, you'll have to be especially careful how you spend it. If it accounts for just 20 percent, you'll have a bit more leeway.

Once you determine how important your benefits are to your monthly income stream, it's time to calculate how much of your Social Security check you should devote to each of your main expenses. (See also: 6 Ways You Can Cut Costs Right Before You Retire)

Housing

Ideally, you'll enter retirement without a mortgage payment. But that doesn't always happen. You might choose to rent during your retirement years. Or, maybe you'll spend your retirement years in assisted living.

Housing often remains a significant expense for retirees, with the Bureau of Labor Statistics reporting in March 2016 that seniors age 55 and older spend an average $16,219 a year on housing. Seniors from the ages of 65 to 74 spend an average $15,838.

If you receive the average Social Security check of $1,360 a month, you'll receive $16,320 a year. This means that the average amount that retirees spend on housing would consume most of your Social Security income each year.

It might make sense to devote a set percentage of every Social Security check to help cover your housing expenses. How much that percentage is will depend on how much you are spending on housing. If you live in a home with a mortgage that's been paid off, you obviously won't need to spend as much of your checks on housing as you would if you were still paying a mortgage. If housing is a significant expense, though, you might consider devoting 60 percent or more of your Social Security check to covering it. (See also: 5 Countries Where You Can Retire for $1,000 a Month)

Food

The Bureau of Labor Statistics reported that seniors from the ages of 65 to 74 spend an average $6,303 a year on food. This makes sense: You have to eat, whether you're working or not. Make sure, then, to reserve part of your Social Security check for groceries and meals out.

You do have control over this expense, of course. You can eat out less often and cook at home more, which would reduce your food expenses. But setting aside 20 percent or so of your monthly Social Security check for food should suffice.

Medical expenses

Depending on your health, medical costs could be a significant expense as you age. The numbers from the Bureau of Labor Statistics bear this out. According to the Bureau, adults from the ages of 65 to 74 spend an average $5,956 a year for medical care. The Bureau says that adults 74 and older spend an average $5,708 a year on health care. (See also: How an HSA Could Help Your Retirement)

Health expenses are one cost you have little control over. Sure, you can exercise and eat well. But you might still suffer health setbacks. It's important to reserve at least some of your Social Security check to cover these sometimes unexpected costs.

Consider saving an additional 20 percent of your Social Security benefits for medical spending.

Other costs

If you've been keeping track, those three expenses might eat up your entire Social Security check. Again, this depends on how much Social Security income you receive each month and how much you actually spend on housing, health care, and food. (See also: How Much Can You Afford to Spend in Retirement?)

If you find that these three big expenses do swallow most or all of your expenses, you'll have to dip into your retirement savings and other income vehicles to cover costs such as travel, transportation, entertainment, and any other monthly bills.

Budgeting your Social Security check highlights just how important it is to have multiple income sources at your disposal after retirement. As you can see, Social Security doesn't go that far when it comes to covering the basic living expenses of many seniors.

You do have options, of course. You can scale back your retirement plans, perhaps choosing to travel less and eat in more often. You can also take on a part-time job. That extra income could come in handy to cover the smaller, unexpected expenses that tend to come up. (See also: 9 Easy Ways Retirees Can Earn Extra Income)

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Sobering Facts About Social Security You Shouldn't Panic Over

Emily Guy Birken — Thu, 04 May 2017 08:00:08 +0000

Most people tend not to think about Social Security until they are in a position to collect benefits. Unfortunately, letting Social Security be something you worry about "later" can cause costly problems — both for you as a beneficiary, and for the program as a whole.

Here are five sobering facts about Social Security that you should know now so that you will be prepared for potential issues in the future. (See also: 6 Smart Ways to Boost Your Social Security Payout Before Retirement)

1. The Social Security Trust Fund may be entirely depleted by 2034

Social Security is set up as a direct transfer of funds from current workers to current beneficiaries. However, when the taxes coming in to pay for Social Security exceed the expenses for the program, the surplus is placed in the Social Security Trust Fund, where it earns interest. As of 2010, Social Security expenses have exceeded the tax revenue, and the Social Security Administration has had to dip into the Trust Fund in order to pay out all promised benefits. As of 2013, the Trust Fund began losing value, and it is projected to be entirely depleted by the year 2034.

When the Trust Fund runs out of money, the projected tax revenue will cover only 79 percent of promised benefits. This means anyone who is entitled to a $1,500 monthly benefit will only receive $1,185.

Why you shouldn't panic

While the coming depletion of the Social Security Trust Fund is troubling, the problem is neither new nor imminent. It's also important to note that the United States is the only country in the world that attempts to predict the 75-year longevity of its social insurance funds, which means we are in a position to do something about the anticipated shortfall. Over the next couple of decades, it is likely that our government will make relatively small changes to the Social Security program in order to make up the 21 percent anticipated shortfall that will occur once the Trust Fund has run dry.

However, it is smart for current workers to recognize that Social Security should not be heavily relied upon for a financially secure retirement.

2. The average Social Security retirement benefit is $1,360 per month

As of January, 2017, the average benefit for a retired beneficiary is $1,360 per month, which doesn't go very far if that is your only source of income. In addition, beneficiaries who are signed up for Medicare Part B (which is the Medicare medical insurance) will see $134 deducted from their Social Security benefit check for the Part B premium.

While very few retirees live solely on their Social Security benefits, these benefits do constitute at least half the income of 71 percent of single seniors and 48 percent of couples. And for a whopping 43 percent of singles and 21 percent of married couples, Social Security benefits represent 90 percent or more of total income.

Why you shouldn't panic

What you need to remember is that you have a great deal of control over how much of your budget your Social Security benefit will represent. If you diligently save for retirement, then receiving an "average" benefit of $1,360 will provide a nice financial cushion on top of your retirement portfolio. While $1,360 is tough to live on by itself, having it available on top of your necessary expenditures would be a wonderful supplement.

3. Cuts to Social Security benefits may be coming

President Trump promised during his campaign that there would be no cuts to current payments for Social Security or Medicare beneficiaries. However, although the White House has made it clear that current beneficiaries' payments are safe, it will not rule out the possibility of making cuts that will affect future beneficiaries. Some of the changes that have been proposed include:

Raise the full retirement age for workers who reach age 62 in 2023, gradually increasing it from the current age of 66 to age 69.
Change the formula for calculating benefits for retirees becoming newly eligible in 2023 in phases over 10 years. The changes would slightly increase benefits for below-average earners and slightly decrease benefits for above-average earners.
Beginning December 2018, change the calculation of the cost-of-living adjustment (COLA) to a chained consumer price index (CPI) calculation, which will reduce the amount of money beneficiaries receive in their annual COLA. The current formula for determining the COLA uses something called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is a useful index for tracking the inflation of all goods, but it does not take into account the fact that many consumers make substitutions when prices go up. (For instance, if the price of beef rises, many consumers will buy chicken or pork instead.) A chained CPI calculation takes these sorts of substitutions into account, so its inflation rate is calculated at approximately 0.3 percentage points lower than the CPI-W rate.
Eliminate the earnings test beginning in January 2019. This test reduces benefits for beneficiaries who are younger than Social Security's full retirement age (currently age 66), are currently receiving Social Security benefit payments, and have income from wages or self-employment that exceed $16,920 per year in 2017.
Eliminate federal income taxation of Social Security retirement benefits as of 2054 and later, phased in from 2045 to 2053.

Why you shouldn't panic

Although making cuts to future beneficiaries' payments is hardly something to cheer about, we do need to recognize that it is much more important to protect the benefits of current beneficiaries. Since current beneficiaries generally cannot go back to work or cut expenses, they are much more vulnerable to cuts in payments than current workers are. In fact, the proposed switch to a chained CPI calculation for COLA may be burdensome to current beneficiaries, since it has been proposed for December 2018, thereby affecting those who have already retired.

What current workers need to do is plan for their Social Security to be an addition to their retirement savings. Then, if these changes and cuts do come to pass, you will not be worried about losing important income.

4. High earners don't pay as much into Social Security

Social Security is paid for through a payroll tax of 6.2 percent for workers and 6.2 percent for their employers, making the total tax contribution 12.4 percent of gross income. However, workers and their employers do not pay Social Security taxes on earnings above $127,200.

While $127,200 is a pretty significant chunk of change, it does mean that very high earners get a break once they are earning that amount. The reasoning behind this earnings cap is to maintain the connection between contributions paid in and benefits received. Since Social Security benefits are paid progressively, lower-income beneficiaries receive a higher percentage of their pre-retirement income in benefits than do high-income beneficiaries. The more money that high-income earners pay into Social Security, the less of a return they see on their contributions.

The progressive nature of Social Security benefits is the reason why it is unlikely that there will ever be a complete elimination of this earnings cap, even though the program could certainly use the funds that such a cap elimination would represent. However, even if we were to increase the earnings cap to $229,500 — which would return taxation to the same level it was in the early 1980s — we could make a major dent in the coming benefits shortfall.

Why you shouldn't panic

Although raising taxes is never popular, there is some indication that our government is working to bring the earnings cap closer to early 1980s levels. In 2016, the earnings cap was set at $118,500, which was the same as the 2015 earnings cap. Raising it to $127,200 represents a 7 percent increase.

5. 10,000 baby boomers are retiring every day

Social Security works pretty well when the ratio of workers to retirees is balanced. Unfortunately, the extra-big generation known as the baby boomers is putting the program out of whack. The 76 million members of that generation began reaching age 62 (the earliest you may take Social Security benefits) as of 2008, and they are just going to keep retiring — at a rate of 10,000 per day.

This huge retirement boom could potentially put an enormous burden on our Social Security program, especially considering the increased life expectancy of this generation as compared to their parents and grandparents.

Why you shouldn't panic

While it's true that approximately 10,000 baby boomers are going to be retiring every day until 2034 (when the last of the boomers will reach age 70, which is the latest you would want to start taking Social Security benefits), there is more to this story than just their retirement.

First, it's important to remember that we've known the boomers would be retiring en masse for quite some time. Policymakers began to plan as early as 1983, when Congress raised the full retirement age.

Second, the boomers are the workers who built up the Social Security Trust Fund, so they will be beneficiaries of the money they themselves contributed through taxes.

Finally, as of 2015, millennials had overtaken the boomers as the largest living generation in the U.S. With such a large group of young workers in the workforce, we should be able to handle the financial cost of 10,000 boomers retiring each day.

This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Fair Way to Split Up Your Family's Estate

Mikey Rox — Fri, 17 Mar 2017 10:30:24 +0000

I've seen many family rifts created over an estate. Without clear guidance on your wishes, heirs and relatives may descend into fights over your belongings, sometimes taking grudges to their own graves. Don't let that happen to your family. Here are a few tips on how to smooth out the kinks of your will before you take your last bow.

Determine Beneficiaries in Your Life Insurance Policy Ahead of Time

If you have a life insurance policy, you have the option to name beneficiaries before you die. You can divide the payout evenly among those you'd like to name, or you can assign a particular percentage of the payout to each individual. Either way, you spare your beneficiaries the unpleasant conversation of who gets how much.

If there are any hurt feelings after the fact because this person or that person didn't receive the payout they feel they deserve, it's really not your problem anymore. At least you spelled out your wishes legally and ahead of time.

Involve Your Beneficiaries in Inheritance Decisions While You're Alive

If you want to involve your family in the asset-dividing task while you're still alive, there are a couple ways to make this work. Certified financial planner Jody Giles — author of Missing Pieces Plan, a guide to help people plan for their final wishes — offers two options for family participation in asset assignment to avoid infighting when you pass.

Round Robin

One way to give away heirlooms now, Giles says, is to hold a "round robin" where each beneficiary gets a turn picking an asset or heirloom.

"I suggest making a list of all the items you deem sentimental and circulate it to your loved ones," says Giles. They can then choose from the list, or add items you may not have even thought about. "You might find they really care about a coffee mug that you don't see as valuable, but they do," she says.

Once you have a complete list, you may consider separating sentimental items (coffee mugs, trophies, a wine opener, nostalgic popcorn bowl) from valuable items, like furniture, silver, jewelry, and art.

Drawing names is a great way to determine who starts the round robin, or you can easily go by birth order or other creative option for deciding who goes first. Then have each loved one choose an item off the "sentimental" list, then the "valuable" list, and so forth.

At the round robin's completion, your loved ones have intentionally and thoughtfully selected your heirlooms. Then, you can decide what you give away now or what you intend to keep until you pass. Most importantly, you have a documented list indicating to whom all your sentimental and valuable items shall pass — as they deem fair.

Play Money

Another idea, according to Giles, is to give an equal amount of "play money" to each intended beneficiary. If necessary, you can hire an appraiser to value and price all of your assets. Each heir is then given the opportunity to "buy" items from the estate.

"If you want to downsize," Giles says, "you can certainly make the transfer during your lifetime or keep track of the 'purchases' to reduce tension and make the transfers seamless after you're gone."

You can also have the satisfaction of knowing that heirlooms you hold dear will continue to be treasured by the next generation.

Include a Letter of Explanation in Your Will

Unless you have the good fortune of being part of the "perfect" family, your assets may not be divided equally — perhaps for good reason. It's your right to divide your assets however you wish, but you can bet it may leave a sour taste in the mouth of whomever gets the short end of the stick.

To quell the hurt feelings, include a letter of explanation in your will. It can go a long way toward helping your loved ones understand your decisions. Maybe you're giving less money and property to a more successful child so some of the less successful ones can turn their lives around. Whatever the reason — if you think an explanation is necessary, provide one.

"Most people say that they allocate money based on need and not love," says Illinois-based attorney Evan Randall. "Obviously a disabled child requires more money in the long run in addition to possibly not being able to work. It gets harder when the needs are on the same level."

Assign Assets and Let Loved Ones Swap Rights to Them

Nobody wants to contest a will, but siblings and other close family members often end up doing that if your will isn't watertight.

Estate-planning attorney Ashley L. Case with Tiffany & Bosco in Phoenix, Arizona, offers a method to eliminate broken hearts and temper tantrums ahead of your death. It involves creating groups of items that you think are equal in monetary or sentimental value.

"Each heir could be assigned a group of items at random, which would represent the inheritance of the heir," explains Case. "In the event that the heir was interested in an item belonging to another heir, the two can negotiate separately."

This allows you to distribute your assets equally while lowering the chances your heirs will have to resort to litigation upon your death. Because, really, who wants to go to court to duke it out over a dead person's stuff?

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Money Moves to Make Before You Remarry

Damian Davila — Wed, 15 Mar 2017 11:00:15 +0000

Every year, about three per 1,000 Americans divorce from their spouse. Since about seven per 1,000 Americans marry every year, there is a chance that some divorcees will eventually tie the knot again with a new partner.

But before you remarry, you should evaluate your finances. Let's review eight money moves that will set you both up for financial safety and success.

1. Make Amendments to Your Will (or Make One!)

The joy of finding love again can make you look at everything through a rosy filter. While no one likes thinking about their mortality, especially close to a big wedding day, the reality is that not updating your will could leave your new partner (and potential dependents) with a messy court battle for your estate. Review your current will and update it as necessary. For example, you may redistribute your estate to include your new dependents and choose a different executor — a person who will manage your estate and carry out the orders in your will.

If you don't have a will, then setting one up should become the top priority of all money moves before you remarry. In the absence of a will, a judge will appoint an administrator who will execute your estate according to your state's probate laws. What is legal may not be the ideal situation for your loved ones, so plan ahead. (See also: What You Need to Know About Writing a Will)

2. Update Beneficiaries Listed on Your Retirement Accounts

Even after setting up or updating your will, you still need to update the list of beneficiaries listed for your retirement accounts. This is particularly important for 401K plan holders. The Employee Retirement Security Act (ERISA) stipulates that a defined contribution plan, such as a 401K, must provide a death benefit to the spouse of the plan holder.

Your beneficiary form is so important that it can supersede your will under many circumstances. When updating your beneficiary form before you remarry, there are three best practices to follow:

Get written consent from your previous spouse, if applicable, to make changes;
Second, designate only children who are of legal age so they can actually carry out their wishes;
Third, find out the tax implications for beneficiaries other than your spouse as a large windfall could unintentionally create a financial burden.

3. Consider Setting Up a Trust

Since we're talking about potential financial burdens, many of them could come out of an estate with lots of valuable assets being divided among many beneficiaries, many of them very young.

When you have accumulated a lot of wealth over the years, you could be better served by a trust than by a will for several reasons, including keeping your estate out of a court-supervised probate, maintaining the privacy of your records, and allowing you to customize estate distribution. While the cost of setting up a trust can be up to three times that of setting up a will, it can be a worthwhile investment to prevent costly legal battles. (See also: Should You Set Up a Trust for Your Child?)

4. Be Aware of Potential Spousal Benefits From Social Security

If your previous marriage ended on very unfriendly terms, you and your spouse may feel that you don't want to leave a penny to each other. Regardless of how you feel, the Social Security Administration (SSA) may still legally entitle your ex-spouse some benefits under certain circumstances.

If your former marriage lasted at least 10 years, your previous spouse can receive benefits on your SSA's record as long as he or she:

Remains unmarried;
Is age 62 or older;
Is entitled to Social Security retirement or disability benefits; and
Has an entitled benefit based on his or her own work that is less than the one that he or she would receive based on your work history.

Even when you have remarried, your ex-spouse could receive a check from the SSA based on your record. This is a conversation that you should have with your new partner before you tie the knot so that you're both on the same financial page.

5. Set Up Mail Forwarding With USPS

Depending on how long ago you got divorced and whether or not you kept the same home from your previous marriage, you could still receive some correspondence addressed to your ex's name. While getting a letter from an aunt isn't a big deal, receiving a large monetary gift, important bill, or legal notice could create discussions that you don't want to have.

To avoid such issues, spend $1 to set up mail forward with the USPS so that all correspondence under your married name (and maiden name, if applicable) is forwarded to a new address. Chances are that your ex-spouse already did this, but it's better to be safe than sorry. This service costs $1 per name, so you would need to spend $1 for a married name, and another $1 for a maiden name.

6. Put Your Debts on the Table

Transparency is a pillar in any relationship. No matter how large your financial obligations may be, your new spouse will truly appreciate finding out now rather than when you're struggling to cover monthly bills, applying for a mortgage, or trying to finance a new car.

Sit down with your soon-to-be spouse and go through your debt payments, such as student loans, credit card balances, mortgages, car loans, and installment plans. Going over your debts will allow you to have an idea of where the money is going every month, start talking about the potential commingling of finances, and be aware of each other's liabilities. (See also: What Happens to Your Debt After You Die?)

7. Disclose Any Alimony and Child Care Payments

Whether you're the issuer or recipient of court-mandated spousal support, spousal maintenance, or child care, make sure to disclose those moneys to your spouse and the corresponding expenses that they cover. Failing to help cover certain expenses while making large payments somewhere else could cause tensions between you and your new partner when not previously discussed.

Be upfront with your partner and tell the whole story. It helps you establish clear expectations about your joint financial future.

8. Evaluate a Prenuptial

Depending on your own financial plans, you may want to fully combine your finances — or not at all. For example, you may have accumulated some serious joint credit card debts from your previous marriage and you wouldn't want to transfer that responsibility to your new spouse or start a new string of similar debts. Evaluating a prenup before tying the knot is a necessary conversation for any couple with large differences in individual net worths, levels of retirement savings, and stakes in businesses. (See also: 5 Ways to Protect Your Business During a Divorce)

While thinking that your second marriage may fail like your first one did may sound a bit pessimistic, the reality is that it does happen. In 2013, four out of 10 new marriages involved remarriage.

Consult with your financial adviser, lawyer, or accountant about your unique financial situation and determine whether or not you need to present a prenup agreement to your soon-to-be spouse. Keep a positive attitude, and remember that this is a time for celebration. Once you've done your homework, you'll be able to fully enjoy your marriage without any financial worries holding you back.

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why Your Group Life Insurance Is Not Enough

Ashley Eneriz — Tue, 31 Jan 2017 11:00:10 +0000

You've done it — you've finally landed a job that offers amazing benefits such as free life insurance. While employer-offered life insurance (also called group life insurance) is worthwhile, it shouldn't be your only source of insurance.

How Do I Get Group Life Insurance?

Many employers will offer a free level of life insurance for employees. Depending on your place of work, this can cover anywhere from $25,000 to your base pay. Since this is a free option, all employees should sign up for the benefit. It's free money if something were to happen to you. However, don't let that be your only coverage. (See also: 5 Reasons Why Life Insurance Isn't Just for Old People)

Is Group Life Insurance Enough?

If you are single, a $25K —$50K check sounds like a nice chunk of change for your parents or other loved ones you leave behind. However, in most cases — yes, even for single people — it's simply not enough. Final expenses can be greater than you think. Funerals can range in price, but a recent survey by the National Funeral Directors Association found a median price of $7K.

Furthermore, if your private student loans, mortgage, or car loans have a co-signer, then that co-signer will be stuck with your debt after you die. To avoid this, you can either remove co-signers from loans through refinancing, or purchase term life insurance that will cover the cost of your remaining debt.

For healthy, young individuals that do not need much coverage, term life insurance rates are very affordable, with some policies costing less than $20 a month. But for individuals who are married and/or have children, you'll likely need more coverage, To calculate how much coverage you need, add up the following:

Funeral cost;
Cost of paying off any debt not forgiven upon death;
Time you want your loved ones to have income and not worry about work — for example, even if your spouse works full-time in a successful career, they might need several months to grieve your loss;
Future college costs or other child-rearing expenses.

For many families, the total will be around seven to 10 times your annual paycheck.

Can I Get Supplemental Life Insurance Through an Employer?

Many employers will offer supplemental life insurance for purchase. Since you are purchasing the policy through your employer, it could be slightly cheaper than purchasing individual life insurance. However, your company technically owns the policy. Therefore, if you quit or are fired, your group life is gone, too. Some employers will give you the option to continue carrying the policy after you leave, but it will be at a higher price.

Individual Life Insurance Versus Group Life Insurance

While signing up for free group life insurance is a must, it is much better to sign up for supplemental term life insurance individually. The policy will stay with you even if you move jobs. Furthermore, you can lock in a low premium now when you are still young and healthy.

Say you were to secure a low-cost policy with your employer's group life insurance at the young age of 25. Your rates should be quite low. Now fast forward eight years. You want to quit your job and have your own term life insurance policy. You will still get a great rate because you are under 40, but your monthly premium will be more at 33 than it was at 25.

To sum it all up, cash in on your employer's free group life insurance perk, but also secure term life insurance when you are still young. This will allow you to lock in the best rate possible.

This article is from Ashley Eneriz of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Term vs Whole Life Insurance: Here's How to Choose

Dan Rafter — Thu, 03 Nov 2016 10:30:09 +0000

You know you need life insurance. It's a way to provide financial protection for your spouse, children, or other dependents should you unexpectedly die. But knowing that life insurance is a smart move and knowing which type of policy to take out are two different things.

Studying up on life insurance isn't fun. Fortunately, most consumers choose between just two different types of life insurance policies — term and permanent. And if they choose permanent life insurance, they usually opt for what is known as whole life insurance.

What's the difference between the two? And which type of insurance is best for you? Here's a crash course in the difference between term and whole life insurance.

Term Life Insurance — The Cheaper Choice

For most people, term life insurance is the smart financial choice. That's because this insurance provides solid financial protection for loved ones, while also costing far less than a whole life insurance policy.

As the name suggests, term life insurance remains in effect for a certain period — or term — of time. You can choose the term, usually anywhere from one to 30 years. The Insurance Information Institute says that most people choose a 20-year term.

When taking out a term life policy, you'll provide a list of beneficiaries, such as your children or spouse. Your term life insurance will pay out your death benefit to your listed beneficiaries if you die — and your death meets the requirements spelled out in your policy during this term (suicide cancels a payout, for example). After the term ends, the policy ends, too, unless you pay to extend it. Your annual premium will usually remain the same during the term.

If you take out a term life insurance policy, you'll have to decide how long you want your policy to remain active. Most people choose a term that will last until their dependents no longer need their financial assistance. They might take out a term policy that lasts until their children will have left their home and started their own careers, for instance. Others might choose a policy that ends only after they know they will have paid off their home and built up a significant amount of savings.

How much you pay for term life insurance depends on many factors, including your age, health, the amount of coverage you want, and the length of your policy. TrustedChoice.com, a website that helps consumers find independent insurance agents, says that a healthy 35-year-old male nonsmoker who takes out a 20-year term life insurance policy with a value of $500,000 will pay an average of about $35 a month for a policy. A 35-year-old healthy female nonsmoker would pay about $61 a month for $1 million worth of life insurance with a 20-year term.

That comes out to $420 a year for the male and $732 for the female taking out the more valuable policy.

Whole Life Insurance

Whole life insurance is a more complicated product. That's because it is really two different financial products in one. It provides life insurance benefits like a term life policy, but also comes with an investment component known as a cash value.

Part of every payment you make goes toward growing this cash value on a tax-deferred basis, meaning that you won't pay taxes on any of these cash gains while they are growing. You can borrow against your life insurance account or surrender it at any time to take the cash that has grown in it.

You will, though, have to repay any loans you make against your whole life policy, with interest.

Whole life also lasts, as its name suggests, for your entire life. No matter when you die, a whole life policy will pay out its death benefits to your listed beneficiaries, as long as the cause of your death is covered under the policy. Your premiums will remain the same until you either cancel the policy or you die.

Because it comes with an investment component and lasts for your entire life, whole life insurance is considerably more expensive. TrustedChoice.com says that a healthy 35-year-old male who does not smoke would pay an average of $98.50 a month or $1,119 a year for a whole life insurance policy with death benefits valued at $250,000. A 35-year-old healthy female who doesn't smoke would pay an average of $82 a month or $960 a year for the same policy.

Which Is Right for You?

Which type of insurance is right for you? If you simply want to provide protection for your loved ones until they are financially independent, a term life insurance policy is usually the better choice thanks to their lower costs.

If you want a life insurance policy that also generates cash value, then you might consider the whole life version. Whole life might make sense, too, if you need to provide financial protection for a loved one who will be dependent on you for your entire life, such as a child with special needs.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What Happens to Your Debt After You Die?

Damian Davila — Thu, 28 Jul 2016 10:30:09 +0000

"In this world nothing can be said to be certain, except death and taxes," wrote Benjamin Franklin back in 1789. However, more and more Americans are including "debt" in that famous quote. In 2015, one poll found that 21% of Americans believed that they would be in debt forever, up from 9% in 2013 and 18% in 2014. But what happens to that debt when you die? The answers may surprise you.

First — What Is an Estate?

Your estate includes all of your assets, including real estate, investments, insurance, and any other assets or entitlements. Since your debts and liabilities are also part of your estate, qualifying assets are liquidated upon your death to cover your debts before your beneficiaries can see any funds.

Establishing a clear will is key to ensuring your estate is managed as you wish. Even when a will is available, executing an estate and administering a will is serious business. So, it's best to hire a legal professional to cross all t's and dot all i's. (See also: Don't Get Screwed: 3 Surprising Times When You Need a Lawyer)

So, what happens to the debts in your estate?

Credit Card Debt

Recent estimates put average American household credit card debt at $15,762, for those households with credit card debt. But unless your family or friends co-signed a credit card with you, they're all off the hook in the event that you pass away and your estate is too small to cover it. Even when your spouse is an authorized user on your credit card account, they won't be responsible for paying if they didn't cosign at the time of application.

However, your survivors shouldn't be surprised if debt collectors still try to get a spouse or child to pay for the debt. The federal Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from using abusive, unfair, or deceptive practices to try to collect a debt. Let your spouse, children, and beneficiaries know that they can file a complaint against abusive debt collectors with the Federal Trade Commission (FTC). (See also: 4 Annoying Things Bill Collectors Can't Do — And How to Stop Them)

Of course, you and your family still need to refrain from tricky tactics, such as taking a $20,000 cash advance days before a death, or continuing to use the authorized credit card after the primary cardholder has died, that could provide a credit card company recourse to legally pass on the debt to the surviving relatives.

Mortgage

There are three main scenarios to consider with a mortgage.

In the first, you were either required by the company issuing your mortgage or decided that it was a good idea to buy life insurance for the remaining balance of the mortgage. In this scenario, your death benefit clears the mortgage and the property goes to the beneficiary listed on the will or to the surviving property owner.

In the second, there is no life insurance, and you and your spouse were "tenants in common," meaning that each of you owned a stated share of the property. To be eligible to receive their share of the property, your spouse would need to first check that there is enough money in your estate to clear your debts and thus no need to sell the property to cover them. If there is enough money in your estate, your spouse would receive your share and take over the mortgage, if applicable.

Finally, there are scenarios in which there was no life insurance and you and your spouse were "joint tenants," meaning that both of you owned the entire property. In this scenario, upon your death the whole property passes automatically to your spouse. But again, the estate must clear any property-related debt first.

Student Loans

Besides credit card debt, student loans are another type of liability that is rapidly increasing among Americans. According to one estimate, the average student loan for a Class of 2016 graduate is $37,173!

In the event of your death, your federal student loans, including direct loans, Federal Family Education Loan (FFEL) Program Loans, and Perkins Loans, will be discharged. Additionally, Direct PLUS loans are discharged in the event that the parent or student on whose behalf the loan was obtained passes away.

But private loans are another matter, and your estate may be responsible for covering any balance. And if anybody co-signed a private loan with you, they'd be on the hook for payment.

To learn more about what would happen to your liabilities upon your death, consult a lawyer.

Have you ever take on debts from somebody that passed away? Share your experience in the comments below.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

When Should Single People Get Life Insurance?

Dan Rafter — Tue, 05 Jul 2016 10:00:09 +0000

You know the typical market for life insurance: People with families to protect. When these people die, their life insurance policies make payments to their beneficiaries, whether that be their children or their spouse.

But what if you're single without children? Is buying a life insurance policy ever a smart move?

In most cases, no, you won't need life insurance if you don't have a spouse or any children who count on your income to pay for their daily living expenses. But as with most financial matters, there are exceptions.

Here are some of the most common reasons why a single adult without children might consider buying life insurance:

Policies Are Cheaper When You're Younger and Healthier

If you are a healthy and a nonsmoker, you'll pay less for life insurance when you are 24 than you will when you are 30, 35, or older. That's because you're at more of a risk to die.

According to Trusted Choice, an independent insurance agent, a 20-year-old male nonsmoker at a healthy weight would pay about $32.53 a month for a $500,000, 20-year term life insurance policy. That cost rises to $35.69 a month for that same healthy male at 35-years-old. And it soars to $111.38 a month when this same male reaches 50.

So, it might make financial sense to buy a life insurance policy when you are in your 20s. Then, when you do get married and have kids, you can change the beneficiaries on your policy to your spouse and children.

You Owe Money With Someone Else

Have your parents co-signed on an auto loan with you? Maybe they've co-signed for that mortgage loan that you are paying off each month. What happens to that debt if you should suddenly die? Your parents will be responsible for paying it off.

However, if you have a life insurance policy with your parents named as the beneficiary, they could use the payout from the policy to pay off the debt that they owed with you. Taking out life insurance in this case would serve as a form of protection for whoever was generous enough to take on the risk of co-signing a loan with you.

You're Providing Financial Support to Others

Just because you're not married and you don't have children, doesn't mean that you are not providing financial support to someone. Maybe an elderly parent lives with you and counts on your financial support each month. If you should unexpectedly die, what would happen to that parent? By naming that parent as a beneficiary, you can make sure that they are financially protected.

You might even be providing financial support to siblings, nieces, or nephews. The right life insurance policy can make sure that this support continues even after your death.

You Want to Leave a Gift

Maybe you simply want to leave a financial gift to someone who holds a special place in your life, even if this person doesn't really need your financial support. By naming that special person as a beneficiary — it could be a niece, nephew, partner, or friend — you'll be leaving behind something of great value should you die.

Term or Whole Life?

Once you've decided that you do want a life insurance policy, it's time to determine what kind of policy you want and how large of a policy you need. There are two main types of life insurance policies: the cheaper term life, and the more expensive whole life.

Term life insurance provides coverage for just a set period of time — usually 20 years — but can be bought for as little as one year, or as many as 30. Your premium will usually remain the same during the entire term. Whole life insurance instead lasts, as the name suggests, until you die. Whole life premiums also include an investment component, what is known as the policy's cash value. The cash value will grow during the life of your policy.

It's best to meet with a financial planner to determine which type of policy makes the most sense for you. A planner can provide recommendations, too, on how much insurance you should take out to meet your financial goals and how best to structure your policy so that you can provide the most financial protection to your beneficiaries if you should die.

Do you have life insurance?

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What You Need to Know About Writing a Will

Andrea Cannon — Wed, 20 Apr 2016 09:00:10 +0000

As many as 40% of Americans over the age of 45 don't have a will. Don't fall into this statistic. It's imperative that you have a will to ensure that your wishes are carried out and your heirs avoid unnecessary hassles and costs after you're gone. Here's what you need to know before you get started.

What Is a Will?

A will is a legal document that declares how your estate will be divided after you pass away. It can also provide you and your family with the peace of mind in knowing that your property will go into the right hands. Writing a will may seem like a complicated, daunting process, but it may be easier and more affordable than you think. (See also: 6 Things I Learned About Money From Famous People's Wills)

What Happens If You Don't Have a Will?

If you don't have a will, your estate will be settled based on your state's laws. A judge will appoint an administrator to make decisions on your estate based on your state's probate laws. Their decisions may not be in line with what you would have wanted, which is why a valid will is so important.

Name an Executor of Estate

First, you will need to name an executor, who is the person who will manage your estate and execute your wishes. They will also deal with any outstanding debts and file your tax returns. Make sure to clearly specify in your will that your executor has the power to deal with any debts and related issues that are outlined in your will.

In most cases, the executor is a spouse, child, relative, close friend, attorney, or bank. You can also name joint executors, and may want to consider naming your attorney as one of the executors. Administering an estate is a complicated process, so you'll want to select an organized, trustworthy person for the position.

An attorney will charge to serve as your executor, which is usually 2%–4% of your estate's assets. If you are designating a friend or family member as executor, you want to be clear about whether they'll be receiving compensation. Serving as executor can be a long, daunting process, so it may be a good idea to compensate the executor. You will want to state very clearly in the will what type of compensation they can expect to receive.

Choose Beneficiaries and Guardians

It's imperative that you know what your assets are, so that you can assign them to the right people. Take note of all your assets, including bank accounts, investments, retirement accounts, property, jewelry, and anything else in your possession.

Your will specifies the beneficiaries for your assets, so you will need to decide who gets what. Very clearly state who will receive your assets, and make sure to also specify if someone in your family will receive nothing. If you do not mention that they are getting nothing, your will may be contested in court. You can also specify conditional gifts, which will be distributed if the beneficiary meets certain conditions.

Your will also names guardians for any minor children and dependents. While you don't need to get permission to name someone as a guardian for your children, you definitely will want to ask. When the time comes, they don't have to accept the responsibility, so make sure they are okay with it. It can be difficult to choose a guardian for your children, but you should carefully make this decision now because if you don't, a judge will make the choice later.

It's also a good idea to specify how your pets should be cared for. You may also want to leave money to whomever you designate as the new caretaker so that your pets can be well taken care of.

Review Beneficiary Designations

Certain accounts, such as retirement accounts, life insurance, and annuities won't pass through probate, so they don't need to be specified on the will. For these types of accounts, you will specify the beneficiaries on a document called a beneficiary designation.

Write a Letter of Instruction

A letter of instruction will be kept with your will and is a more informal write-up of which properties should be assigned to which beneficiary. It can also include instructions on paying any outstanding debts, account numbers, passwords, and other information that will help your executor settle your estate. You can also include instructions regarding your death and burial.

Choose a Witness

You will need to have at least one witness present when signing the will (some states require two or three witnesses). It is advised that you do not select a beneficiary or your attorney as your witness(es) as this can potentially create a conflict of interest. Some states also require that the will be notarized.

Choose a Safe Spot for Your Will

You should keep your will in a secure place, such as a fireproof safe in your home. Many people also have their attorney hold onto it for safekeeping. Make sure you let someone you trust know where the will is. You can also give signed copies to your attorney, executor, or a family member that you trust. However, the original signed will is usually required in order to avoid any unnecessary issues.

Updating Your Will

You can update your will whenever necessary. In most cases, a will is adjusted after major life events, such as marriage, divorce, the death of a beneficiary, or the addition of a new dependent. It's a good idea to revisit your will at least every five years to ensure nothing has changed. If there have been significant changes, or you have moved to another state, you may want to write a new will instead of simply updating the old one.

Do You Need a Lawyer?

Having an attorney to walk you through creating a will and testament can be invaluable. Writing a will is already a stressful, unusual process, and having a skilled professional on your side will ensure you have no questions at the end and that all of your assets are appropriately accounted for. They can also review your will, help prevent simple mistakes (like signing something in the wrong place, which can invalidate the will), and provide you with witnesses.

Every state also has different requirements, which can be difficult to keep up with on your own. Most websites that offer DIY wills aren't state-specific. An attorney will ensure that you meet the requirements of your state and that you don't make any unintended mistakes. Keep in mind that your will is determining where 100% of your assets will go, so it may not be something you want to deal with on your own.

Writing a Will On Your Own

On the other hand, if you have a very simple, straightforward financial situation, you may not need a lawyer. Many people choose to prepare their own will, which is why do-it-yourself will kits are so popular. Some online service providers, like LegalZoom, can walk you through the will and testament process, with complete customer support, all at an affordable price. You can also choose estate planning software, like the Quicken WillMaker, which will provide the legal documents you need to plan for your future.

How Much Does It Cost?

Drafting a will is not expensive, especially when you consider how important this document is. In most cases, it costs around $40–$100 to file a will on your own, and approximately $200–$2,000 to hire an attorney to do it for you (depending on the complexity of your finances).

Do you have other tips for writing a will? Please share your thoughts in the comments!

This article is from Andrea Cannon of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Should You Set Up a Trust for Your Child?

Matt Bell — Thu, 25 Feb 2016 11:00:09 +0000

When you think of trust funds, what comes to mind? Spoiled rich kids, living off the money set aside for them by their uber-wealthy parents? If so, you may be surprised to learn that you don't need to be a gazillionaire to benefit from a trust.

Read on to see if a trust might be right for your kids.

Estate Planning

Estate planning runs the gamut, from the basic to the complex, depending on your wealth and the complexity of your life. To put various estate planning documents, such as wills and trusts, into context — and to determine which ones you may need — consider the following three levels of estate planning.

Titles and Beneficiary Designations

For some of your assets, making sure they end up where you'd like them to requires very little effort on your part. You just need to make sure they are titled correctly or that you've designated the right beneficiaries. A will is generally not required. Even if you have a will, titles and beneficiary designations take precedence.

If you're married and want property to go to the surviving spouse should the other spouse die, simply titling the property in both of your names "with rights of survivorship" will accomplish that. This includes your home and car. For other assets, all it takes to transfer ownership as you'd like upon your death is to name the right people as beneficiaries. This includes life insurance, individual retirement accounts (IRAs), 401K accounts, and bank accounts. These are relatively simple steps with important implications, so make sure you've made the right choices on titles and beneficiary forms.

A Will

For everything not specifically earmarked via title or beneficiary designation — property titled in your name only, and everything that doesn't come with a beneficiary designation form (jewelry, art, a baseball card collection, your prized parakeet) — you'll need a will to get it where you want it to go. Otherwise your state's "intestate" laws will dictate who gets what. (Trust me, your state probably isn't interested in finding the best home for your bird.)

It is all the more important to have wills once you have children. This is the document in which you name a legal guardian for your kids in the event that you and your spouse both die, and you specify who will manage money for your children until they turn 18 (or 21 in some states).

Why Try a Trust?

For many people, a will is enough, especially if they don't own a lot of assets and don't have a very complicated financial life. For others, a will isn't enough; they also need a trust.

Once you accumulate more wealth, or if your life becomes more complicated (you have kids from a prior marriage, have property in another state, own a business), a trust may be in order. A trust does not replace a will; it is used in addition to a will. Here are some of its main benefits.

It Gives You More Control

Leaving a lot of money to an adult child can do more harm than good. With a trust, you can create a distribution schedule, perhaps giving them a quarter of the balance starting at age 25, and then another quarter every five years until it is all distributed. You can also name someone to manage the money while it is still owned by the trust and approve any early distribution decisions (perhaps you'd allow money to be accessed early for education or other purposes).

It Keeps Your Estate Out of Probate

Probate is a court-supervised process of validating your will, inventorying your assets, having property appraised, making sure assets are distributed according to the terms of the will, paying the bills of the deceased, and more. It is required if you have a will only, can take a year or longer, and can end up costing 2%–8% of the total value of the estate once you're done paying attorney's fees and court costs. A trust enables your heirs to bypass probate, freeing the trustee to wind down the estate without court supervision.

It Keeps Information Private

Your will becomes public record upon your death. By contrast, the terms of a trust are not required to be made public.

It Helps Customize Estate Distribution

Depending on the complexity of your situation, a trust may help you customize the distribution of your estate more easily than a will. For example, you may want to leave more to an adult child in a low-income profession than another who works in a high-income profession. Or, you may want to keep a tight rein on how inherited money is used by a beneficiary known for his or her free-spending ways.

There are many types of trusts, but the most common type is a revocable living trust, which simply means you can make alterations if your circumstances change. Creating a trust requires the help of an attorney and could cost up to $3,000 to set up versus less than $1,000 for a will. However, the money-saving benefits of avoiding probate, and the added controls available for complex situations, may ultimately make a trust less expensive.

There are many variables involved in determining whether you need a trust. If, after reading this article, you suspect you may, talk with an experienced estate-planning attorney to further weigh the pros and cons.

Have you considered a trust for your heirs?

This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: