Tips for Passing Your Entire Estate on to Your Loved Ones

estate planning and passingThere’s one phenomenon the wealthiest person who has ever lived has in common with the very poorest. At the moment of bodily death, everything they own of the physical, material world stays behind, even the shirts on their backs! It is a cruel, inescapable reality that a person may sacrifice much to get ahead in life, but none of it goes with him or her.

If you’re like me, you will want the tangible results of your life’s success to pass untouched to the ones you love. There are ways to protect your estate so that as little of it as possible is siphoned off by third-party intruders.

Joint assets. This involves a trust factor, but it can be an effective way to preserve an asset for a loved one. Many elderly people set up a joint bank account with a child to simplify the bill-paying process in the event they become mentally or physically incapacitated. Some may even put their loved one’s name on the deed of their most valuable asset, their house, so that this property will pass automatically to their designate. This works well for the person who has only one or two children. If there are more, the sparks may fly!

Set up a trust. The word trust sounds intimidating, but an individual can create one (for a fee, of course) to incorporate his or her personal assets. Trust agreements can be made revocable so that you aren’t locked into the agreement if you (while still legally capable) change your mind at a future date. The assets within the trust agreement will eventually become the responsibility of your designated trustees. Those assets will be excluded from will probation.

Write a will. Wills are your way to communicate from the dead. Though most significant assets can be included in a trust, there are some items that are simply better listed in the appendix to a will – such as your sterling silverware set or mint Beatles album autographed by the band. If you want your nephew to receive that Beatles’ album after your death, the appendix to your will is your chance to tell everyone so. You may have a favorite charity that you want to receive a portion of your estate. Spell it out as heirs can be uncharacteristically miserly when it comes to sharing their inheritances! You can select an executor for your will – either a family member or a law professional. Some choose the law professional because depending on the complexity of the estate, it can be a big and thankless job – making sure all debts and taxes are paid, closing accounts, notifying government agencies, distributing assets specified in the will according to the deceased’s instructions.

A living will (or advance directive) is primarily a guide for what type of medical intervention you want to be employed to save your life. Being able to refer to a living will can be a blessing for your loved ones, especially if you become dependent on life support for physical survival.

Designate your Power of Attorneys for health care and finance. Whom you choose can be extremely important to you, while you are still alive. It goes without saying that you should choose someone you trust. None of us likes the idea of becoming incapacitated in this life, but it happens – sometimes due to an accident, sometimes due to natural decline. Your Power of Attorney can, if you are declared incapable of making your own decisions, take over your role of decision-maker for your life. He or she is required to act in your best interest, but your concept of your best interest and his or hers may differ! However, he or she may need to act decisively to protect your assets – and your physical well-being. If the your P.O.A. is also your heir (and quite often POA’s are family members), he or she will be sure to preserve that all-important inheritance you have worked so hard to protect.

Move to a different state. A few states have their own separate inheritance taxes, most don’t. The federal government exemption is safe for most of us at $5 plus million. And the states that do impose them generally start with a $1-million exemption.

Rental Property Investment: A Smart Alternative to the Stock Market, or Not?

rental properties or the stock marketInvesting in the stock market may be safer than investing in the lottery, but it definitely is not for the faint of heart. Riding high one day may mean a big crash the next. Investors are known to be fickle and not immune to mass panic attacks. Before you even have time to react, much of the value of your investment is wiped out.

Real estate may be an attractive alternative. Especially if it can be purchased at a historically low price. Real estate prices have recovered in most of parts of the country after the unprecedented drop of the late 2000s, but there are still some good buys out there.

And what about buying real estate not to live in but to rent out? That way you own an asset that will hopefully appreciate in value while at the same time earning an income that is likely more than the current yield in today’s low-interest environment. After all, if you buy a residential property for $100,000 and rent it out for $1,000 per month, you will be earning $12,000 for the year, or 12%. Not a bad rate of return.

I’m not saying it isn’t a sound idea, but before you run out and put in that offer, here are a few points to consider.

Will you have to borrow to make this investment? This isn’t necessarily a bad thing. Mortgage interest rates are among the most favorable around. And if your mortgage payments are $500 per month, you are still making $500 cash. Basically your tenant is paying your mortgage, and you get to keep the property once the mortgage is paid off. You may own investments that you could cash in so that you don’t have to borrow to buy the property, but you will have to weigh the advantages and disadvantages carefully. Holding onto the investment may be more financially rewarding than selling it simply to avoid paying the mortgage payments.

Tax considerations. A rental property is treated as commercial from a tax standpoint. This is beneficial in many ways. You can claim the mortgage interest as an expense. Any costs to improve the property are either expenses (minor, immediate repairs) or capital improvements (major, long term). Yes, if you sell the property, you will have to pay capital gains tax if you hopefully sell it for more than you paid, but you can deduct from that gain the cost of capital improvements, legal fees, commissions.

Insurance. Insurance on a rental property is often pricier than on the residential property that you call home. From the insurance company’s standpoint, it is riskier. Tenant and landlord may have a disagreement; the tenant may take it out on the property. Many tenants really don’t care about the property as it doesn’t belong to them so they are not likely to take care of it as well as the owner would. Liability risks are higher with people other than the owner living on the property.

Good tenants, bad tenants. Screening prospective tenants is like rolling dice, though there are steps you can take to protect yourself during this critically important step. Ask for references from previous landlords. What are their income sources? Check them out on social media sites such as Facebook (you can learn a lot from their choice of friends and their posts – are they partyers?) Go with your gut feeling. If they look like clubhouse bouncers when you first meet them; you may want to consider a few more applications. Good tenants are a dream. They pay the rent on time, complain only when it is warranted.

Some of them take pride in their home, rental or not, and may actually make improvements at their expense. They keep the grounds neat and tidy. But bad tenants are like characters out of the worst Halloween horror flick. They don’t pay their rent on time – or at all; turn your hard-won property into the social hub of the neighborhood, or worse yet, a grow-op. Evicting them can be a drawn-out ordeal, involving court orders and sheriffs … meanwhile, your house is deteriorating in value, and you are not receiving any income from it. You may be stuck with their hefty utility bills when they finally leave. You will wish you had never bought the property to begin with!

One way to safeguard yourself is to ask for a significant amount of money to start – first and last, damage deposit (if allowed by tenancy legislation in your area). Many questionable would-be tenants won’t be able to come up with that much cash up front. In a nutshell, wise tenant selection is key to making this investment work.

Cash Flow Good, Debt Bad

cash flow flowsEver since the time of cavemen we’ve been looking at cash flow as an important part of survival. Sure, back then the math was instinctual, but it went something like – food I have – spoiling food = amount of energy to find new food. We understood on a basic level that being in the negative was a bad thing–today it leads to debt and failure, back then it led to death and starvation.

Dumb comparison? Maybe. But the point is the same–cash flow is your life.

The reason I mentioned a balance sheet in the last post was because of how important that balance sheet is to your business. The cash flow of your business can make or break you.

What are some things you need to be doing as a business owner to stay on top of cash flow?

The first thing I would do is run what the accountants call a cash flow acid test. This will give you a fairly good idea of where you stand today. Once you have this information you can start preparing for tomorrow.

Debt is the Killer?

Debt can kill you. However, at the same time it can be your best ally. I know many people who run their business off of loans; loans from themselves. This may sound crazy but it is a proven system that works. If you have debt to a bank you pay interest. When you start using your own money you treat it the same way as bank debt. This won’t affect your business much, however, it will affect your retirement. This is just a good little personal cash flow tip to help you get ahead. Your welcome.

Where Will You Be Tomorrow?

Keep a very good eye on where you plan to be tomorrow. Factor in new expenses and what types of changes are coming around the corner. This will give you a good idea of what your cash flow is going to look like in the future. Our goal is to get to positive cash flow and keep it that way. If you can stay on top of the new upcoming changes then you will keep your cash flow in the positive.

It Really Is All About Cash Flow

Business owners, investors, even day to day workers need to understand one simple thing: it is all about cash flow.

When you look at it this way it could change your entire perspective on your decision making process. I’ve talked to many business owners who have a mentality that a business is things and work. It isn’t. A business is about cash flow. If a decision you are going to make is going to affect your cash flow in a negative way, then don’t make that decision.

It may not be that simple to figure out, however I have had many business owners change their mind about big decisions once they started thinking about it in cash flow terms.

Your Accountant is You

Of course you have an accountant, you have to. However, your accountant only wants to keep his job, you need to keep your life. You will always be more of an asset to yourself than anyone you hire. Your financial life is the life blood of your business. Take the time to be invested in your financial outlook. Understand the cash flow in your business and you will be much more likely to succeed.

Last Works

Take cash flow seriously. Get a balance sheet, run the acid test, find out where you are today and where you are going. Don’t let too much debt way you down and treat your money with the most respect possible. This is the formula for getting ahead. Getting to a positive cash flow situation is the best thing you can do for your business, it will make you or break you. Make cash flow a priority to track and understand.

Keeping a Small Business Budget

budgets are importantLet’s be honest. Things can get behind in a small business extremely fast. When you start getting behind then you find corners to cut. I’ve found one of the easiest corners for a self employed or small business owner to cut is budgeting.

I mean really budgeting; following your money, taking care of every dollar, thinking ahead about expenses to come. It’s an easy to thing to lose track of. In fact, whether things are going good or bad, it seems like many small business owners want to lose track of these things. It seems easier to just let things flow and see where it goes. You cannot have an “if it’s meant to be it will work out” mentality with a small business…it won’t work out.

We all know the statistics that 90% or so of businesses fail in the first year, but do you know why? According to the Small Business Administration of the US there are 8 reasons–and 5 of these have to do with money and using your money.

Budgeting then is not a lifestyle choice for the nerdy guy down the road who has a calculator in his front pocket all day long. No, budgeting is for you. You need to be that nerdy guy down the road. Know your business finances and expenses down to the smallest decimal point.

Here are a few things I have done in the past to keep on top of my business finances. I think some of these, if not all of these, could be really helpful for you.

  1. – If you haven’t heard of then check it out immediately. They do a great job of incorporating modern day technology with budgeting and tracking your money. This works wonders for a business owner. You can track everything that you are doing in a very simple way while you are doing it. You will get alerts, graphs, and anything else you can think of. It’s a great, simple way to stay on top of your budget.
  2. Paper and a Pen – I’m not going to lie, I still like paper. It may be less convenient but I still write down all of the expenses and monetary decisions I make in real time. Mint can do this without paper, basically, tracking things as you spend them, however, I like thinking about what I am spending money on.

    There are many times, more than I can count, where I have decided not to get something because of my handy notebook. Before I make a purchase it makes me think through what I am doing and if I really need what I am purchasing. It’s been a great help to me.

    I also still plan my days on paper, and I’m not an old man. I find that writing things down clears my head and helps me plan, organize, and budget in a more clear and more effective way. Either way, you should be doing something similar to #1 or #2 on a daily basis.

  3. Balance Sheets – I love planning. Honestly, sometimes I like planning more than doing.Along with this, I’ve always loved Robert Kiyosaki. I don’t know how much he actually did to get rich, beside writing books, but it’s a pretty good “pump me up” session watching his stuff. Here is a video I like.

    Balance sheets will do wonders. I keep one at all times and I continue to update it. I use this not only as a method to view where I am, but also a great way to see where I am going.

    Also, some good advice in this video on assets and liabilities. Good information if you haven’t heard it before.

    The balance sheet could be your saving grace. You need to have a good idea of where you are in your business. Many times your balance sheet will include personal and business information. I know for many small business owners and self employed individuals these are not two separate pieces but indeed they are one in the same. Learn to use a balance sheet, it will teach you more than you might think.

By really taking the time to plan and budget you will find that you have more money than you think. Often times we waste money on things that aren’t necessary. By taking the time to figure out where you are you can more successfully get to where you are going.

Budgeting seems simple, but it needs to be a habit. It isn’t glamorous, but it’s a good first step into the financial portion of your business. It’s the stepping stone to everything else we will be talking about in this blog, so start there, and then we can branch out into new areas and topics of financial conversation.