Designing Our Future

Chapter 1

 

The Future Is Nearer Than You Think

 

 

  Americans are an optimistic group. We are constantly exposed to financial information on the news, in magazines, and on television. Despite the numerous articles on financial issues, a surprisingly small portion of the United States’ population actually spend adequate time planning for their financial future. The creation of an estate, especially one that has been given adequate thought and preparation requires the expertise of many people. Seldom is a single person equipped to properly handle the entire procedure. Since one of those professionals is likely to be an insurance agent, it is important that he or she understand how estates must be set up. Even though part of the process will not directly involve insurance products, the agent needs to understand the process to perform his or her job completely and professionally.

 

  Life insurance products usually relate directly to estate planning. There are types of life insurance products that may be used for other life goals, but preparation for death is the first and foremost use for life insurance policies. For this reason, life insurance policies are often included in estate planning.

 

 

Knowledgeable Agents

 

  Some agents may not see the need to understand anything beyond their own immediate products. As products have become more sensitive to consumer needs and desires, however, agents are finding that broader knowledge is beneficial. In some situations, broader knowledge is even essential.

 

  Agents who understand current financial climates are always in demand. Therefore, not only do the clients benefit; the agent does as well through increased earnings. Planning a client's financial future can be extremely satisfying when you know you have done an excellent job. Since financial planning is an ongoing affair, it cannot simply be set down and filed away. Clients will rely upon their agent for ongoing and changing goals. Do not confuse financial planning with the financial vehicles used. Financial planning is NEVER the products used.

 

 

Acquiring Assets

 

  There can be no estate if there are no assets. An insurance agent is often the starting point in creating an estate through the use of a life insurance policy. This is especially true for young families who have not yet accumulated any other types of assets. As time goes by, the young family will acquire assets beyond their life insurance policy. Both the client and their insurance agent must recognize the needs that develop as assets accumulate. 

 

  Tax laws constantly change. It is unlikely that the general agent will be educationally equipped to give tax advice, so it is seldom wise to do so. As a result of the complex role played by tax laws, an accountant is a vital part of estate planning. With the phased-in dismemberment of the Federal estate tax, it is estimated that around 95 percent (or more, by some estimates) of all estates will be exempted from liability. This does not mean that estate planning is no longer necessary or advisable. The Economic Recovery Tax Act of 1981 did, however, change the nature of much estate planning.

 

 

  Taxes are often the target of estate planning. Most Americans want to pay less than they currently do. The point, of course, is to leave larger amounts of assets available to the estate beneficiaries. The true financial specialist, however, will consider tax reduction or avoidance as merely one aspect of estate planning. Tax avoidance is seldom the main focus. There is good reason for this: first, tax laws are constantly changing. While the changes may not be extensive, any type of change can distort the end result of the financial plan. Secondly, the goal must always be financial security. This is why tax minimization is only one aspect of financial planning rather than the main focus.

 

  In the past, wealthy clients relied on well-known accounting firms to handle their finances within the bounds of the law. That can no longer be automatically assumed. It began with the downfall of Anderson Accounting (following the Enron scandal) and investigations of other well-known firms in 2003 and 2004 following questionable use of tax “loopholes.”

 

  It was followed by General Electric, Tyco, WorldCom, Bernie Madoff, American International Group (AIG), and Lehman Brothers. The Association of Certified Fraud Examiners, in a 2020 report, said a global study found that five percent of a company’s annual revenues to cases of fraud. However, people do not expect fraud to be carried out by accounting firms.

 

  Accounting scandal refers to a case of accounting fraud that is damaging to the company, an industry, or even citizens who may have no knowledge of what happened. For example, the Wells Fargo scandal involved intentional acts of fraud against individuals who had accounts at the bank. Accountholders were charged small amounts of money without their consent that totaled millions of dollars for the bank. In the case of the Bernie Madoff scandal, some individuals lost millions of dollars.

 

 

Estate Planning

 

  Estate planning is never the products used. Rather, estate planning is the procedures used that allow a person to transmit his or her property to persons of his or her own choice in a manner that is satisfactory and appropriate. Using this definition, it is easy to see that taxes are not a primary objective.

 

 

  Every person is an individual and will have individual needs or desires. Therefore, the objectives are likely to be extremely varied among clients. The client may wish to:

1.     Will property (assets) to the spouse without providing the recipient more wealth than he or she wants or needs or wishes to handle.

2.     Transfer property or income to children who may be in a lower taxable bracket.

3.     Transfer property or income to other relatives, friends, organizations, or charities either in life or after death.

4.     Control how and when the beneficiaries receive the assets.

 

  Estate planning involves many more goals than those listed above. It is the professional's job to point out any dangers that may be connected to such objectives and to also point out any alternatives that may be more satisfying.

 

  There are always points to consider during estate planning. Some of these include:

1.     The form or method used to transfer property.

2.     The method necessary to transfer stock from a closely held corporation. Some options include buy-sell agreements, business continuation trusts, recapitalizations, and mergers.

3.     Following death, any circumstances that might alter the wishes of the deceased in relation to his or her estate. 

 

  Estate objectives change over time. In the beginning, objectives typically relate to family security; nearing retirement objectives relate to financial security when employment income has ended. So many factors change the direction of a person's life, and all these changes may have an effect on the desires and objectives involved with the estate. Initially, the client may want to buy a home, plan for college for themselves or their children, and avoid or minimize taxes. As time progresses a college degree is achieved, a home is purchased, and tax avoidance or reduction may become less important.

 

  There is usually less money available in the early years of planning.  The first adult years are spent trying to set up a home, acquiring personal property, and raising children. Careers take time to establish. Even so, many people will end up far wealthier than they ever imagined. Additional wealth brings redirected objectives. One of the most important factors affecting how we view our estate involves the people we associate with. Some potential beneficiaries may die or become distant (lose importance). New people with new needs may enter our life. Such things as death, divorce, marriage, adoption, and so forth bring about redirected goals.

 

 

  While estate planning has many advantages, one important advantage is peace of mind. Having a goal is always a comfort and reaching that goal brings great satisfaction. As one goal is reached, another will take its place. Ultimately, the dedicated person will reach and surpass many goals in their lifetime. These are the people others may assume are financially gifted. In reality, they are simply goal driven, doing what is necessary to achieve financial security.

 

  Estate planning is not always about growth of assets. Many times, the goal is providing for those who are unable to provide for themselves. Certainly, financial considerations are still a major factor, but merely as a means of completing a non-financial goal. It would be impossible to list all the wishes that financial planning may involve. They depend upon so many factors and emotions that the professional will simply enter each new encounter with an open mind and a ready ear. It must be stressed that the art of listening is a most valuable asset to the career agent.

 

 

  Each individual has full legal control of their estate regardless of their position in life. Sometimes one exercises that control by simply doing nothing at all. In effect, that person "chooses" to be non-effective.  According to author Charles Givens, "When it comes to handling money, you will end up either the victor or the victim." It is unfortunate that so few Americans consider future financial needs, preferring to spend rather than plan and save. The need for materialism often blinds us to what should be obvious: we cannot live today as if there will be no tomorrow.

 

 

Wasted Dollars

 

  Americans seem anxious to try anything. It has been estimated by some that upper-income Americans waste as much as $20,000 every year simply by participating in perfectly legal activities with a variety of established institutions. These institutions include banks, brokers, car dealers, insurance producers and their companies, credit card companies, and the biggest taker of them all, the IRS. This money is wasted because consumers do not take the time to plan financially.

 

  Americans admire those that seem to be financially gifted, but the term “gifted” is wrong. These individuals are simply financially educated, goal-oriented, and disciplined. When you combine education with discipline, the combination is always a winner.

 

 

Wishing Our Way into Retirement

 

  Most Americans prefer to simply wish, want, hope, and pray for financial success. Meanwhile, they are buying (often on credit) every new trinket that comes along. It is hard to believe that anyone could think they can retire comfortably without lifelong planning. Obviously, Social Security is not adequate for retirement. Wishing, wanting, hoping, and praying will never accomplish financial security unless it is followed by a firm plan. Successful financial planning comes from direction and control. It rarely occurs by accident.

 

  Financial success comes from meeting goals, which follow a set pre-planned path to some degree. Certainly, there will be deliberate changes in the financial plan, but a plan will still be followed. Financial planning is not accidental or theory.  Financial planning involves logical ideas that work.

 

 

  America is known for its poverty-to-riches stories, yet many Americans believe they will always be poor because they are currently poor.  This attitude allows them to live without financial goals using a “Why-try? I-can’t-succeed” mentality. All of us will not end up millionaires, but it is possible to improve our current financial status. People do it every day.

 

  Since few citizens keep a written budget, few realize how much they actually earn and spend in a lifetime. This casual attitude regarding the income we have prevents us from using our money wisely. Although day-to-day costs can be burdening, most people have no idea where much of their hard-earned money goes. Few people bother to even make out a simple budget. It is common for a person to have $100 cash unaccounted for on a weekly basis. That $100 a week is $5,200 per year and $52,000 over just ten years.

 

 

Goal Setting

 

  No one states a retirement goal of poverty. Many Americans never even consider a retirement goal until the event is imminent.  Unfortunately, too many citizens have only immediate goals. We want everything now. Goals often begin as dreams. Whether we call them dreams or goals, however, a specific plan of action is necessary to turn ideas or desires into reality. Day-to-day living takes a lot of energy and can divert an individual from focusing on the financial direction necessary to accomplish future goals. Setting up and maintaining an estate plan is a daily ongoing affair. An estate begins in early adulthood, not simply in the later years of life.

 

  Many of us are financially self-destructive. Expecting financial security without planning and working towards it would fit into this category. This attitude allows a person to do nothing other than wait for the pot of gold to land in their laps. These individuals, while dreaming of wealth or accomplishments, always wait for it to simply "happen." These individuals may dream of winning the lottery, hitting it big at the gambling table, or inheriting wealth. The real world seldom delivers these desires. As a result, these individuals end up wasting their time and resources. Even if such an individual were to win a lottery or experience a large inheritance, their lack of financial responsibility would simply waste the money away. Those who put too much importance on “looking good” to others are unlikely to ever have financial goals that succeed. Looking good requires they buy everything anyone else might have.

 

  Goals need to be written down and studied. Putting goals on paper makes them official – more than a dream. Goals need to be specific. A vague goal cannot be fully acted upon. For example: "I want to be financially comfortable when I retire." While that is certainly a goal, it is too vague. How much money is desired at retirement? It should be a specific dollar amount. At what age is retirement desired? Again, it must be specific. An exact age should be written down. Thirdly, a financial road map must be established. How much of the weekly or monthly earnings will be set aside to achieve this retirement goal? An exact dollar figure must be established and then acted upon. The individual needs to be realistic, of course, so that the savings can occur. A figure that is too high may only frustrate the person causing no savings at all to be achieved.

 

  Putting money aside is never easy. Who wouldn’t rather spend than save?  We often hear people say that it takes every dime they make to simply pay the bills. In many cases, it takes every dime because there are excessive bills, some of which could be eliminated. That may mean downsizing the entertainment budget, brown-bagging instead of buying lunch each day, or cutting up the credit cards.  It is imperative to keep detailed bookkeeping records to track excessive or unnecessary spending. A surprising number of people do not even know precisely where their money is spent each month. Again, an itemized expenditure list is always a first step for setting up goals. The expenditure list should contain no less than three months’ worth of figures.

 

  The following is a sample of what a monthly expenditure list might look like:

Rent or Mortgage	Phone & Utilities	Car Payment	All Insurance	Auto Gas	Food	Credit Card %
$1,100	$250	$865	$150	$320	$500	$125

 

  Please note that the last column says, "credit card interest." Only the interest should be listed here, not the entire purchase price. If clothing were purchased, for example, the purchase price would be listed under clothing. Only the interest charged by the credit company (plus any additional fees) would be listed in the credit card column.

 

  There is no set format for an expenditure list. Whatever the household spends money on regularly belongs on the chart. Some additional items on the expenditure list could include clothing, lunches, business expenses (such as motel costs), dry cleaning, entertainment, plus any other item that seems to be a regular expenditure. If money is spent for any item at least once per month, a column should be made for it. This is the only way to track where money is spent. Once an individual knows precisely where the money is going, it is much easier to add that most important category: savings!

 

 

  While the insurance agent performs several functions, one of the most difficult can be clarifying the client's objectives. The agent may realize that the consumer’s objectives are misdirected or unrealistic. Obviously, this can be awkward for the agent. Graphs, such as pyramids, may allow an agent to bring forth realities without directly confronting the client in a negative manner. If an agent makes a client feel inadequate, he or she may fear making any decision at all or resent the agent’s input.

 

 

Accurate Information Required

 

  Any type of plan must follow some recipe. Like good cooking, a successful plan never happens by accident. The very first rule of financial planning is simple: base your plan upon accurate information. To do so requires careful attention to details. The plan developed will only be as good as the information obtained.

 

 

  Information gathering can feel both awkward and time consuming. Even so, it is a vital step in setting up a sound financial plan. The skill of the agent during information gathering always shows. Information set on paper generates consumer questions, which in turn allows the agent to minimize misunderstandings and bring forth suggestions. Skimming over this stage will affect all other areas of the financial plan. It is necessary to fully understand the financial picture, as it exists today, to determine how it will look in the future.

 

  Many financial planners prefer a pyramid as the basic format for viewing a person's financial picture. A pyramid gives a solid sense of order, which benefits both the consumer and the agent. It is also one of the simpler graphical ways to show financial suggestions to a client. Degrees of risk are often easier to comprehend when a pyramid is utilized, with the highest risk put at the top and the lowest risk placed at the bottom. This order makes sense because the bottom of a pyramid is broad and obviously the foundation for the rest of the structure. Pyramids may be used to explain a multitude of ideas as well as degrees of risk.

 

  If a pyramid is used to show a client's assets, the same general format is used. Solid assets are placed at the bottom and less secure assets are placed at the top. When used for cash flow, a steady dependable income would be at the bottom, with such things as over-time compensation placed towards the top.

 

  Since pyramids may be used in so many ways, there really is no right or wrong way to use them, if the concepts are clearly understood by the consumer. The main objective is to keep the graphs simple, clear, and understandable.

 

  Financial planning is very much the same as a road map. It involves continual growing and changing financial goals as incomes shift (hopefully upward), debts come and go, and family structures alter. Since a map has both a starting point and a destination, so too must the financial plan. The destination may change from time to time with necessary adjustments to reflect those changes. The client, with the help of his agent, must determine where he or she is now, and then identified where he or she wishes to be at specific intervals in the future. Along the way, various desired goals will be reached and passed. New goals will replace completed goals.

 

 

  Achieving goals is not an easy task. Unwise choices could mean a loss of assets. How those goals are arrived at, and the amount of risk taken to get there must be determined according to each individual's level of comfort and financial ability.

 

  Whatever the financial goals of the individual may be, there tends to be three phases to them:

1. Accumulating wealth,
2. Preserving wealth, and
3. Distributing wealth.

 

  The starting point of any financial goal is wealth accumulation.   Obviously, it is not possible to meet a financial goal unless assets exist. When wealth is successfully accumulated, it is certainly important to preserve it. Some individuals thrive on risk and constantly subject their accumulated wealth to the possibility of loss. For most people, however, preservation is as important as accumulation.

 

 

  Once the desired level of wealth is reached most people tend to become more conservative in their financial personality. This may even be true for the risk-takers. This is probably wise since the accumulation period often consumes most of one's working years. It would be foolish to risk losing what it took a lifetime to gather.

 

Wealth Distribution

  Distributing wealth can be a reward in itself. Since there are those who have accumulated more than they will need in their lifetime, their aim becomes one of sharing. Who they share with may range from children to charities? If they are gifting to charities, there are a variety of ways to do so. This may even be done through insurance products. The idea of being recognized publicly for their contributions, coupled with tax benefits, is very inviting to many people. However, it would be a mistake to give prior to death unless the individual is certain they have enough money to last their entire lifetime. The day-to-day activities of living can bring with it financial surprises. Over the years, Americans have seen stock market downturns that wiped out huge portions of individual savings. Enron made people aware that trusting large institutions is not always wise.

 

Estate Control

  Although there are many things in life over which we have no control, our estate is not one of them. Unless we choose not to, each person has total control over the decisions made regarding their estates.

 

  Insurance producers must have more knowledge regarding financial goals and estates than would the general layperson. Despite this fact, it is common for producers to fail to properly plan their own financial future and estate. Examine your current financial picture: would you find your own affairs in order if you died today? Would your heirs need a psychic interpreter to figure out what was intended? Ask yourself if your assets are listed in an easy way to understand?

 

  Are there sufficient insurance or other provisions to take care of your family and beneficiaries? Is insurance carried to finance taxes that might reduce your estate? There are some basics each of us must attend to.

 

  An estate has two jobs to do:

1. Give the person independence and security while living, and
2. Give the surviving family members independence and security after the breadwinner has died.

 

  It is important not to get so involved in the mechanics and costs of transferring property to beneficiaries that the first important step is overlooked: establishing the estate.

 

  Too many Americans become so focused on avoiding probate through various schemes that they lose sight of the real purpose of planning: developing assets and future security. What a shame that the same energy is not being spent to create the estate. The best estate plan is one that creates the maximum benefits for the right beneficiaries. A bad plan is one that does anything less than that. Probate or no probate is simply a side issue of lesser importance. In fact, for some, probate is necessary to close access to assets. Many types of vehicles that avoid probate provide continual access to the estate assets whereas probate has a specific point of closing access.

 

  Although some people enjoy working towards a financial goal, for many it is difficult path to stay on. Estate planning is the art of designing a program for the effective management, enjoyment, and disposition of property at the least possible cost and energy. The plan must be one that can be followed. If the individual feels they have given up all enjoyment today to reach tomorrow’s goal, it is not likely to be achieved.

 

 

 

  Everyone needs some type of estate plan, no matter what our current role in life. This includes both men and women whether married or single. Every estate plan must include a will, even if the individual plans to use some type of estate trust. Many people fail to use an estate plan that will do the best job possible. In such cases, it is often the will that provides the best security for the desired beneficiaries. Even a badly written will is better than none. However, a well-written will likely costs no more than a badly thought out one.

 

  Unfortunately, very few estates are set up as well as they could be. The reasons vary. Perhaps life takes so much time that the inevitable death is ignored. Perhaps advice is taken from those least qualified to give it. Perhaps the attorney used was not well trained in estate planning. Whatever the reason, a poorly planned estate can affect everyone involved.

 

 

  Most people get much less independence and security (both in life and in death) than they could have achieved with proper planning and finance management. Stashing away enough money to survive, even if your job doesn't, is the true meaning of independence. In today’s uncertain economy no one has real job security. Taking financial responsibility for our lives is not only important but also necessary.

 

  Gaining financial independence may be achieved in several ways, but there are some basics involved:

1. As much of your estate as possible should be in assets that are not dependent upon you or your business. Assets that produce income without your support are ideal. This can especially involve insurance agents since many of our businesses depend upon our presence to continue. Each agent should take this into account when they set up their own estate.
2. The best estate plan is one that assumes you are out of the picture and sets up your property now as closely as possible to the way you would like it set up for your family. In other words, your assets are currently in the condition you would wish them to be for the benefit of your family.
3. Your estate objective, with Social Security and other income, needs to produce enough money for you and your dependents to live on both when you retire and when you die. This needs to be the target of your insurance and investment programs.
4. On paper, figure out what will happen to your property when you die. This includes how you will pay debts, taxes, and expenses. It must also include what amount of money will be left and how much income that amount of money will produce each year. An estate plan needs to keep this figure in mind while increasing and protecting assets and yet have the flexibility to allow adaptation to life changes.

 

 

All Estates Need a Will

 

  All estates require a will even if a trust or other vehicle is also utilized. You will see this statement throughout this course because it is such an important fact. A will is simply the most basic of documents. While holographic wills are usable in most states, it is best to go to an estate-planning specialist. Such a specialist is usually an attorney, but any person with specialized knowledge may be able to provide the service. A holographic will is a completely handwritten will. Even the date must be handwritten (January first, nineteen hundred and ninety-two rather than 1/1/92). Naturally the document must also be signed. Former President Calvin Coolidge's will stated only: "I leave my entire estate to my wife, Grace, and request that she be appointed executrix without bond." For very simple estates such a will might suffice. However, in today's complex social structure few estates are so simple.

 

 

  Since preparing a good estate plan requires thought, it is generally necessary to work with professionals including insurance agents, attorneys, and accountants.

 

These are the steps typically followed:

1.         List the people you will want to provide for. Consider their personal needs, but also their faults and capabilities. Consider what opportunities you wish for them to have (such as a college education), what responsibilities they could reasonably handle, and what burdens you wish to spare them. Also consider any possible weakness' you might wish to protect them against.

2.         Review your assets. Obviously, the assets will determine the basic abilities of the estate. Usually, an estate falls into one or more groups:

a.        A quantity of capital such as securities, real estate, etc.,

b.       A family business,

c.        A quantity of payroll rights such as profit-sharing rights, options, contracts, pension rights, or group insurances, or

d.       Accumulated savings, possibly supplemented by insurance policies.

 

  Any significant estate will fall into at least one and possibly several of these groups. Each asset must be examined to determine where they might fit - both now while you are living and later when you have died. The worth of each asset might be considered in each of these four ways:

a.        How much income and enjoyment are they giving you now?

b.       What is the asset worth today and, if sold, how much of the asset would you keep?

c.        What would their value be for estate tax purposes?

d.       How much cash would the asset bring at your death?

3.         What is the best way to transfer each asset?

4.         As your estate currently stands, what would it do for your family?  Use some simple mathematics to compute taxes, debts and, most importantly, the amount that would be left after these things were settled.

5.         What could you do now to cut down on any liabilities of your estate?  For the most part, there are only two basic ways to do this: transfer assets out of your estate now or take advantage of any available tax exemptions. Since tax laws change, a tax specialist is a necessary professional in estate planning.

6.         How could you increase your estate and raise cash if necessary? Typically, there are two primary ways to accomplish this:

a.   Buy life insurance, or

b.   Arrange for the most efficient accumulation of income, which is part investment and part tax-planning.

7.         How can you set up assets for your family now? This would include such things as gifts, living trusts, insurance and annuities, and joint ownerships.

8.         What would be the best way for your assets to be transferred at death? Consider probate, and perhaps its avoidance in some cases. Also consider what your will should cover, trusts, and tax savings. Consider giving up rights to some types of assets.

9.         Do you wish to do something for charity? If so, could that be done now while you are living? Be cautious. Charitable giving should never be considered during life unless there are absolutely enough assets to last until death.

10.      Select those people that you will rely on to help make decisions and carry them out. This will likely include financial advice about your assets and their future and advice on taxation.

 

  In the final phase of implementation, individuals are likely to need an estate-planning attorney. Just as doctors specialize, so do attorneys. Look for a person with expertise in the estate-planning field. Finally, pick an experienced executor or trustee who you know for certain will have the time and knowledge to give your affairs the attention they require. People commonly select friends and relatives for this chore but that is not necessarily the wisest choice. Friends and relatives may have a personal view regarding your choices that can alter how they carry out their duties. For example, there was a case in Washington where a will directed the brother (who was the appointed executor) of the deceased to transfer all his assets to a specific nonprofit animal group. The deceased’s brother was angry that no assets were given to family members. Therefore, he put his son in the man’s house, charging the estate $5,000 a month for “care-taking duties.” All assets were handled in a similar manner. He did everything possible to delay settlement of the estate. When the estate finally settled, the intended beneficiary received very little. Nothing the executer did was illegal.

 

 

  When we think about our own personal property, we seldom consider it in terms of our death. Yet, this is necessary for proper estate planning. Ask yourself these questions:

1.     What value would be placed on each asset for estate tax purposes? This requires some simple mathematics: figure the approximate cash liabilities and deduct them from the estate value. Liabilities often require raising cash from the estate if no other avenue has been instituted. After all the estate is settled, what will be left for the beneficiaries?

2.     What does each asset do for your personal business, investment and future retirement needs?

3.     Do any of your assets need your personal experience and skill (such as your insurance business)?

4.     What is the liquidity value of each asset? In connection with this question, a second one will follow: how easy would the asset be to liquidate? Would it require time and great effort to sell?

5.     In the event of your death, what would each of your assets do for your family? Would they produce annual income, and if so, how much? Should an asset be moved into some other income-producing asset? Remember to consider your assets as though you had died yesterday and now you are your own executor. What role would capital gains play if an asset were switched today?

 

  Once you have looked at your assets through the eyes of an executor, you will have a better perspective of what you must do with each asset. This does not necessarily mean changing them, especially if the asset is part of your life today. It may mean adding extra insurance (key-man insurance, for instance) or taking some other steps. When advising your clients, always ask them to think about their assets in terms of their own death. Everything becomes clearer if they put themselves in the position of their own executor or trustee.

 

 

Determining An Asset’s Value

 

  All assets should be valued. Some assets require this for insurance purposes, but even those that do not should have a known value.  Some estate planning requires a valuing of assets. Doing so allows one to consider the effects of taxation and the time it would take to proceed through probate. Often the probate process is ground to a halt because the value of an asset is difficult to establish. Knowing the approximate value of individual assets and what it would take to liquidate it also allows a person to approximate the over-all value of their total estate (a necessary step). If a person does not know the financial size of their estate, it would be very difficult (if not impossible) to make intelligent decisions for present and future financial planning. Once approximate values are placed on each asset, those values must be reviewed on a yearly basis. So many factors can change the value of assets that it is necessary to continually update them.  Written evaluations by experts are best.

 

  Placing a value on an asset is not always easy. There may be disagreement among several so-called "experts." If an asset is difficult for the owner to assess, you can imagine what could happen at death. The Internal Revenue Service will desire a higher determination while beneficiaries will desire a lower value. The litigation could go on for years. When assets are difficult to place a financial value on, it might be wise to consider selling or donating the asset to take it out of the estate portfolio and ease the burden of probate.

 

  The term "value" may have different meanings depending upon the context. Webster's New World Dictionary defines it: "1. the worth of a thing in money or goods; 2. estimated worth; 3. purchasing power; 4. that quality of a thing which makes it more or less desirable, useful, etc."

 

  The Federal taxing statutes term value as the "fair market value." The courts have defined the term to mean "the price at which property would change hands in a transaction between a buyer and a willing seller, neither being under compulsion to buy or to sell and both being informed as to the relevant facts."

 

 

 

  An individual might consider IRS’s fair market value to mean a reasonable amount that the asset could be sold for. In fact, it may have nothing to do with what a buyer is willing to pay. If the IRS determines a collectible car is worth $25,000 but no buyer can be found willing to pay that much, it might still be assessed at $25,000 even though it is eventually sold for only $15,000. When a verified authority has previously deemed the value to be $15,000, it is much more likely that the IRS will agree when death occurs.

 

 

 

  Not all transfers consider actual asset value. Therefore, some asset transfers may not be considered as fair market transfers. Sales under unusual circumstances may not hinge on either fair market price or value. This could include such things as asset sales due to a divorce, forced sales (which could occur under various circumstances), or sales made in a restricted market. It might also include transactions between related or friendly parties, or corporations under common control.

 

  Fair market value may mean nothing more than someone’s opinion.  It is fair to say that "fair market value" may have vastly different meanings depending upon who is establishing the value. The buyer may have a different view of an asset's "value" than would the seller. Negotiations often settle differences of opinion. Fair market value often changes from day to day, depending upon current market trends and supplies. Book value is not necessarily synonymous with market value. Certainly, tax appraised values often do not reflect actual market values. At death market value is whatever the Internal Revenue says it is, unless the taxpayer can prove in court that another figure is valid. Having verified values established can be very important to the settlement of an estate.

 

  When no previous value has been established, or when there is a difference of opinion involved in asset valuation, three techniques may be used in part or whole to determine market value according to the assets highest and best use. These techniques are recognized and accepted in most cases by the courts. These techniques utilize income capitalization, reproduction cost minus depreciation, and comparative sales. In some cases, all three techniques may be used, but that is not necessarily so. Which techniques the court may decide to use depends upon the nature of the property to be valued.

 

INCOME CAPITALIZATION

  Income capitalization is generally applied to income-producing properties such as apartments, hotels and so forth.

 

REPRODUCTION-COST-MINUS-DEPRECIATION

  This is generally applied only to buildings or other improvements. The appraiser estimates the current replacement cost of the buildings and then subtracts the estimated depreciation on the original cost of the property.

 

COMPARATIVE SALES

  The comparative sales technique uses the price of recent sales of property that are comparative to the asset in question. This generally brings in current price trends for each given area or location. Of course, the comparative sales must be recent sales to work effectively.

 

 

Determining the Dollar Amount

 

  Retirement will require enough money to live on for the duration of one’s life. What is “enough” money? We have all probably heard the saying "Whatever we earn, we spend" or "The more we earn, the more we spend." Americans are known to be poor savers. Because saving for retirement seems to be a lost virtue, putting money aside must be treated as a bill rather than an option. Only then will retirement and other financial goals have any chance of success.

 

  The dollar amount of “enough money” will depend upon the person.  Some people are much more materialistic than others or prefer spending to saving (refusing to commit to future needs). Personality and emotions are strong components when it comes to spending and saving money. Certainly, the cost of living can vary from region to region. There are so many factors that affect a person's feeling of security that we, as agents, cannot presume to tell an individual what amount of their earnings can be considered excess, and therefore savable. What we can do is lay out their financial picture allowing them to come to their own conclusions. In the end, the client will be the one to make the decision to save or not to save. Agents are merely the catalyst that brings forth the decision at all.

 

  It is actually fortunate that people vary so widely in their approach to money (how they spend and how they save). Since there is a definite quantity of money in existence, those that spend offset those that save. If all Americans wanted exactly the same things in life, the American culture would be vastly different. One of the reasons our country has prospered is our diversification – even in spending. Those who buy excessively fuel our economy. Of course, we may end up supporting those same people when they retire through our tax dollars.

 

 

  There is a certain fascination to the dynamics of buying and selling. For example, it is not possible for everyone to spend more than he or she receives, even if only for a short period of time, because one person's expenditures is another person's income. One person's purchase is another person's sale (thank goodness, or insurance agents would not make a living!).

 

  Just as a point of reference, when this course speaks about money, we are referring to U.S. dollars (versus types of trading or exchange). The government could, of course, put new money into circulation in any manner they wished to. When the gold standard was used to back our currency, the printed dollar was backed by a real value. That is no longer true.  Now our currency has value only because people choose to honor paper currency in the trade of goods and services. Money is merely a token of trade. It has no real value. When we go to the grocery store, the person at the counter has agreed to trade food for the token, which they then trade to their vendors. All parties have agreed to use money as a token of trade.

 

  In a manner of speaking, the government puts money into circulation by spending money. Although the government spends on few things, what they do spend on includes bonds and other debt instruments. The government's purchasing agent is the Federal Reserve System, which is a group of government-controlled banks, which have the legal authority to create money. The new money is created when the Federal Reserve buys bonds from bond dealers.

 

  Not only our government has bought bonds, of course. So do individuals. The difference lies in how the bonds are paid for. The Federal Reserve System pays for the bonds by creating new money.  You might say they print money to buy back some of the government's IOUs. Their purchases and occasionally sales of bonds add new money to the nation's supply.

 

 What all of this means is that the supply of money depends upon the activities of the Federal Reserve System. The demand, or need, for money directly reflects the cash-holding preferences of our nation's population. One of the jobs of the Federal Reserve System is to avoid causing inflation when they create new money. 

 

  The Federal Reserve Board consists of a Board of Governors and twelve Federal Reserve Banks. These banks hold much of the cash reserves that U.S. commercial banks are required by law to keep.

 

  When the Federal Reserve buys a bond, it sends a message to the dealer's local bank, instructing the bank to credit the dealer's checking account for the amount of purchase. The Federal Reserve then pays the bank by crediting the same amount of money to the bank's account at one of the twelve Federal Reserve banks.

 

  It must be noted that providing the credit costs the Federal Reserve System (FED) nothing since the deposit at the Reserve Bank is "created." If the local bank should desire to withdraw the actual currency from its account at the Reserve Bank, more currency would simply be printed. Money is, after all, simply Federal Reserve Notes.

 

 

End of Chapter 1