Updated 6 yearss ago
A good financial checkup should include more than just a tally of your assets. It should look at whether you have your financial documents in order and whether you are protecting your wealth.
"Clearly the most important thing is to take some personal time and make a reality check," says Martha A. Honey, Sarasota market president for Harris Private Bank. "Taking action, that's the key."
Here are some steps to take now:
1. You're in Florida -- make sure your will and trust are too.
If you had your will drafted in another state, it is valid in Florida, but there are some quirks of Florida law that make it a good idea to spend a few dollars and get a Florida lawyer to draft a new one. In Florida, for example, the executor of the will can live anywhere if he or she is a blood relative. If the executor is not a blood relative, however, the person must be a resident of Florida. "If someone moves to Florida with a will that names an out-of-state executor who is not family, although the will was validly executed in the other state, the executor would not be able to serve," says Barbara Simanek, an estate planning attorney at Kirkpatrick & Lockhart in Miami.
If you spend part of the year out of state, a will drafted in Florida by a Florida lawyer can be used to prove Florida residency -- along with a Florida driver's license, voter registration and other documents.
In addition to a will, a revocable living trust, which typically costs $1,200 to $3,000, is a good idea for many people. A trust allows survivors to avoid the expense and delays of probate and helps keep the details of your estate private. It also allows you to appoint a trustee who will be able to manage all of your assets if you become disabled or incapacitated, says Harold Evensky, chairman of Coral Gables financial planning firm Evensky, Brown & Katz. If you do set up a trust, be sure to transfer your assets into the trust. Otherwise, the trust is useless.
2. Hurricane-proof your insurance needs.
Hurricanes Charley and Frances were a stark reminder that protecting your assets is just as important as building them. That means your home, personal property and overall assets. Real estate values have been skyrocketing in Florida. Make sure your homeowner's policy has kept up. One item of particular interest for many Floridians is boat coverage. In general with insurance, "it's better to get Rolls-Royce coverage with a high deductible," says Evensky.
Some other insurance tips:
> "Beef up your auto insurance as much as you can, particularly if you let others, like children, borrow your vehicles," says John Pankauski, vice president and senior private client adviser with Wilmington Trust in Stuart. State Farm Insurance has named an intersection in Pembroke Pines as the most dangerous in the nation. Its Florida list includes spots in Tampa, Clearwater, Orlando and Plantation.
> If you serve on the boards of any organizations, check to see if the organization has liability insurance for its directors. If it doesn't, or if it isn't adequate, make sure you have a general liability, or umbrella, policy.
3. Take your finances to school.
A 529 education savings plan lets you stash $100,000 or more into an account to fund tuition, fees, books and other expenses. The sweet part of the deal: "All of the accumulation is tax-free, not tax-deferred," says Wayne L. Carson Jr., senior vice president at Mellon's Private Wealth Management Group in Fort Lauderdale.
The two types of 529 plans are "prepaid tuition plans" (used primarily for in-state colleges) and "college savings accounts" (for any accredited college nationwide or internationally). Most are set up by state governments. Both types are open to everyone, with no limits on income.
When it comes to 529s, Floridians don't have to stick with the two Florida plans -- the old Florida Prepaid College Program that has been around since 1987 and the much more recent Florida College Investment Plan. Most states let non-residents participate and, because Florida does not have a state income tax, there are no tax advantages for picking the Florida plans. Indeed, Benjamin Tobias, president of Tobias Financial Advisors in Plantation, doesn't mince words with his recommendation: "I would stay away from the state of Florida's plans. Fee costs involved with the plans are higher than they should be."
Tobias calls 529 plans "one of the most wonderful tools for a young parent." A good place to study the plans is at savingforcollege.com.
4. The saving grace.
"Ninety percent of financial planning is living below your income level and saving money," says Chas. P. Smith, a fee-based financial planner in Lakeland. "That's the only thing that really counts."
The personal savings rate in 2004 is around 2%, according to the U.S. Department of Commerce. That's far below the minimum of 10% that Smith recommends for a comfortable retirement.
Most financial planners advise clients to contribute the maximum to company and individual retirement plans.
"They need to take advantage of every tax-deferred plan available," says Stephen Aucamp, senior vice president for trust and estate planning for Lydian Bank & Trust in Palm Beach.
5. Up the ante.
"Most people are way underinsured," says Brian Fricke, president of Financial Management Concepts in Maitland. If you are single or a two-income couple with no children, you may not need life insurance. But if you have kids or a stay-at-home spouse, get enough insurance for your family to live on comfortably. A $2-million nest egg invested in stocks and bonds typically would let your family draw 5%, or $100,000 a year, without tapping the principal.
If your assets total more than $1.5 million, consider setting up an Irrevocable Life Insurance Trust. Although life insurance proceeds are not subject to income tax, they are subject to the federal estate tax unless they are in an irrevocable trust. "Purchase the policy inside an irrevocable trust," says Lakeland financial planner Chas. P. Smith. He advises that if an existing policy -- rather than a new policy -- is transferred into the trust, there is a three-year look-back period that would negate the tax benefits if the policyholder dies before the three years are up.
6. Benefit from a benefits check.
Disability insurance that covers temporary or permanent disability is as important as life insurance, if not more so.
If your company provides disability insurance, check the benefits to find out how much of your salary is covered and for how long. If there is no disability coverage or it is not adequate, look for an individual policy. Benefits under the federal Social Security program are very limited.
If you are working, you probably have health insurance through your job. If you are planning to retire before age 65, however, a critical issue will be the availability -- or lack thereof -- of affordable health insurance. Find out whether your company offers group health insurance to early retirees and what you need to do to meet the company's requirements.
As you begin to think about retirement, gather information on pension, stock options and other benefits. Review beneficiary designations, says Lydian Bank's Stephen Aucamp.
7. Get real.
Don't count on your portfolio returning 15% or even 10%. "Get realistic with what you expect your portfolio to do," says Coral Gables financial planner Evensky. "Fifteen percent isn't realistic." Evensky says that over the next decade, he expects a portfolio of 40% bonds and 60% stocks to produce a real return after inflation of about 5%.
8. Get up to date.
If you haven't updated your durable power of attorney, living will and, especially, healthcare surrogate form in the past couple of years, do it now. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) was enacted to make sure that medical records remain private. But if you are incapacitated, HIPAA's privacy protections could prevent family or friends from making healthcare decisions. "Have your documents redrafted so your trusted loved ones and advisers are specifically empowered to receive your medical records they will need to care for you and your property," says Wilmington Trust's Pankauski.
9. Spread the wealth.
There's more to asset allocation than splitting your portfolio between bonds and stocks, large-cap and small-cap, international and domestic issues. "All these asset classes work in cycles," says Pamela Segal Rhodes, vice president and portfolio manager at Fiduciary Trust International of the South in Miami.
Keep in mind that the Florida intangible personal property tax is still around. If you own stocks, bonds, mutual funds or other taxable assets, you'll have to pay $1 for every $1,000 above the first $250,000 for singles, $500,000 for couples. If your intangible tax bill is significant, consider an intangible tax trust that lets you legally avoid or minimize this tax, says Pankauski.
It's important to stash certain investments in tax-sheltered accounts such as 401(k) and IRAs and others in taxable accounts. You most likely wouldn't want to put tax-free municipal bonds in a 401(k) or IRA, for example. "Make efficient use of your sheltered accounts," says Harold Evensky.
10. Trust yourself.
Although it may seem fair for a couple to hold their assets jointly, that could be a costly decision. If you have more than $1.5 million in assets, setting up a credit shelter trust and dividing assets between husband and wife will let you leave up to $3 million (in 2004 and 2005) to your heirs tax free.
Florida does not have an estate tax, but the federal estate tax kicks in for estates valued at more than $1.5 million. That limit climbs to $3.5 million in 2009 and, under current law, will totally be repealed in 2010.
For now, with a credit shelter trust, when one spouse dies, the assets in that person's name up to $1.5 million are passed to an irrevocable testamentary credit shelter trust. The second spouse is entitled to the trust's income and any principal required for his or her health, education and welfare. When the second spouse dies, leaving the remaining assets up to $1.5 million to the beneficiaries, the credit shelter trust from the first spouse's estate terminates and the beneficiaries inherit the money. They would pay no estate tax.