You may be a younger adult. If you are like most young adults, planning for your retirement is one of farthest things from your mind. Planning for your disability, death or other catastrophe is even farther from your mind. It is estimated that 70% of adult Michigan residents have done no estate planning. I would venture to guess that for younger adults, this statistic would be higher.
Let’s say you have an unfortunate accident and are now temporarily unable to care for yourself or take care of your finances. The only persons able to make decisions for you are those to whom you have given prior written authority or those appointed by the probate court. Since you are over age 18 and if have done no planning, you have not given anyone prior written authority to act on your behalf. Your only option is probate court.
Your loved ones will now have to petition the probate court to appoint a guardian to care for you and to make medical and mental healthcare decisions. They would also have to petition the probate court to appoint a conservator to handle your finances and other property. These are two separate proceedings, two separate $150 filing fees and related attorney fees. Often times the court will require your conservator to petition the court before spending any money for you over a certain amount such as $200 or $300.
Would you like your loved ones to make these decisions without court involvement? Well you can with financial and healthcare powers of attorney. These documents would allow your loved ones to make these financial, medical and mental health care decisions for you when you are unable and without court involvement.
When you are younger, often times you are renting an apartment. When you rent an apartment, you should be aware that your property in your apartment, your stuff, is not likely to be insured by your landlord for fire, theft or other injury. The landlord will typically only have fire/casualty and liability coverage on the building. Make sure that you get a renters insurance policy if you want to replace your stuff in the event of such a calamity.
Do you, and your spouse and children have health insurance? Can you get covered on a policy? What are the costs? As long as you can afford health insurance, you don’t want a situation where you have an illness or accident and do not have coverage.
Investigate individual disability insurance policies to replace your income in the event of your incapacity. Look at life insurance to provide for your survivors. Even look at long-term care policies for when you can no longer care for yourself. You can often times lock in attractive rates for these insurance coverages when you are young and healthy. You may not be able to afford the same coverage when you are older or after an illness.
You usually are not thinking about retirement when you are younger. But this is one of the best times to think about your retirement. Pay yourself first. Put away something every month. Instead of buying a house that you can just barely afford, purchase a smaller home you can easily afford and bank the savings.
If you put away $500 a month starting at age twenty and it earned an average of 6% after tax, you would have nearly $1.4 million at age 65. And if you save amounts in an IRA, 401(k) or other qualified plan, your savings could grow either tax deferred or tax free. Your employer may even match a portion of your contributions.
Married couples have other opportunities. If you are married, try living on one income. I have known a number of couples who have based their lifestyle on only one income, even though both worked. By using one income for living and the other for saving, you can have substantial savings upon retirement. If you cannot live on one salary, with two incomes, at least you have the opportunity to do more saving than if you only had one household income.
If you came into the marriage with your own property and children, how would you want your stuff distributed upon your death? If you have no will in Michigan, upon the instant of your marriage, your spouse is entitled to the first $134,000 of your estate after your death in 2010 and the remainder would be split 50/50 between your spouse and your kids from a prior marriage.
With a will you can leave it all to your new spouse or all to the kids. However, if you left it all to the kids, your new spouse would still have a claim against your property equal to one-half the spousal share if you had died without a will.
You could leave all your property to whomever you want after your death if you and your spouse enter into a pre- or post-nuptial agreement in which your spouse waives all interest and rights in your property. If properly drafted, I understand that these agreements may also be effective in the unlikely event of a divorce.
You also could leave everything to your children in a trust. However, your surviving spouse would still have certain claims against those assets in the trust unless you had a pre- or post-nuptial agreement. You can also use a trust if you are not married. With a trust, after you are gone, you can give what you have, to whom you want, when you want, the way you want. You also avoid probate with a trust if your property is properly titled or funded in your trust.
Just because you are younger doesn’t mean that you don’t have to do any estate, retirement or other planning. A little planning early in your life can go a long way, save yourself a lot of money and minimize problems down the road.
By: Matthew M. Wallace, CPA, JD
Published edited January 2, 2011 in The Times Herald newspaper, Port Huron, Michigan as: Start planning now to avoid future worries