SINGLE WITHOUT CHILDREN
At 38 years old, Valerie Bonner stands to leave behind a sizable estate currently valued at more than $200,000. However, there is no legacy plan to pass on her riches. She has no children, so her 78-year-old mother is the beneficiary on her retirement accounts and one of her life insurance policies.
The East Windsor, New Jersey, employee benefits manager has invested in her company’s 401(k) program since she became eligible in 1990. Bonner also has multiple life insurance policies, including approximately $225,000 in life insurance, which includes a $100,000 whole life policy. The other policies are through her employer, which provide insurance up to her salary amount. She doubled that to make sure there’s enough money available to pay off her condo and other debts in the event of her death. In addition, Bonner contributes 10% of her annual income to retirement and savings accounts. However, she has no estate plan or will. “I’ve always said I’m going to do that when I turn 40,†says Bonner.
Pass Wealth Down, Not Up
Estate planning attorney Lori Anne Douglass, partner at Moses & Singer L.L.P. in New York City, warns against single women delaying this process. “If there is no legal document in place saying otherwise, then all assets of a single person with no children will go to that person’s biological parents in equal shares,†says Douglass. She further explains, “You don’t want money to travel up; you want it to travel down.â€
Leaving wealth to parents without an estate plan in place has potentially serious implications because your parents will either have a greater tax burden on their personal estate due to the inheritance or become ineligible for certain senior assistance. To guard against these issues, singles looking to leave money to parents may want to consider a supplemental needs trust, which would insulate disabled seniors from losing any government assistance such as Medicaid. If parents are well-off, singles may want to consider an insurance trust to prohibit them from having to pay estate taxes on insurance payouts.
Get Insured
Life insurance and health insurance policies are priced based on age and health, so it’s most cost effective to get medical, disability, and life insurance policies while you’re young. Singles don’t need a huge amount of insurance, but they do need to have something. “You’re the sole earner and there’s no one else to fall back on. If you own a home and get sick or die, what’s going to happen to that house? That property still has to be paid off,†says Cheryl Broussard, author of The Black Woman’s Guide to Financial Independence (Penguin; $20).
SINGLE WITH CHILDREN
The day before 40-year-old Stacey Rodgers went into labor, she arranged for the father of her now 3-year-old daughter Alexandria to take a medical test for a $200,000 life insurance policy. “I talked to him about the need for us to think about long-term protection in the event that one of us isn’t here to care for her,†says Rodgers of the conversation she had with her former boyfriend. “I took out life insurance on her father to add to her well being. It provides me with security,†Rodgers explains.
Make Sure the Father of Your Child is Insured
“If an individual gives consent and takes the exam, you can take out a policy and own it,†says ShirleyAnn Robertson, an agent with Prudential Insurance in Schaumburg, Illinois. Robertson advises that couples have the conversation early when things are going well in the relationship.
Establish a Trust for Your Child’s Inheritance
Rodgers earns six figures as the director of group insurance at Pearson, the parent company of Financial Times. She puts away 11% of her income into her 401(k) and receives the company match of 6%. Including the life insurance policy on Alexandria’s father, Rodgers has policies valued at $1.2 million earmarked for her daughter. Her estate also includes her residence in Somerset, New Jersey, and some CDs. She wanted to make sure her wealth was protected in the event of an untimely death. “I established a trust so that my assets will be given to my daughter upon milestone birthdays.â€
Douglass sanctions this plan: “If you’re looking to preserve wealth, you should put everything you own into a trust instead of leaving it outright to your children.†This process puts a trustee over the inheritance to better ensure that assets are distributed and spent wisely. Trusts don’t have to cost a fortune to set up. Broussard says some attorneys will work with clients on a sliding pay scale. She also suggests pre-paid legal services for single-parent households with lower incomes.
Diversify Insurance Policies
Rodgers has term, whole life, and variable policies to ensure stability. A term policy is set for a period of time, either 10, 20, or 30 years. Once a single parent is able to afford more insurance, it is recommended that she diversify with whole life policies that can be universal (fixed rate of return) or variable (rate of return based on market fluctuations).
“If a person has more to spend per month, then I suggest a blended scenario with a longer term and a whole life policy that continues to build cash value,†says Robertson. This scenario would provide cash upon death to children while they are still young. After the term policy expires, the mother would still have cash value from the whole life policy that she could access during her entire lifetime.
“I don’t want to see people with a $10,000 or $25,000 policy anymore,†says Robertson. “You need a minimum of a $500,000 or a $1 million policy; that’s how you create a legacy and wealth preservation.†Obtaining the proper insurance is a simple step that can make a big difference in your wealth plan. “Life insurance is the easiest way to preserve wealth,†says Michelle Oliver, president of the Oliver Financial Group.
SINGLE WITH CHILDREN
The day before 40-year-old Stacey Rodgers went into labor, she arranged for the father of her now 3-year-old daughter Alexandria to take a medical test for a $200,000 life insurance policy. “I talked to him about the need for us to think about long-term protection in the event that one of us isn’t here to care for her,†says Rodgers of the conversation she had with her former boyfriend. “I took out life insurance on her father to add to her well being. It provides me with security,†Rodgers explains.
Make Sure the Father of Your Child is Insured
“If an individual gives consent and takes the exam, you can take out a policy and own it,†says ShirleyAnn Robertson, an agent with Prudential Insurance in Schaumburg, Illinois. Robertson advises that couples have the conversation early when things are going well in the relationship.
Establish a Trust for Your Child’s Inheritance
Rodgers earns six figures as the director of group insurance at Pearson, the parent company of Financial Times. She puts away 11% of her income into her 401(k) and receives the company match of 6%. Including the life insurance policy on Alexandria’s father, Rodgers has policies valued at $1.2 million earmarked for her daughter. Her estate also includes her residence in Somerset, New Jersey, and some CDs. She wanted to make sure her wealth was protected in the event of an untimely death. “I established a trust so that my assets will be given to my daughter upon milestone birthdays.â€
Douglass sanctions this plan: “If you’re looking to preserve wealth, you should put everything you own into a trust instead of leaving it outright to your children.†This process puts a trustee over the inheritance to better ensure that assets are distributed and spent wisely. Trusts don’t have to cost a fortune to set up. Broussard says some attorneys will work with clients on a sliding pay scale. She also suggests pre-paid legal services for single-parent households with lower incomes.
Diversify Insurance Policies
Rodgers has term, whole life, and variable policies to ensure stability. A term policy is set for a period of time, either 10, 20, or 30 years. Once a single parent is able to afford more insurance, it is recommended that she diversify with whole life policies that can be universal (fixed rate of return) or variable (rate of return based on market fluctuations).
“If a person has more to spend per month, then I suggest a blended scenario with a longer term and a whole life policy that continues to build cash value,†says Robertson. This scenario would provide cash upon death to children while they are still young. After the term policy expires, the mother would still have cash value from the whole life policy that she could access during her entire lifetime.
“I don’t want to see people with a $10,000 or $25,000 policy anymore,†says Robertson. “You need a minimum of a $500,000 or a $1 million policy; that’s how you create a legacy and wealth preservation.†Obtaining the proper insurance is a simple step that can make a big difference in your wealth plan. “Life insurance is the easiest way to preserve wealth,†says Michelle Oliver, president of the Oliver Financial Group.
DIVORCED
Cynathya Mouton of Union City, California, is not letting her divorce derail her from her wealth preservation goals. The 42-year-old decided to stall building a real estate empire when she realized that divorce was imminent. To ensure she didn’t lose any more wealth to her ex-husband in the divorce settlement, she stopped purchasing homes for a while. After the two-year battle was over in 2003, Mouton resumed her plan. She now has seven properties that yield $84,000 per year in rental income. This is in addition to the six-figure income she earns from her position as an assistant general manager at Honda of Oakland.
Stick to Your Wealth Preservation Goals
Stacey Tisdale, author of The True Cost of Happiness: The Real Story Behind Managing Your Money (John Wiley & Sons; $24.95), says, “In challenging times, the first thing you want to do is throw your goals out the window. Depending on your financial settlement, create a realistic financial plan and continue to build wealth.â€
“I’m just starting a $2.5 million universal policy,†says Mouton, who sees insurance as a major staple in her plan. “My rainy day fund is pretty huge because I need to save six months to a year, so I need pretty close to $200,000 saved,†says Mouton, referring to her emergency fund.
Establish a Trustee over Your Child’s Inheritance
Mouton is a firm believer in real estate and looks forward to leaving wealth to her children. In order to ensure that the wealth doesn’t cycle back to her ex-husband, she needs to put certain protections in place.
“There’s nothing you can do about the legal custody of your children if it’s granted to their father, but you can do something about your money,†explains Douglass. To protect against this, divorced women should leave their wealth in trust to their children and select a trustee to administer the wealth.
Get a Team of Advisers
“If going through a divorce, you should get a financial adviser in addition to your attorney. Sometimes lawyers don’t understand the financial aspects,†says Broussard, who points out that attorneys do not specialize in finances. “Lawyers just say to split it down the middle: ‘You take that, he takes that, and give me my fee.’â€
Oliver stresses that if you are entitled to half of your husband’s wealth, make sure you invest it wisely. “What you do to preserve that half is what matters,†says Oliver. “Be savvy enough to know to put that half away for the long term.â€
Establish an End Date to Any Alimony
In today’s society, it’s not uncommon for the woman to be the breadwinner in the household. In these cases, more women are paying alimony to their husbands instead of the other way around. “Make sure that whatever obligation you have to pay out money for alimony has an end date,†says Douglass. The good part is you get to deduct alimony on your income taxes as an expense.
WIDOWED
Since Patricia Hutchins’ husband passed away last August after suffering a heart attack, she has been understandably somber. But if you wish to make the 58-year-old homemaker laugh, just ask her if she plans to return to work. “No; for what?†she quips with a chuckle. “I don’t have to have that extra worry about what I am going to do, or where I am going to stay. I volunteer at the church and I plan to continue doing that.â€
Hutchins is proof that it doesn’t require a six-figure household income to prepare for the future. Thanks to sound budgeting, reduction of debt, and affordable insurance coverage, Hutchins is able to continue her lifestyle after the death of James, her husband of 40 years. “When two people are married there is a spiritual connection, and my husband was my best friend. The grieving process would be really messed up if the finances were not met,†says Hutchins.
James was a carpenter foreman for the Chicago Transit Authority, earning a salary of $80,000. Considering Hutchins has nearly no debt to pay, except her monthly mortgage payment of $1,016 on the home she and her husband purchased 33 years ago, Hutchins can get by comfortably on her husband’s pension, widow’s Social Security benefits, a 401(k), and James’ $100,000 life insurance policy.
File Estate Taxes
In 2009 a federal estate tax of 45% will be applied to estates more than $3.5 million. In 2010 the tax will be repealed and in 2011, the law will change and a federal estate tax of 50% will be applied to estates more than $1 million. There are also local estate taxes which can be incurred on estates as low as $1 million currently. These amounts vary from state to state. “Although it may look like you don’t have a taxable estate and you don’t have to do anything, you do have to see an attorney,†stresses Douglass. It’s very easy to get past the $1 million exemption threshold once you continue to pass on real estate equity, 401(k) investments, and life insurance monies to the next generation. “Find out the tax laws in your state so you know what your rights are and don’t violate any tax laws,†says Harrine Freeman, author of How To Get Out of Debt (Adept; $19.95).
Invest Inheritance Monies
“What widows invest in depends on their age and whether they’re still working, but they want to put part of the money in something that is going to give them growth, whether that’s real estate or the stock market,†says Broussard.
While the ultimate plan is to invest the money, Robertson cautions that widows should not be rash in their investment decisions. Hutchins put her insurance payout in a high-yield checking account earning 4%. Robertson says this is the best thing to do for the first few months until a widow can assess her financial obligations and make unemotional investing decisions. However, “the focus is to never live off those dollars but to live off the interest, because the moment we consume the money there’s no more money to live on,†insists Robertson.
“Try to invest the face value of the policy conservatively where you can live off the growth,†says Haskins. To master this step, it’s best to take out as much insurance as possible in the early years of the marriage so you’ll have more to invest. Hutchins says she and her now-deceased husband took out $100,000 policies on each other in the 1970s, which was a huge amount at the time. Around 2003, the couple tried to increase the policy but opted not to because the premium was too expensive based on their age.
Update Your Estate Plan
“Widows must have an estate plan to properly transfer wealth to their children,†says Douglass. Hutchins has two living adult children, 29-year-old James, and 37-year-old Natasha. Hutchins also has a child who is deceased, Lucretia, who died at age 33 about five years ago. Although Hutchins and her husband had no estate plan or will in place as a couple, she says she plans to put one in place now for her children. “My husband and I always wanted to provide something for them. I know that I would want to leave something for my children and my grandchildren,†says Hutchins. In the interim, Hutchins has already changed the beneficiaries on her personal $100,000 life insurance policy to her children and three grandchildren.
This story originally appeared in the April 2009 issue of Black Enterprise magazine.