You’ve worked hard over the years to accumulate wealth, and you probably find it comforting to know that after your death the assets you leave behind will continue to be a source of support for your family, friends, and the causes that are important to you.  But to ensure that your legacy reaches your heirs as you intend, you must make the proper arrangements now.  There are four basic ways to leave a legacy: (1) by will, (2) by trust, (3) by beneficiary designation, and (4) by joint ownership arrangements.

Wills

A will is the cornerstone of any estate plan.  You should have a will no matter how much your estate is worth, and even if you’ve implemented other estate planning strategies.

You can leave property by will in two ways: making specific bequests and making general bequests.  A specific bequest directs a particular piece of property to a particular person (”I leave Aunt Martha’s diamond broach to my niece, Jen”).  A general bequest is typically a percentage of property or property that is left over after all specific bequests have been made.  Typically, principal heirs receive general bequests (”I leave all the rest of my property to my wife, Jane”).

With a will, you can generally leave any type of property to whomever you wish, with some exceptions, including:

• Property will pass according to a beneficiary designation even if you name a different beneficiary for the same property in your will
• Property owned jointly with rights of survivorship passes directly to the joint owner
• Property in a trust passes according to the terms of the trust
• Your surviving spouse has a right to a statutory share (e.g., 50%) of your property, regardless of what you leave him or her in your will
• Minor children have certain inheritance rights
• State law may limit your ability to leave property to charity

Caution: Leaving property outright to minor children is problematic.  You should name a custodian or property guardian, or use a trust.

Trusts

You can also leave property to your heirs using a trust.  Trust property passes directly to the trust beneficiaries according to the trust terms.  There are two basic types of trusts: (1) living or revocable, and (2) irrevocable.

Living trusts are very flexible because you can change the terms of the trust (e.g., rename beneficiaries) and the property in the trust at any time.  You can even change your mind by taking your property back and ending the trust.

An irrevocable trust, on the other hand, can’t be changed or ended except by its terms, but can be useful if you want to minimize estate taxes or protect your property from potential creditors.

You create a trust by executing a document called a trust agreement (you should have an attorney draft any type of trust to be sure it accomplishes what you want).

A trust can’t distribute property it does not own, so you must also transfer ownership of your property to the name of the trust.  Property without ownership documentation (e.g., jewelry, tools, furniture) are transferred to a trust by listing the items on a trust schedule.  Property with ownership documents must be re-titled or re-registered.

You must also name a trustee to administer the trust and manage the trust property.  With a living trust, you can name yourself trustee, but you’ll need to name a successor trustee who’ll transfer the property to your heirs after your death.

Tip: A living trust is also a good way to protect your property in case you become incapacitated.

Beneficiary designations

Property that is contractual in nature, such as life insurance, annuities, and retirement accounts, passes to heirs by beneficiary designation.  Typically, all you have to do is fill out a form and sign it. Beneficiaries can be persons or entities, such as a charity or a trust, and you can name multiple beneficiaries to share the proceeds.  You should name primary and contingent beneficiaries.

Caution: You shouldn’t name minor children as beneficiaries.  You can, however, name a guardian to receive the proceeds for the benefit of the minor child.

You should consider the income and estate tax ramifications for your heirs and your estate when naming a beneficiary. For example, proceeds your beneficiaries receive from life insurance are generally not subject to income tax, while your beneficiaries will have to pay income tax on proceeds received from tax-deferred retirement plans (e.g., traditional IRAs).  Check with your financial planning professional to determine whether your beneficiary designations will have the desired results.

Be sure to re-evaluate your beneficiary designations when your circumstances change (e.g., marriage, divorce, death of beneficiary).  You can’t change the beneficiary with your will or a trust.  You must fill out and sign a new beneficiary designation form.

Caution: Some beneficiaries can’t be changed.  For example, a divorce decree may stipulate that an ex-spouse will receive the proceeds.

Tip: Certain bank accounts and investments also allow you to name someone to receive the asset at your death.

Joint ownership arrangements

Two (or more) persons can own property equally, and at the death of one, the other becomes the sole owner.  This type of ownership is called joint tenancy with rights of survivorship (JTWRS).  A JTWRS arrangement between spouses is generally known as tenancy by the entirety, and a handful of states have a form of joint ownership known as community property.

Caution: There is another type of joint ownership called tenancy in common where there is no right of survivorship. Property held as tenancy in common will not pass to a joint owner automatically, although you can leave your interest in the property to your heirs in your will.

You may find joint ownership arrangements are useful and convenient with some types of property, but may not be desirable with all of your property.  For example, having a joint checking account ensures that, upon your death, an heir will have immediate access to needed cash.  And owning an out-of state residence jointly (e.g., a vacation home) can avoid an ancillary probate process in that state.  But it may not be practical to own property jointly where frequent transactions are involved (e.g., your investment portfolio or business assets) because you may need the joint owner’s approval and signature for each transaction.

There are some other disadvantages to joint ownership arrangements, including: (1) your co-owner has immediate access to your property, (2) naming someone who is not your spouse as co-owner may trigger gift tax consequences, and (3) if the co-owner has debt problems, creditors may go after the co-owner’s share.

Caution: Unlike with most other types of property, a co-owner of your checking or savings account can withdraw the entire balance without your knowledge or consent.

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Expanded rollovers from 401(k) and other employer plans to Roth IRAs now permitted.

With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a daunting task. Many investors feel it’s useful to have a system for finding stocks that are worth buying, deciding what price to pay, and realizing when a stock should be sold.   Bull markets–periods in which prices as a group tend to rise–and bear markets–periods of declining prices–can lead investors to make irrational choices.  Having objective criteria for buying and selling can help you avoid emotional decision-making.

Even if you don’t want to select stocks yourself–and many people would much prefer to have a professional do the work of researching specific investments–it can be helpful to understand the concepts that professionals use in evaluating and buying stocks.

There are generally two schools of thought about how to choose stocks that are worth investing in.  Value investors focus on buying stocks that appear to be bargains relative to the company’s intrinsic worth.  Growth investors prefer companies that are growing quickly, and are less concerned with undervalued companies than with finding companies and industries that have the greatest potential for appreciation in share price.  Either approach can help you better understand just what you’re buying–and why–when you choose a stock for your portfolio.

Value investing

Value investors look for stocks with share prices that don’t fully reflect the value of the companies, and that are effectively trading at a discount to their true worth.  A stock can have a low valuation for many reasons.  The company may be struggling with business challenges such as legal problems, management difficulties, or tough competition. It may be in an industry that is currently out of favor with investors.  It may be having difficulty expanding. It may have fallen on hard times.  Or it may simply have been overlooked by other investors.

A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock’s fair value.  Value investing takes into account a company’s prospects, but is equally focused on whether it’s a good buy.  A stock’s price-earnings (P/E) ratio–its share price divided by its earnings per share–is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth.

Value-oriented data

Here are some of the questions a value investor might ask about a company:

• What would the company be worth if all its assets were sold?
• Does the company have hidden assets the market is ignoring?
• What would the business be worth if another company acquired it?
• Does the company have intangible assets, such as a high level of brand-name recognition, strong new management, or dominance in its industry?
• Is the company on the verge of a turnaround?

Contrarians: marching to a different drummer

A contrarian investor is perhaps the ultimate example of a value investor.  Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.

The challenge for any value investor, of course, is figuring out how to tell the difference between a company that is undervalued and one whose stock price is low for good reason.  Value investors who do their own stock research comb the company’s financial reports, looking for clues about the company’s management, operations, products, and services.

Growth investing

A growth-oriented investor looks for companies that are expanding rapidly.  Stocks of newer companies in emerging industries are often especially attractive to growth investors because of their greater potential for expansion and price appreciation despite the higher risks involved.  A growth investor would give more weight to increases in a stock’s sales per share or earnings per share (EPS) than to its P/E ratio, which may be irrelevant for a company that has yet to produce any meaningful profits.  However, some growth investors are more sensitive to a stock’s valuation and look for what’s called “Growth At a Reasonable Price” (GARP).  A growth investor’s challenge is to avoid overpaying for a stock in anticipation of earnings that eventually prove disappointing.

Growth-oriented data

A growth investor might ask some of these questions about a stock:

• Has the stock’s price been rising recently?
• Is the stock reaching new highs?
• Are sales and earnings per share accelerating from quarter to quarter and year to year?
• Is the volume of trading in the stock rising or falling?
• Is there a recent or impending announcement from or about the company that might generate investor interest?
• Is the industry going up as a whole?

Momentum investing: growth to the max

A momentum investor looks not just for growth but for accelerating growth that is attracting a lot of investors and causing the share price to rise.  Momentum investors believe you should buy a stock only when earnings growth is accelerating and the price is moving up.  They often buy even when a stock is richly valued, assuming that the stock’s price will go even higher.  If a stock falls, momentum theory suggests that you sell it quickly to prevent further losses, and then buy more of what’s working.

The most extreme momentum investors are day traders, who may hold a stock for only a few minutes or hours then sell before the market closes that day.  Momentum investing obviously requires frequent monitoring of the fluctuations in each of your stock holdings, however.  A momentum strategy is best suited to investors who are prepared to invest the time necessary to be aware of those price changes.

Why understand investing styles?

Growth stocks and value stocks often alternate in popularity. One style may be favored for a while but then give way to the other.  Also, a company can be a growth stock at one point and later become a value stock.  Some investors buy both types, so their portfolio has the potential to benefit regardless of which is doing better at any given time. Investing based on data rather than stock tips or guesswork can not only assist you as you evaluate a possible purchase; it also can help you know when to sell because your reasons for buying are no longer valid.

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Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child’s college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?

Evaluating the opportunity cost

Deciding between prepaying your mortgage and investing your extra cash isn’t easy, because each option has advantages and disadvantages. But you can start by weighing what you’ll gain financially by choosing one option against what you’ll give up. In economic terms, this is known as evaluating the opportunity cost.

Here’s an example. Let’s assume that you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you’re paying 6.25% interest.  If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest, and pay off your loan almost 6 years early.

By making extra payments and saving all of that interest, you’ll clearly be gaining a lot of financial ground.  But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so–the opportunity to potentially profit even more from investing.

To determine if you would come out ahead if you invested your extra cash, start by looking at the after-tax rate of return you can expect from prepaying your mortgage. This is generally less than the interest rate you’re paying on your mortgage, once you take into account any tax deduction you receive for mortgage interest.  Once you’ve calculated that figure, compare it to the after-tax return you could receive by investing your extra cash.

For example, the after-tax cost of a 6.25% mortgage would be approximately 4.5% if you were in the 28% tax bracket and were able to deduct mortgage interest on your federal income tax return (the after-tax cost might be even lower if you were also able to deduct mortgage interest on your state income tax return). Could you receive a higher after-tax rate of return if you invested your money instead of prepaying your mortgage?

Keep in mind that the rate of return you’ll receive is directly related to the investments you choose. Investments with the potential for higher returns may expose you to more risk, so take this into account when making your decision.

Other points to consider

While evaluating the opportunity cost is important, you’ll also need to weigh many other factors. The following list of questions may help you decide which option is best for you, also visit http://kenhimmler.com/ for more strategies.

·          What’s your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.

·          Does your mortgage have a prepayment penalty? Most mortgages don’t, but check before making extra payments.

·          How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there’s less value in putting more money toward your mortgage.

·          Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.

·          Do you have an emergency account to cover unexpected expenses? It doesn’t make sense to make extra mortgage payments now if you’ll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change–if you lose your job or suffer a disability, for example–you may have more trouble borrowing against your home equity.

·          How comfortable are you with debt? If you worry endlessly about it, give the emotional benefits of paying off your mortgage extra consideration.

·          Are you saddled with high balances on credit cards or personal loans? If so, it’s often better to pay off those debts first. The interest rate on consumer debt isn’t tax deductible, and is often far higher than either your mortgage interest rate or the rate of return you’re likely to receive on your investments.

·          Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you’ve gained at least 20% equity in your home may make sense.

·          How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage, when you’re likely to be paying more in interest).

·          Have you saved enough for retirement? If you haven’t, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.

The middle ground

If you need to invest for an important goal, but you also want the satisfaction of paying down your mortgage, there’s no reason you can’t do both.  It’s as simple as allocating part of your available cash toward one goal, and putting the rest toward the other.  Even small adjustments can make a difference.  For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments, or by putting any year-end bonuses or tax refunds toward your mortgage principal.

And remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes to your circumstances, market conditions, and interest rates.

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