Finally, she should consider having her trust distribute the trust principal in multiple installments over an extended period of time (for example, at ages 30, 35 and 40). While this is in part to ensure that the money is handled responsibly by her heirs, it is also added protection in case any child suffers through a divorce during this time period. More of the principal would be maintained in the trust that the ex-spouse would have difficulty attaching. Between principal distributions, the trust could still distribute the interest to her beneficiaries and even principal for their health, education, maintenance and support.
The health of Maria's retirement prognosis, even employing conservative assumptions, is good enough that she should be able to live comfortably and still pass on a very nice inheritance to her children. This should be seen as a much deserved blessing for a lifetime of excellent stewardship of her finances. After living frugally all these years, Maria should reward herself by enjoying the occasional extravagance throughout her retirement.
The plan in 5 steps
|1) Decide where to live.|
Tip: Brush up on the new capital gains tax rules that affect owners of a second home.
- Option No. 1 is to stay in Napa Valley.
- Option No. 2 is to sell the Napa Valley home and use sale proceeds to improve property in Silicon Valley, move there and refinance that mortgage.
- Avoid tapping retirement funds to pay for remodeling or pay off mortgage.
- Capital gains exclusion would apply to sale of Napa Valley home, but not to Silicon Valley property.
- Option No. 3 is to buy a different property altogether.
|2) Consolidate accounts.|
Tip: Search Bankrate for the highest yields on money market funds.
- Move money from scattered bank accounts into the Schwab account. Use this as an emergency fund.
- Open a liquid, taxable investment account to warehouse cash for short-, medium- and long-term goals.
- Move 403(b) accounts that don't charge surrender penalties into traditional IRA.
- Convert some funds from traditional IRA into a Roth IRA.
|3) Reconfigure portfolio.|
Tip: Learn about investing by reading "How to build a sound portfolio."
- Invest 15 percent in stocks and funds.
- Small percentage of that should go to commodities, Asia.
- Allocate 50 percent to fixed income.
- Fixed income should include short-term CDs and global bond funds.
- Invest 35 percent in U.S. government money market funds.
|4) Re-evaluate insurance|
Tip: Brush up on five essential types of insurance coverage.
- Homeowners and auto insurance policies provide adequate coverage.
- Ensure that rental property has replacement and contents coverage.
- Get certificate of insurance coverage from contractors' insurance carriers.
- Conduct an in-home inventory of personal assets and store in fireproof safe.
|5) Update estate planning docs.|
Tip: Learn about wills and trusts in Bankrate's Financial Literacy series on Planning for your heirs.
- Update durable power of attorney and advance health care directive.
- Change titles on real estate, investment and bank accounts to fund revocable living trust.
- Consult a California estate planning attorney to draw up new documents.
- Discuss property matters with children for equitable disposition.
- Consider having the trust distribute its principal in multiple installments to beneficiaries.
This Money Makeover was prepared by Certified Financial Planner Timothy Maurer, director of financial planning at The Financial Consulate, an independent fee-only financial management firm in Hunt Valley, Md.
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