National Savings Rates

by Bruce Fenton

If you are short of something economic to worry about, try the American savings rate. The people of Europe might tell us that our economy is going down like a lead sled because we Americans are such poor savers. And, more than a few of the financial press seem to share that view.

The world is so concerned that we Americans save too little, borrow too much, and basically consume too much for our own good.

The problem is one of perception and definition. To begin, we need to be clear on the term “national savings rate.” The Bureau of Economic Analysis (BEA) defines the savings rate as the amount the U.S. population saves divided by its disposable income. Personal savings is calculated by taking personal income and subtracting from it personal contributions to social insurance, personal tax, non-tax payments, and personal expenditures.

Their measurements are totally out of touch with contemporary American wealth accumulation practices. Missing from the calculations are increases in wealth from short or long-term capital gains. Nor is wealth created from real estate by refinancing or selling counted. The numbers do not count gains from growth inside pension plans or IRAs. Neither do the numbers include valuations of business interests or growth in equity in investment real estate.

An article in Reuters® pointed out that despite the high savings rates in the growing economies of Asia, Asians need to learn to save “smarter” according to Jonathan Larsen, head of retail banking in Asia for Citibank®. He notes they tend to keep too much in cash. Traditionally this has been due to the relative immaturity of the investment markets.

As the middle classes develop in Asia, and they begin to put more of their savings to work in the markets, we can anticipate their savings rates to come down, their wealth to grow, and their consumer class to spend.

Not a bad equation for a stronger economy!

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Life Insurance Beneficiaries

by Bruce Fenton

One of the seemingly easier tasks involved in the purchase of life insurance is naming the beneficiary. An agent with pen in hand asks the applicant, “Who will get the cash?” The applicant looks at his/her spouse and without a thought replies, “My spouse, of course.” However, as simple as it appears, choosing the beneficiary of a life insurance contract can be quite complex.

The beneficiary of a life insurance policy is the person named (designated) by the policy owner to receive the benefits payable when the insured dies. The right to name this beneficiary is, perhaps, the most important right the policy owner has.

Generally speaking, the person who applies for insurance on his/her own life can name anyone beneficiary. Dad can name Mom, kids, parents, etc., but there are limitations. For example, in community property states, if Dad buys a policy on his life using community property funds to pay the premiums and divides the death benefits between Mom and kids, only his half of the community property death benefit may be given to the children without Mom’s consent.

If the insurance is on the life of a minor, most states will not recognize the competency of minors to enter into a contract. Therefore, life insurance on a minor’s life is usually owned by adult parents or other relatives. In such a case, the owner may only designate the minor, parent(s), sibling(s), child(ren) or grandparent(s) of the minor as beneficiary.

Life insurance policies owned by someone other than the insured also have restrictions on beneficiary designations. In the early history of life insurance, it was not uncommon for people to wager on the lives of others by buying life insurance on a third party without that person’s knowledge or consent. This led to the nasty practice of speeding up the demise of an insured in order to collect on the death benefits.

Insurers stopped this practice by requiring that owners of life insurance policies on another person only name a beneficiary who has an insurable interest in the insured. The generally accepted definition of insurable interest is “any reasonable expectation of benefit or advantage from the continued life of another person.” Put simply, one might say the insured is worth more to the beneficiary alive than dead.

To qualify for insurable interest, the beneficiary may be a person related by blood or law, or someone who has a lawful or substantial economic interest in the continued life of the insured. This may include a business partner, or in the case of a corporation, the corporate entity itself for purposes of funding a partnership buy-sell or stock redemption agreement.

The wording of the beneficiary designation is important. Consider the designation that reads, “Mary Jane Smith, wife of the insured.” Let’s say the insured later divorces Mary Jane and marries Sue Ellen. Prior to changing his life insurance beneficiary designation, he dies. Sue Ellen attempts to collect because the beneficiary designation reads “wife of the insured.” However, the law gives the money to the named beneficiary, “Mary Jane Smith”—not the descriptive phrase. The ex-wife gets the money as a taxable gift from his estate, payable by his estate.

Children may be listed as beneficiaries either by name or by class. If children are listed by name, those born later must be added by change of beneficiary; if listed by class, all children including those born later are included. However, this raises a number of questions and problems for insurance companies. First, they have no way to identify all of the children, especially if death happens many years after the policy is started. All children must be located and identified before the insurance proceeds can be paid out. Second, the definition of “children” is often in question. For example, do illegitimate children count?

It is no surprise that the best “policy” to make sure your loved ones receive the full intended benefits of your life insurance proceeds is to seek professional advice. There’s more to the process than simply writing a name on a sheet of paper!

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Kids and Money

by Wendell Cayton

I recently became an advisor to a group of grade and middle school students participating in a stock market simulation game. Sponsored by Cal State Hayward, the game allows student teams from around the country to invest a mythical $100,000 in stocks and mutual funds. The winner’s are the various age group teams with the greatest investment value at the end of the contest.

From my experiences helping families with their financial affairs, the real winners are all the participants who learn some rudimentary fundamentals about money, prices, markets, and economics. Unfortunately, this part of their education is often overlooked in their home life, where money matters, like sex, is often a taboo topic of discussion.

For too many children, home finance matters consist of a parent(s) sitting at the kitchen table, late at night, once a month scratching figures on a pad, and writing checks. This is always followed by a noticeable deterioration in mood, and proclamations beginning with the negatives, “We can’t afford,” “Have to cut back,” and “No more.” Money is something just not spoken about in polite company.

As a result, children grow up and enter adulthood with few positive ideas about handling money. At 18 they enter the adult world of money and fantasy when they are inundated with credit cards and ample temptations for spending. I relate this to giving a child a very powerful car… and no driving lessons!

The need for financial education for our children is quite clear. According to Dara Dugay, Executive Director of the Jump$tart Coalition for Personal Financial Literacy in Washington, only about 10% of high school graduates have learned personal finance. She points out that the average American is spending more than he or she is saving, a fact that reinforces the idea that children learn spending habits and not savings habits.

Fortunately there are a great many resources available to parents and students alike who want to learn about personal finances. Nonprofit organizations like Jump$tart, the National Endowment for Financial Education (www.nefe.org), and the National Institute for Consumer Education (www.emich.edu/public/coe/nice) have a wide offering of resources and educational materials.

Both parents and children might benefit from reading a number of the fine books now available on the topics of money and personal finance such as Robert Kiyosake’s Rich Dad, Poor Dad, or Willard Strawski’s Kids, Parents and Money.

Here are a few simple stratagems parents can undertake to get their children started out in the right direction:

First, have a simple plan with a few easy to understand goals. Write down several meaningful goals for the child to work toward. Help the child set up a budget to reach the goals. Help the child learn the principles of time, the value of money, and delayed gratification. Also, teach the importance of credit and the responsibilities that go with borrowing.

Second, teach the child the principal of saving first and spending second. I once knew a financial planner who liked to tell his listeners that there were two types of people: “Those who spend first and save what’s left, and those who save and spend the rest.” The truism of life is that the former always end up working for the latter!

Finally, relate financial matters to the real world. For example, instead of harping on children to turn off the lights, show them the power bill and let them calculate what it costs to leave on a light or the TV. Make it a participatory learning experience.

Using Your Gut Instincts

by Bruce Fenton and Jake Mazulewicz Ph. D

From undergrad business classes to Fortune 500 boardrooms, today’s legal and business environment focuses on analytical thinking: cash flows, statistics and round table discussions.

But how do we explain the staggering difference between people like Michael Dell, who grew Dell Computer from his dorm room to $9 million in sales in his first nine months, and the rest of us? Surely Michael Dell was not simply better at crunching numbers. Some researchers believe one answer may lie in the area of intuitive thinking.

In the high stakes, fast paced world of Los Angeles litigation, celebrity divorces and philanthropy, Stacy Philips, managing partner of Phillips, Lerner & Lauzon, sometimes helps her firm and her clients by relying on her intuition in addition to just book smarts.

Philips calls the use of intuition “critically important” and says “good intuition and people skills are far more valuable than anything else when it comes to any person’s success in both personal relationships and career.”

She is not alone.

A growing number of respected academic researchers and business thinkers are starting to promote similar thinking. Since intuition is a faster working, older and more developed part of our cognitive functions than analytical thinking, research attributing effectiveness to “using one’s gut” may account for some of the rapid growth and effective management of many companies, like Dell.

Despite its advantages, there is little or no training for executives in the use of intuition. In certain circles, mentioning intuition as a decision-making tool might draw a similar reaction to tea leaves or Ouija boards.

Leading executives make extensive use of intuition and gut instincts in their decision processes, sometimes without even being aware of doing so. Perhaps it’s the trust level you feel for a new business associate or the hunch you have about a new office location being “right.” There is evidence that these instinctual reactions are actually be the result of years of training and observation that becomes wired in to your subconscious not unlike the grace of a highly trained athlete.

Philips notes that people are born with a certain ability to size people up as well as potential to improve those abilities.

“I also believe that intuition can be a product of experience – that a person can develop more keenly honed intuitive skills by living life and doing his or her job,” she says.

Whether juggling her time with her many board meetings, media appearances and work on her first book, Philips has become used to trusting her gut instincts.

“My intuition is usually on target. I use it with regard to work, friends and family,” she says. “I use intuition as a guide to know when to push and when to pull back. I also use it to read my audience, whether that is with regard to a client, opposing counsel and his or her client, as well as the judge.”

Perhaps one of the biggest challenges with intuition is knowing when and when not to listen to or act on it.

Philips says she “always” trusts her intuition – “but I don’t always rely on it. I take the time to think more deeply – to consider all sides of an issue – before I decide how to proceed to resolve it.”

Another challenge, particularly in the world of highly educated attorneys, is to step outside the box and trust your inner resources even though most formal training in America overlooks this area.

Philips is an example of an achiever who has balanced both: educated at Dartmouth College and Columbia Law, she has her share of conventional textbook knowledge but also learned from growing up with a lawyer parent that there are other equally important tools inherent to human beings.

“The woman who worked as my nanny when I was growing up wasn’t highly educated, yet she was very wise and had impeccable instincts,” she says.

Every executive knows a similar example; the instincts that separate the achievers and the super achievers are there, they just need to be used, developed and used some more.

If you feel uncomfortable using intuition for crucial decisions, there is still hope. First of all, take a look at decisions that you already make that use intuition. Sometimes, these are hard to notice because they are so obvious.

A lawyer who decides to alter a case’s course based on the non-verbal reaction of opposing council or even from the look in the eye of a judge is using intuition that in some cases is very highly developed. Outside the courtroom, experienced attorneys might unconsciously use intuition in the review of documents or handling of clients. An experienced estate planner or tax attorney may be able to sniff out a problem document in an instant because the document does not have the right “feel” for them.

It’s in these, intangible, difficult to explain areas that our greatest skills often occupy. On investigation, many managers find that their intuition was correct, particularly in dealing with people, an area so complex it is virtually impossible to make decisions using analytical means.

The next step to utilizing your inner natural resources is to track when your gut instinct tells you something and your subsequent action, over time, determine if there is a pattern. One way to do this is to keep a simple journal if you do not already do so. Entries list the date and might read “met potential employee, instinct tells me will work well even though salary request is higher than average” or “I have a feeling this client relationship could be a problem despite the revenue.”

With a couple minutes a day, after a few months you can accumulate an impressive and useable collection of data about our own inner natural resources. This data, perhaps some professional coaching and a keen sense of self awareness can form the foundation for making new use of a tool you have had all along and a tool that could be one of your greatest assets.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Cohabitation Raises Legal Issues

by Bruce Fenton

It’s a fact…according to the 2000 U.S. Census, the number of unmarried partner households rose 72% nationwide during the ’90s. Changing values and economic conditions have combined to make cohabitation a part of our national culture and raised important legal issues for those who choose to so live.

Unlike married partners, those who cohabit do not share legal rights to property, inheritance, income and debts. And, if children are involved, additional issues of custody and support arise.
As unromantic as it may seem, a clearly written partnership agreement at the beginning of a relationship becomes the proverbial ounce of protection worth more than a pound of cure. The time to make these decisions regarding property ownership, inheritance, and support is before any triggering events occur. To attempt to prove the existence of an agreement after the fact, and without a written contract, can be costly and time consuming.

Even without formal documents, traditionally married couples have certain rights to property, protected by law. Those rights, such as the right to inherit property upon the death of a partner, are not available to the unmarried couple, same-sex or otherwise. Executing an appropriate contract can protect these rights.

For a contract to be valid it must pass four basic tests. First, the parties to the contract must be capable of contracting. This rules out a contract involving a minor or someone deemed incompetent.

Second, there must be valid consent. To be valid, the parties must agree without coercion, duress, undue influence, or fraud.

Third, the contract must have a lawful object…not an illegal activity.

And fourth, after the precedent setting Marvin v. Marvin case of 1976, the contract between partners cannot be based primarily on the rendition of sexual favors. The Supreme Court of California in the Marvin case held that contracts between unmarried couples are not against public policy and are enforceable, as long as the contracts are not founded explicitly on the consideration of sexual services.

The major elements of a living-together agreement should include property ownership and property rights, inheritance rights and support.

Like a business agreement, property ownership should address the issues of title and division of ownership interests, credit toward future property interests created by contributions to property, the rights of the parties in the event they choose to dissolve the partnership, and, equally important, inheritance rights.

Inheritance rights are a particularly sticky issue, since state intestacy laws have been written to favor a blood family member, never an unmarried partner. Therefore, a valid will and/or living trust are a must if the partners intend to pass on property to each other at death.

Partners can agree to pool their earnings for mutual support. Or, they may choose to treat income earned by each as that person’s separate property. Or, as the Marvin case pointed out, one may be the breadwinner while the other provides non-income producing support.

Unmarried couples do have one advantage over traditional married couples, especially in community property states. They may transfer property between partners for the purpose of avoiding future creditor claims, something difficult to accomplish in community property jurisdictions.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Teaching Children About Money

by Bruce Fenton

Among life’s important little lessons to pass along to our children is how to handle money. Shrinking stock market returns are echoing through family structures, and where there was once abundance, now there is less; and older children who have come to depend upon their parents for financial support have, in some cases, tapped out the till.

Parents who were once able to make cash gifts to adult children are finding themselves thinking twice about handing out this largess, as they wonder about their own financial futures.

Many are finding themselves sandwiched between taking care of older parents who did not plan on living this long, and continuing to support a younger generation who grew up thinking a TV in every room, a credit card in every pocket, and a nifty new sports mobile was a right, and not a privilege.

Thomas Stanly, PhD, author of a seminal study of family wealth, The Millionaire Next Door, referred to parental support for adult children as Economic Outpatient Care.

Stanley noted that many of the older generation who provide Economic Outpatient Care showed uncommon skill at accumulating wealth earlier in their lives. Yet these same parents feel compelled, even obligated, to continue to provide support for adult children.

The net result is that the children, or those who receive such outpatient care, accumulate less on their own. They use the gifts to present a facade of a lifestyle. Worse, they become adept at manipulating their parents for more, rather than taking on responsibility for their financial situation.

Parents of younger children still have a chance to guide offspring along the road to financial responsibility.

There is a nifty piece of software on the Web for teaching younger children about money. Family Bank at www.ParentWare.org is a computer-based allowance manager that helps children learn money skills and management. According to the author it comes with a set of rules that, when agreed to by the parent and child, and adhered to by the parent, will help the child develop the habit of sound financial management.

According to Nellie Mae (college loan administrator) over 78% of college students are carrying loads of high-interest, unsecured, credit card debt. Not surprising, since credit cards solicitations are everywhere on today’s college campuses…“no income, no employment, no problem!”

Parents can do their kids a favor by teaching them a few simple rules about credit cards. First, explain to them the facts of life regarding their credit history. Without good credit, buying cars and renting apartments become more expensive at best…impossible at worst. Second, put training wheels on a credit card; start them with a prepaid or debit card that is simple to monitor. You can see if they are using it wisely while controlling the amount they spend.
Third, explain the cost of credit. Show them the math. They are smart enough to figure out what 18% interest means if added to the cost of a purchase. Explain late fees…even when only $10 might be owed. It still has to be paid on time!

Finally, monitor their purchases and teach them what is appropriate and necessary versus what is “nice to have” or an impulse.

Teaching children about money, in many respects, can be as valuable as any other aspect of their education!

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Passing the House Along

by Bruce Fenton

Giving the family home to the kids may not be your idea of prudent estate planning, but in fact, passing the family home or a second home on to the next generation can have definite tax advantages. A Qualified Personal Residence Trust (QPRT) can be used for this purpose.

A QPRT allows the older generation to make a future interest gift to the younger generation of a primary or secondary home at a discounted value for gift and estate tax purposes. Since it is a gift of a future interest, the grantors (Mom and Dad), may retain the right to use the property for a term of years.

Current estate tax laws have increased the amount of one’s estate that can be transferred to a non-spousal heir. The plan of Congress was to eliminate the estate or transfer tax by 2010. However, due to the sunset provision of the law, on January 1, 2011, the estate tax comes back.

Given the fact that the Federal Government is operating in the red it is entirely foreseeable that estate taxes may never go away. After all, the easiest people to tax are those who don’t complain, as is the case with those deceased! Given the fact that Congress will need the money, it makes sense to me to plan that some type of transfer tax will always be with us, justifying the use of a QPRT as an estate-planning tool.

The mechanics of a QPRT are fairly straightforward. The grantor, or maker, of the trust is the owner of the home. The children are typically the beneficiaries of the trust.

The grantor gives the property to the trust. However, the grantor reserves to right to use the property for a set number of years he determines. The right to use and enjoy the property is assigned a value as determined by current IRS valuation tables. This value is subtracted from the current value of the property and the remainder is considered to be the taxable transfer.

At the conclusion of the term, the property is then owned outright by the trust and may be distributed out of trust to the beneficiaries, or remain in the trust as property of the trust.

The trust or the beneficiaries of the trust may sell the property, use it themselves, or even lease it back to the grantors, provided the lease is at fair market value. If they elect to sell the property, their tax basis is the tax basis of the grantor plus any gift taxes paid.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Children and Money

by Wendell Cayton

Our children hold our economic future in their hands. As frightening as that may seem, the fact is how they learn to handle money and how they learn to save (rather than spend) will shape the ultimate financial success of our retirement years.

If they learn to save rather than spend, interest rates will stay low and the stock market will remain strong. If they learn self-reliance they will be a productive economic force rather than an inflationary drag on society, all of which makes our retirement savings more valuable.

As a society steeped in the virtues of higher education and entrepreneurial spirit we are poised to put vast stores of wealth into their hands. For example, a child born today, whose family is fortunate enough to save $5,000 per year for the next 18 years in preparation for college, at age 18 will have more than a quarter of a million dollars to manage!

But that is just a small piece of the pie. The younger generations are expected to inherit more than10 trillion dollars from their parents’ estates within the next forty years. That wealth can either be productive or destructive . . .depending upon their management skills!

Fortunately there are some excellent resources available for both parents and children to learn money skills.

Willard Stawski, a stockbroker in Grand Rapids, Michigan, developed a system to teach children money management skills, The Cash University Money Management for Kids. It’s a kit that includes an audiotape explaining the program and various tools such as an Allowance Calculator, an erasable board with a section to list chores for making money and a section for negative behaviors that lead to deductions. The child receives his own checkbook, which can be used to write a check to a parent for an immediate cash need and to track funds. In addition, there is a College Savings Board to list special chores for the child to earn college education funds. The kit is targeted at kids ages 4 to 9 and sells for $24.95. Contact: phone (800) 209-4800 or www.cashuniversity.com.

If you want to put that home computer to use for something besides games and email, here are a few Web sites that teach children and young adults about money and investing.

• Investing for Kids is a site designed by kids that covers a wide variety of topics. It is divided into three levels: beginner, intermediate and advanced. It features a nifty stock market game as well as a bulletin board for questions and comments.
  
• Kids Bank.com was developed by a bank and teaches about money and banking through the use of cartoon-like characters. This is a great spot to start the younger set learning about money, where it comes from, and how it works.
  
• Young Investor, (this site is no longer available) teaches the basic concepts of investing through various character guides, from which the child can choose. It contains a handy library with financial articles and a dictionary of financial terms, as well as tips for parents on how to teach their children about investing.
  
• Independent Means is a site targeted at girls under 20. The content focuses on entrepreneurial as well as investment skills. The emphasis is to teach financial self-reliance to young women. A feature on the site that I found especially meaningful is a book titled No More Frogs to Kiss by Joline Godfrey (Harper Business) which discusses 99 action plans to financially empower girls. This is a must–visit site for parents and their daughters!

Harry Dent, the often-quoted author of “The Great Boom Ahead” and “The Roaring 2000s”, has forecasted a sharp drop in the stock market sometime after the year 2010 as baby boomers stop saving and investing and begin spending. The X factor in his predictive models is our children. Will they be productive? Will they be savers and investors? Will they handle their money, and that which they inherit from us, wisely? If they do, the severity of Dent’s predicted down market will be greatly reduced to all of our benefit. Therefore it makes sense to invest in educating our children now . . .they are our future!