Archive for category Finance
Estate Planning Problems
Death is a certainty for all of us. Failure to carefully plan for this eventuality may result in inability to achieve your desired objectives. Consideration must be given, not only to the way property will be distributed at your death, but also to ensuring lifetime income for yourself and possibly a surviving spouse. Certain characteristics of agricultural estates pose additional problems. Lack of liquidity may require the sale of business assets in order to pay estate taxes and debts. Indivisibility makes periodic gifts more difficult. In addition, many farm operations are very capital-intensive with low cash returns relative to the amount of investment. These problems are not unique to agriculture. Many estates involving other closely-held businesses encounter similar problems.
Faced with these problems, and not knowing what to do, many families do nothing, or delay planning until it is too late. A few of the typical problems which may result from lack of planning include:
• The division of a farm under state inheritance laws results in small, uneconomical units.2 The combined value of the small units when sold separately may notequal the value of the farm when sold as a total unit; nor could the smaller units be separately operated as efficiently as the whole farm.
• The farm-operating heir may not be adequately compensated for contributions to capital improvements, labor and management, and the care of the parents. Understate inheritance laws, the heir will share equally with other broth- ers and sisters who have not made similar contributions.
• Guardianship of minor children may require close court supervision with numerous costs and restrictions where one or both parents die without a will.
• A will may be challenged for incompetency of the parent or parents who waited too long to make a will or the potential of undue influence being placed upon the parent from other sources or family members.
• Land may be divided and subdivided to the extent that it becomes difficult to obtain a mineral lease covering an entire tract inherited by widely scattered co-owners.
• It may be necessary to sell much of the estate if no provisions are made for payment of taxes and other costs.
• Estate taxes may be greater than they would have been if some other method of distributing the estate had been chosen.
• The farm-operating heir may be saddled with an impossible debt-load. This sometimes results from attempting to buy out the other heirs at an unreasonable price and on inadequate terms.
• Ill-feelings and bitterness may arise among heirs, resulting from lack of knowledge and understanding of the law.
• Parents may suffer from economic hardships due to unexpected illness or disability if insufficient property is re- tained to care for them adequately during their remaining years.
• Unnecessary problems may be created by not understanding implications of a joint tenancy or life estate.
• Problems may also arise from failure to consider desired qualifications of an executor.
Many of these problems could be eliminated by proper planning. Determining the facts in the particular transfer problem and understanding the alternative ways of handling the problem, are the first steps that must be taken.
control of finances
Statements like “I have too much month at the end of the money” are often said as a joke. The reality of not having enough money to meet basic needs is no laughing matter. The best way to gain control of finances is to establish and manage a plan for spending. Planning for spending is a financial practice that many consumers fail to do. This leads to frustration with money matters and overuse of credit.
There are several steps that ensure success and put together the pieces of the financial puzzle. The worksheets provided could help determine where a family is, where they want to be, and how they can get there. The most important pieces to the puzzle are income, expenses, reserve accounts, and credit use.
Income. The most common source of income for most families and individuals is take home pay from work outside of the home. Use monthly net income rather than monthly gross income when planning. With net income, or take home pay, deductions have already been made for many expenses. Don’t list these again on the expense sheet. Overtime pay and other sources of income that are not regular or reliable can be used as a resource but should not be included in monthly net income. Changes in economic conditions can lead to a sharp reduction in overtime opportunities.
Expenses. In order to plan for spending, it is important to know where the money is going. If this is not known, write down how much and where spending occurs each month. This can be as simple as using a pocket sized tablet and a pencil or a computer with some money management software. Once spending is known, planning can begin.
When filling out a monthly expense sheet it is important to be as realistic and honest as possible. It is natural to underestimate expenses because it makes people feel in control. In the “current” column list all expenses. When completed, if they are too high, mark which expenses can be changed in the “adjusted” column. The “actual” column can be used to record actual spending for a month to determine how accurately current expenses are estimated. The “periodic” column
Reserve Account. Some bills are paid quarterly, semiannually, or annually such as car insurance and property taxes. Money needs to be set aside to pay these periodic expenses when they come due. The easiest way to do this is to place money needed for future bills into a separate account. Using a savings account will keep it out of the immediate reach and will actually earn some money (i.e. interest) as well. Figure the actual amount needed to set aside by following our directions. This is the most important step in planning because one large annual bill can completely undo a spending plan and lead to excessive credit use.
Credit Use. There are many advantages to using credit if it is handled wisely. Misuse of credit can be very costly. Financial educators recommend that no more than 15 percent of monthly net income should be spent on credit payments. For example a household with $2,000 net income per month paying more than $300 in credit card payments is probably headed for trouble. This figure does not include house payments.
Putting It Together. Putting everything in writing is just the first step. It takes time to make adjustments that will make all the pieces come together. Once the plan is finalized, changes in financial habits may be required. These changes take time and energy. It can help to remember what your goals are and how good it feels to reach them.
Explanation of monthly expenses
1. Savings is the most important part of expenses and should be figured first. Base this amount on savings goals that are established (example: $200 to go into Roth IRA or college savings fund).
CORPORATE MISGOVERNANCE
So, if the risk-averse investor continues to park good money with bad company directors, what can be done to protect the innocent? The investor has to be both reasonable and proactive. We have seen the pitfalls from the side of the ?nancial experts who have lost investors’ money, partly from a lack of proper communication. This fault can come from both sides, either the salesperson “ramping” a ?nancial instrument that is more risky (or much valuable) than is likely within the bounds of reality, or the investor having a risk appetite that is completely unsuitable. Furthermore, there is a problem with the regulatory moves to make self-disclosure best practice for the industry when the salespeople do not want to, or cannot, reveal the true extent of risk.
Regular people, not Wall Street professionals, have lost a collective fortune by relying on the tainted advice of the biggest and most trusted names in the world of ?nance.
As one Merrill Lynch analyst wrote:
We are losing people money and I don’t like it. John and Mary Smith are losing their retirement (money) because we don’t want . . . an investment banking client – the CFO of Goto.com to be mad at us.
We have to admit that a corporate gagging order, under many slogans (“Don’t rock the boat”, “Don’t tell the customer more than you have to” etc.), is likely to continue despite all legal moves for full disclosure. Faced with this scenario, it is incumbent upon the John and Mary Smiths of this world to take on the role of investigative investor and to evaluate the extant risk and fair valuation themselves. They should forget reputation and actively ask themselves whether the business opportunity offered really merits an appropriate investment.
What is more appropriate is that investors do not pass the investment mandate so readily to the “experts”, but consider the suitability risk. The suitability risk has been de?ned as: “The risk that the institution sells the client the ‘wrong’ product, which the client later claims to be inappropriate for its needs or level of experience.
Aristotle was asked what reason was. He gave examples of what reason was, and what a reasonable man would do under certain circumstances. This question still unsettles modern legal thinking two millennia after the Greek classics. The US Supreme Court employs the “reasonable man” hypothesis, to determine what a reasonable person would do under speci?c circumstances. Degrees of reasonable risk and reasonable return still trouble us today.
Determining a reasonable risk-return performance is a more dedicated and complex task than many banks have thought, even now. One view takes this task as a combination of three horizontal processes cutting across all business lines throughout the corporation:
1. Setting up risk-return guidelines and benchmarks.
2. Risk-return decision making (“ex ante perspective”).
3. Risk-return monitoring (“ex post perspective”).
It is time for the John and Mary Smiths of the investment world to extend their snouts and sniff out the risk themselves.
What has emerged over recent months is a renewed effort to force “corporate transparency” and disclosure. There are numerous moves to improve corporate governance and we track a handful of them. Will these moves drive the thieving or incompetent directors into the open? Faced with such corporate uncertainty, we need a risk management strategy to handle the potential danger. We compare this project initiation or remit according to the best practice in RAMP (risk analysis and management of projects). RAMP offers us the risk management actions to choose:
- Avoiding risk
- Reducing risk
- Reducing uncertainty
- Transferring risk
- Insuring risk
- Sharing risk
Nobody loves a loser, and there are few dealing operations in banking and fund management that would wish to appear anything less than a winner.