Get With The Plan: November 29, 2009

112909Caroline is mostly retired and working part-time. Rental income helps her pay the bills. Still, her financial status is an unusual one.

“I am 70 years old and legally married, however, my husband and I have lived separately for 17 years,” she says.

Caroline, whose name has been changed, has set aside $122,976 in IRAs, $63,617 in mutual funds, $4,608 in savings and $3,484 in checking. She owns half of two properties mortgage-free: The home in which she lives and the home where her husband lives.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, to help Caroline determine what money moves she needs to make.

“The main reason they are staying together is that as long as they are married, she gets medical benefits, but this creates a whole lot of issues that need to be addressed,” Lynch says.

Most people think that if they have a will, all their estate planning issues will be addressed properly when they die. Lynch says that thinking is far from the reality.

Most major assets, such as property, IRAs, life insurance and annuities will be distributed based on the beneficiary designation or the titling of an asset regardless of what a will states.

This is a big deal for Caroline and her husband. They have two properties that are owned “Joint Tenants with Rights of Survivorship,” or JTWROS. This means that when the first person dies, the second person gets the property. This, Lynch says, is not what Caroline and her husband want to happen when they die.

Instead, Lynch says, the properties should be titled “Tenants in Common,” which means each person owns half and has a right to distribute their property through their will provisions. He says because the homes are Caroline’s largest assets, it’s critical they are titled correctly.

Both of the homes have rental units, and Caroline enjoys income from her property. But, Lynch says, there is a tremendous liability if someone gets hurt on either of the properties. Even if Caroline is doing a great job maintaining sufficient liability insurance on the property she maintains, if her husband doesn’t maintain proper insurance on the other property, or if he forgets to send a premium check, Caroline would also be considered a responsible party.

“Since these properties are owned individually, both of their personal assets are at risk,” Lynch says. “Another problem could be a potential tax lien that you may not be aware of. How will you know if there is a problem?”

The current titling of the homes also poses an issue if Caroline ever needs additional money and decides to sell the home so she can use the proceeds for her care. This is her “Plan B.”

“The problem is that she does not own it outright. What if the ex says no?” Lynch says. “I see a lot of potential problems that can involve being in court and spending a lot of time and aggravation in legal fees.”

Caroline’s will was last prepared in 1993, when the couple separated, and Lynch says it’s time for an update. Additionally, she needs to review her Medical Power of Attorney and other legal documents with a good estate planning attorney so she can make sure that if she needs medical treatment, a family member can authorize the care.

Caroline describes herself as a conservative investor, which Lynch says generally means about 40 percent of a portfolio should be in stocks. Right now, Caroline has about 66 percent of her investments in stock, which is a moderate portfolio, heading towards an aggressive one.

Lynch says this allocation has been good in the past eight months because the stock market has risen. If the market drops and she needs to draw income, however, Caroline will be forced to sell stocks at market lows, Lynch says.

“By having more money in cash and fixed income investments, if the market tanks and she needs money, she can use the cash and fixed income while allowing her stocks to go through the market cycle and come back,” Lynch says.

So while Caroline may appear to have a solid asset base and a realistic budget, there are far too many possible mishaps to ensure security through retirement.

“You plan, not because you think everything will go perfect, but rather because nothing goes perfect,” Lynch says. “The best way to solve a problem is to avoid the problem and right now, I see too many potential issues for things to go wrong.”