Jonathan Clements's Blog, page 395

Counting Down

IT’S FIVE WEEKS until the end of the year—which is five weeks during which you can do some valuable financial housekeeping. Here are seven recommendations:

1. Give tax efficiently. In the past, charitable contributions were a direct and easy way to lower your tax bill. But with the recent tax law changes, which include a big hike in the standard deduction and limits on some itemized deductions, this strategy doesn’t work as well. My suggestion: Consider opening a donor-advised fund and making contributions using the every-other-year strategy that I outlined earlier in 2018.

2. Claim your Social Security account. The Social Security Administration has an excellent website that provides easy access to your benefits statement. I urge you to sign up for two reasons.

First, to build a complete retirement plan, you need to know what size benefit to expect from Social Security. If you’re married, or ever were married, you’re likely entitled to a spousal benefit, which you’ll want to research as well.

Second, Social Security is, unfortunately, susceptible to fraud. There have been cases where thieves have successfully applied for and received benefits under someone else’s name. No one is immune to fraud. But when you set up your online account—and secure it with two-factor authentication—you lower the likelihood of this happening.

3. Audit your portfolio (1). Around year-end, the conventional wisdom is to conduct tax-loss harvesting—that is, scour your taxable investment account for losses in an effort to trim your tax bill. While that’s a worthy exercise, I also recommend a different kind of harvesting: Thin out the chaff—the inferior or overpriced investments—that may be hiding among your investments. While everyone hates taxes, don’t let the tax tail wag the investment dog. In other words, don’t be so allergic to paying capital gains taxes that you suffer for prolonged periods with subpar investments.

4. Audit your portfolio (2). In the past, I’ve compared mutual fund companies to junk food manufacturers, constantly churning out new, unnecessary and unnecessarily expensive variations on existing funds. Over time, especially if you work with a broker, these types of investments may accumulate in your portfolio.

In an article last year, I outlined a four-part litmus test for evaluating investments. My recommendation: If you have some downtime over the holidays, take an hour to scrub your portfolio using my litmus test. If an investment doesn’t make any sense to you, contact your broker and ask him or her to explain it. If your broker’s explanation doesn’t make any sense, consider selling.

5. Audit your portfolio (3). After several years of mostly steady gains, markets in the U.S. have become more volatile over the past two months. While this can be unnerving, I see a silver lining: It’s a gentle reminder that the stock market can go down as easily as it can go up—perhaps more easily.

Consider the performance of some of the market’s favorite stocks this year: Apple is down nearly 26% since the beginning of October, Facebook is down more than 39% since the summer, and chip maker NVIDIA is down a sobering 50% from its high. No one can predict where the market will go next, but you definitely can reduce risk by ensuring you don’t have outsized exposure to any one investment.

6. Hedge your bets on estate taxes. One benefit of the 2017 tax overhaul is that federal estate taxes now impact far fewer families. Still, as I pointed out last week, there’s no guarantee this will always be the case. If you have substantial assets, I still recommend making regular annual gifts to your children.

In 2018, you can make $15,000 gifts to as many people as you want without any tax consequences. If you have a multi-million-dollar net worth, this may not sound like a lot. But suppose you’re married and have three children. You could give your children a total of $90,000 ($15,000 x 2 parents x 3 children) every year without any impact on your lifetime federal estate tax exclusion.

7. Visit your accountant. During tax season, accountants are so inundated with work that they can barely keep their heads above water. At this time of year, though, they’re happy to have visitors. My suggestion: If you use a CPA, take an hour to sit down with him or her and revisit your 2017 tax return. Ask your accountant to walk you through it, and ask for observations and recommendations. Understand the key drivers of your tax bill and ask what steps you could take to reduce it this year. Even if you don’t walk away with any real savings opportunities, it’ll be an hour well spent, because it will give you an opportunity to learn the basic mechanics of a tax return.

Adam M. Grossman’s previous blogs include Deadly Serious, Five Messy Steps, Hole Story and Seeking Zero . Adam is the founder of  Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter  @AdamMGrossman .

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Newsletter No. 37

THE STOCK MARKET is like a whiny child, demanding our attention. But how should we react to the recent slump in share prices? It all depends on where you stand, as I explain in HumbleDollar’s latest newsletter.

The newsletter also includes brief descriptions—and links to—the dozen blogs we’ve published since the last newsletter. And I’m offering a final chance to order signed copies of From Here to Financial Happiness at the bargain price of $20. Want copies for the holidays? Don’t wait too long to order.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His most recent articles include A Little Perspective, Simple Isn’t Easy, Fanning the Flames and Just Asking.

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The View From Here

HOW THINGS LOOK depend on where you stand. Trying to figure out how to respond to the market drop? After the initial slump, a brief rally and then another decline, the S&P 500 is down 10% from its September all-time closing high of 2930.75.

History suggests that, five years from now, share prices will be no lower than they are today, and 10 years from now they’ll be handsomely higher. But at times like this, history can be scant comfort.

What matters is making sure you get through the years ahead without too many self-inflicted investment wounds. To that end, consider four scenarios:

1. If you’re buying stocks regularly, keep calm and carry on.

Sure, the price of the stocks and stock funds you own may have shrunk. But with every dollar you add to your 401(k) plan, IRA or regular taxable account, you’re now purchasing shares at cheaper prices.

In other words, this market decline has a huge silver lining—and the more you save each month and the younger you are, the bigger that silver lining is. As a regular buyer of stocks, you should be rooting for share prices to stay low through your heavy-duty savings years, and only wish for a rally as the time approaches when you’ll spend your nest egg.

2. If you will need to draw from your portfolio, count your cash.

Add up how much money you’ll need from your financial accounts over the next few years. Do you have the necessary sum in cash investments and high-quality short-term bonds? If not, I would seriously consider raising the necessary cash from the riskier side of your portfolio. The fact is, if you have money you’ll need to spend in the next five years, it’s financially dangerous to have it sitting in stocks and high-risk bonds.

I realize it’s painful to sell shares when the S&P 500 is down 10% from its peak. But let’s face reality: If this is the beginning of a bear market, things could get a whole lot worse from here. In a bear market—defined as a decline of 20%—the drop turns out to be around 35% on average (though the precise average varies depending on which index and what time period you look at). It’s far better to sell at today’s somewhat reduced prices than hem and haw, only to see stock prices plummet.

3. If you sense you have too much in stocks, it’s decision time.

There’s your objective situation: whether you’re adding fresh savings to your portfolio or looking to tap it for spending money. And then there’s the tricky subjective issue: How will you feel if stocks keep falling—and is there a risk you’ll freak out?

Repeat after me: Nobody knows where stocks are headed in the weeks and months ahead, which means you shouldn’t be deciding whether to buy or sell based on yours or anybody else’s wild guess.

So what should be the determining factor? More than anything, you should ponder how you would react if share prices slumped another 10% or 20%. Would you shrug it off—or would you be miserable, and potentially panic and sell at fire-sale prices?

If you’re already feeling anxious, it’s probably best to panic now and lighten up a little on stocks, while prices are still at relatively lofty levels. The odds are, you’ll be banking profits. After all, the S&P 500 is up 1% over the past 52 weeks and 289% since March 2009, and that doesn’t include dividends.

4. If you feel you’re underweighted in stocks, prepare for reentry.

Start by deciding how much of your portfolio you’d like to move into stocks. Next, settle on a schedule for getting the money invested. Again, this should be based not on some wild guess about the stock market’s direction. Instead, what matters is what you can stomach.

If the current market swoon turns into a bear market, history suggests the peak-to-trough decline will take somewhat more than a year, though past bear markets have been as short as three months and as long as three years. That means we could be in the early days of this decline and prices could be much more attractive down the road. But there are no guarantees: This decline might take far longer and be far deeper than the typical drop—or the current mild market indigestion may never turn into a full-blown bear market.

My advice: Take the money you have earmarked for stocks and divide it into 24 monthly investments. If stocks tread water or rally from here, you’d invest the money on that schedule. If the S&P 500 falls another five percentage points, so it’s 15% below its all-time high, you might double the size of your monthly investment. That trigger would be 2491 or below on the S&P 500. If the S&P 500 drops 25% from its all-time high, to 2198, you would triple how much you invest each month.

Does that seem too aggressive—or not aggressive enough? Take my schedule and modify it for your own risk tolerance. But whatever you do, write down your planned investment schedule and tape it to your desk, your refrigerator or some other place you’ll regularly see it. That’ll be the reminder of what you committed to in calmer times.

Last Call

WANT A COPY of From Here to Financial Happiness signed by yours truly? It could be a great holiday gift for a friend or family member—or for yourself. Just follow this simple four-step process:

Email Jonathan(at)JonathanClements.com specifying how many copies you want and what mailing address they should be sent to. Copies can’t be shipped to addresses out the U.S.—sorry.
You’ll receive an invoice from PayPal asking for $20 per copy. That $20, which covers the book, shipping and handling, is 33% off the cover price.
Pay the invoice using a credit card, debit card or PayPal. You don’t need a PayPal account to purchase books. Your copies will be shipped once your invoice is paid.
If you want copies by Dec. 25, please pay your invoice by Dec. 1.

Latest Blogs

“Folks have been asking me whether they should steer clear of the stock market for a while,” writes Adam Grossman. “That sounds sensible—until you realize the difficult steps involved.”
On Jan. 5, 1914, the Treasury Department unveiled the first Form 1040, recounts Julian Block. It was just four pages—including a single page of instructions.
“Overspending, ignoring future financial needs and not learning to manage money are common failures,” notes Richard Quinn. “But why are we surprised? Formal financial education is very limited.”
Want to avoid financial misunderstandings with your spouse or partner? Do what Ross Menke and his fiancée do: Hold a monthly money date night.
“What’s the most important financial decision you’ll make in your life?” asks Dennis Friedman. “I believe that, for many people, it’s who they choose to be their significant other.”
Financial literacy deteriorates 2% every year after age 60, while confidence in financial decision making doesn’t decline. Jiab Wasserman discovered the unfortunate result—in her own family.
“A year later, I confessed to opening a Roth,” writes Lucinda Karter. “I let him look at the account statement—a huge step for me—and he noted with bemusement that the $1,000 was still sitting in a money market fund.”
Why does every adult need an estate plan? Adam Grossman offers 10 reasons: to name a guardian for the kids, allocate personal possessions, avoid unnecessary legal bills and more.
“I became obsessed with checking Zillow,” recalls Kristine Hayes. “One morning, I awoke to find a listing that was just 10 minutes old. I contacted my agent and asked to schedule a viewing that day.”
If you think the daily swings in the S&P 500 are painful, ponder the many far larger financial losses suffered by Americans during a typical day.
“My wife found five boxes of shoes she didn’t recall she had,” Richard Quinn writes. “Even I found two boxes of unworn shoes—but I’m innocent, because my wife bought them for me.”
“Minimize expenses and emotions, maximize diversification and discipline” is Allan Roth’s succinct formula for investment success. “It’s easy to say. It’s a lot harder to do.”

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His most recent articles include A Little Perspective, Simple Isn’t Easy, Fanning the Flames and Just Asking.

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We’re Stuffed

THERE’S A RETAIL chain called The Container Store. As the name implies, it sells all types of containers, storage units and custom closets to help people organize their stuff, much of which they likely don’t need.

Let’s say you want a separate plastic box for each pair of shoes. You can have it. Did you know men own an average 12 pairs of shoes and women an average 27 pairs? Amazingly, 85% of women own shoes they purchased but have never worn.

We own too much stuff. I was speaking with a cable installer recently. He told me he had just finished hooking up 11 televisions in one home. The average home has 2.3 televisions, which is actually declining, as younger people instead stream on other devices.

Don’t think you have too much stuff? Try moving out of your home of many years and cleaning out your closets—which we just did. My wife found five boxes of shoes she didn’t recall she had and which she had never worn. Even I found two boxes of unworn shoes—but I’m innocent, because my wife bought them for me.

The problem with all the stuff we have is that somewhere along the line we likely spent good money on it. That means we couldn’t use that money for something else—like savings or paying down debt.

In an Experian survey, 68% of respondents said a key reason they carry credit cards is to buy the things they need. It’s the “need” part that is debatable. The majority of respondents (62%) reported having one to five credit cards, with three being the average. Their credit card debt averaged $2,326.71, with an average monthly charge of $779.83.

Americans paid banks some $104 billion in credit-card interest and fees in the last year, up 11% from a year ago and 35% over the past five years. Apparently, the frugality brought on by the Great Recession has waned. Being somewhat of a nerd, I calculated that if just one year of interest payments were instead invested, after 40 years, Americans could have $1,069,714,665,461 in the bank, assuming a 6% return. The last time I heard that kind of number it was the federal deficit.

How do we use our credit cards? Up to 27 million U.S. adults report putting medical expenses on their credit cards, according to a NerdWallet analysis, costing them an average of $471 in interest for a year’s worth of out-of-pocket medical spending. That’s more than $12 billion total. Paying for personal emergency medical expenses ranked sixth among the reasons folks cited for ending up with credit card debit.

What was the top reason? Survey respondents put the blame on themselves, saying they spent more than they could afford on unnecessary purchases. Once you live that way, maybe it’s no great surprise you also end up charging those out-of-pocket health care costs.

And then, of course, there are the shoes. I tried looking up the price of an average pair of women’s shoes. Good luck with that. Let’s just say the cost of 27 pairs of shoes likely exceeds average out-of-pocket health care expenses.

Our penchant for accumulating stuff may be our undoing down the road—and I haven’t even included the cost of those containers we buy to store what we don’t need and don’t recall owning. Except for the chronically poor, everyone can afford to save if they simply decide what stuff they can live without—provided they decide before they actually buy it.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Clueless, Hard Earned and Time to Choose. Follow Dick on Twitter @QuinnsComments.

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Signed and Sealed

WANT A COPY of From Here to Financial Happiness signed by yours truly? It might make for an enriching holiday gift for a friend or family member—or perhaps for yourself.

Just follow this simple four-step process:

Shoot an email to Jonathan(at)JonathanClements.com specifying how many copies you want and what mailing address they should be sent to. We can’t ship books to addresses outside the U.S.—sorry.
You’ll receive an invoice from PayPal asking for $20 per copy. That $20, which covers the book, shipping and handling, is 33% off the cover price.
Pay the invoice using a credit card, debit card or PayPal. You don’t need a PayPal account to purchase books. Your copies will be shipped once your invoice is paid.
If you want copies for Christmas, please pay your invoice by Dec. 1. Unfortunately, at this juncture, I can’t promise delivery by Hanukkah.

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Good Old Days

SAY “1040” and most of us think of the income tax returns we file each year on April 15. But it’s only because of chance that we fill out 1040s, instead of 1039s or 1041s: That number was up next in the sequential numbering of forms developed by the Bureau of Internal Revenue, the predecessor of today’s IRS.

It all began on Jan. 5, 1914, when the Department of the Treasury unveiled the new Form 1040 for tax year 1913. The feds set March 1, 1914—less than two months away—as the deadline for filing the form with the local tax collector’s office.

Today’s 1040 differs completely from 1913’s. Let’s focus first on tax brackets: 1913’s brackets began at 1% on taxable income of up to $50,000. The next ones were: 2% on income between $50,000 and $75,000; 3% on income between $75,000 and $100,000; 4% on income between $100,000 and $250,000; 5% on income between $250,000 and $500,000; and a top rate of 6% on income above $500,000. Contrast 1913’s comparatively miniscule rates with those set by last year’s Tax Cuts and Jobs Act (TCJA): 10%, 12%, 22%, 24%, 32%, 35% and 37%.

The first 1040 was just four pages. Page No. 1 summarized your income and deductions, and was where you computed your income tax (eight lines). The second page listed the details of your income (12 lines). The third page listed your deductions (seven lines). What was the fourth page? It provided instructions—all on a single page.

Page three’s list of deductions was skimpy, compared to today’s sumptuous array of write-offs. It included a deduction of $3,000 for single taxpayers and $4,000 for married couples. While spouses could file joint or separate returns, in no case could their combined deductions be more than $4,000. (So yes, the marriage penalty—which has been mostly erased—dates back to the first modern return.) The $3,000/$4,000 write-off alone was sufficient to relieve the vast majority of Americans of the need to pay income taxes.

Other authorized deductions included:

Personal interest paid (a deduction almost completely deep-sixed by the Tax Reform Act of 1986)
Uninsured losses from “fires, storms, or shipwreck” (mostly abolished by TCJA; unsurprisingly, no mention of plane crashes)
Business losses (TCJA ended carrybacks for net operating losses and allows only carryforwards)
All other taxes paid, including real estate taxes (capped by TCJA at $10,000 for those itemizing their deductions)
Bad debts
Reasonable depreciation of business property (“reasonable” was replaced long ago by numbingly complex rules explaining how to calculate depreciation write-offs for buildings and equipment)

What remained to be done after taxpayers filled out their forms? In 1914, they had to sign “under oath or affirmation” before “any officer authorized by law to administer oaths.” Nowadays, we simply sign.

Back then, taxpayers filed just over 350,000 1040s. IRS sleuths audited 100% of tax returns. Today, an underfunded IRS is understaffed—and your chances of being audited are slim.

J ulian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Two’s a Crowd, Stepping Up and Give and Receive. Information about his books is available at JulianBlockTaxExpert.com. Follow  Julian on Twitter @BlockJulian.

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A Little Perspective

TODAY WAS PAINFUL. How painful? Think of the financial losses:

Homeowners who closed on their house sale might have lost as much as 6% of the proceeds to real-estate commissions.
Car buyers who picked up their new vehicle probably gave up more than 10% of the purchase price just by driving off the dealership lot.
Those who signed separation agreements with their soon-to-be-ex spouse likely surrendered 50%.
Investors who bought load funds might have been nicked for 5.75%.
Employees who got their paycheck were dunned 7.65% for payroll taxes, maybe 12% for federal income taxes and perhaps 3% for state income taxes.
Those who then spent their paycheck might have lost another 5% to sales taxes. And if the money they spent was $100 in cash withdrawn from an out-of-network ATM, they could have lost another $3 to bank fees, or 3%.

Oh yeah, the S&P 500 also slipped 1.82%. Thank goodness for small losses.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His most recent articles include Simple Isn’t Easy, Fanning the Flames and Just Asking.

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Money Date Night

IN AN EFFORT to understand each other’s financial background, my fiancée and I began holding a money date night. These finance-focused conversations started out slowly. But they’ve become our way to talk about money and our future together.

As a financial planner, I don’t want to dominate the financial side of our lives. I believe household finances should be managed together and not individually. We view this date night as an opportunity to learn about our individual feelings toward money and what our goals are. Having a chance to voice our beliefs around this sensitive topic has brought us closer together.

Want to try it yourself? A money date night might sound like a tedious, painful experience. But done right, it can be a fun and engaging way to connect with your partner or spouse.

It’s important for both partners to have an idea of the family’s finances—not least because misunderstandings over money are among the most common reasons for divorce. What does a money date night look like? This isn’t meant to be a full-on financial planning session. Instead, the conversation should remain light. There will be a review of the family’s financial goals, the previous month’s spending and a look at any upcoming out-of-the-ordinary expenses.

Before the money date begins, update the family balance sheet—the list of all your assets and debts—and pull together a cash flow statement showing how much income you receive each month and where it goes. This should be done beforehand, so you don’t waste time that could be spent talking.

To start the money date, grab your beverage of choice. Find a comfortable spot to sit, where you can have an uninterrupted discussion. This would also be a good moment to put phones in another room and turn the television off.

Your family’s financial goals are a great way to open the conversation. This is a chance to discuss any dreams or ambitions you’ve had recently. To avoid getting too deep in the weeds, stick to the top three goals—and make them as specific as possible. Some examples:

Contribute the maximum allowable amount to your retirement accounts.
Donate 10% of gross income to charitable causes or a donor advised fund.
Reduce eating out so you can contribute more to your annual travel fund.

A review of last month’s financials should be discussed next. Did you spend less than you made? What expenses surprised you? How much money did you put in investment accounts? This should be viewed as an opportunity for both parties to get on the same page, especially if one partner handles the family’s finances.

Finally, talk about the irregular expenses you see on the horizon, such as vehicle maintenance, weddings to attend, medical procedures and home remodeling projects. What can you do today to budget for these pending financial needs? You might set up an automatic monthly transfer from your checking account to a designated savings account, so you have cash to handle these unexpected costs.

How often should you have a money date night? I favor doing them monthly—or quarterly at a minimum. If you do it any less often, the family’s finances may get off track—and there’s a greater risk of financial misunderstandings.

Ross Menke is a certified financial planner and the founder of Lyndale Financial, a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear, concise advice, so his clients can achieve their life goals. His previous blogs include Slow Going and Flying Solo. Follow Ross on Twitter @RossVMenke.

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Heading Home (IV)

DURING THE FIRST three weeks of house hunting, I looked at a dozen different properties. None met all the criteria I’d set for my “ideal” home, but a couple came close. My price point of $380,000 limited me to looking at smaller, starter-type homes. The competition for those houses was often fierce. On at least three occasions, a home I wanted to view would appear as a “new listing” one day and be marked as “pending sale” the next.

I became obsessed with checking Zillow every few hours. One Wednesday morning, I awoke to find a listing that was just 10 minutes old. It was a small house in the neighborhood I was hoping to live in and had an asking price of $370,000. I contacted my agent and asked if we could schedule a viewing for later that same day.

When I saw the house a few hours later, I knew it was the one I wanted to buy. It was a single-level, 1,100 square foot house located at the end of a long private driveway. The setting was quiet and private, and the house had been owned by just one person since being built in the late 1980s.

I spent two hours looking at every square inch of the house and yard. There was a perfect area for the dogs. There were three bedrooms, two bathrooms and an oversized double-car garage. While some parts of the house were clearly stuck in the ‘80s, many areas had been updated. It was a house I could move into without having to do any major renovations. Best of all, it was located just six blocks from where my mother lived. I told my agent I wanted to make an offer that day.

Knowing how quickly homes were selling, deciding on a price to offer wasn’t easy. My agent suggested offering $375,000, the value of the home listed on the property tax assessment. Because I was currently renting an apartment, I didn’t have any contingencies in my offer. I could close at any time and I could come up with the money for the down payment quickly. I submitted my offer, along with a $4,000 earnest money check, and crossed my fingers.

The seller wanted 48 hours to review offers. In the end, three other potential buyers also submitted bids on the house, but it was mine that was ultimately accepted. I was overjoyed to have found a house that not only exceeded my expectations, but also didn’t go over the budget I’d established.

The next two weeks were filled with home inspections, radon tests and paperwork. I was able to secure all the funds for my down payment easily and my loan paperwork was wrapped up within two weeks of making the offer. With a closing date still five weeks out, I had plenty of time to second-guess my decision and wrestle with the long-term financial implications of becoming a homeowner once again. But deep down, I knew I’d made the right choice.

Kristine Hayes is a departmental manager at a small, liberal arts college. This is the fourth in a series of articles about her recent home purchase. The previous installments were Heading Home (I), Heading Home (II) and Heading Home (III).

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Deadly Serious

THE MUSICIAN PRINCE died in 2016 at age 57, leaving behind a legacy of musical genius. Unfortunately, he also left behind an ongoing legal and financial mess. The issue: For reasons no one understands, Prince neglected to prepare even the most basic estate plan, leaving potential heirs squabbling over his fortune.

Under the latest tax law, passed late last year, only those with more than $11.2 million in assets ($22.4 million for a married couple) are subject to federal estate taxes. Still, you don’t have to be a wealthy rock star to need an estate plan. I believe every adult—regardless of net worth—should have at least a basic plan. Here are 10 reasons:

1. State estate taxes. Even if your estate won’t top the $11.2 million federal threshold, your state might impose its own estate tax. Eighteen states, in fact, have some type of estate or inheritance tax. In some states, the limit is harmonized with the federal limit, meaning that you would only face a state-level tax if your estate met the federal threshold. But in many states, the limit is far lower. In Massachusetts, for example, it’s just $1 million.

2. An ever-changing tax regime. While today’s $11.2 million federal estate tax exemption is extremely generous, there’s no guarantee this generosity will last. While estate tax revenue is virtually meaningless to the federal budget, it’s politically symbolic and has seen frequent changes. As recently as 2000, the limit was less than $1 million and the top rate was a hefty 55%, compared with today’s 40%. In 2010, on the other hand, there was no estate tax at all. The lesson: Don’t conclude that today’s estate tax regime is the one that will apply to you.

3. Naming a guardian. Should something happen to both you and your spouse, perhaps the single most important function of an estate plan is the appointing of a guardian for your children. This is even more critical if you’re a single parent. While your loved ones may have the best of intentions, it isn’t unusual for custody disagreements to arise when parents pass away.

Should children live with their grandparents or perhaps with an aunt or uncle? Should priority be given to those who live locally? To those who share your values? To those in a more comfortable position financially? It’s unlikely that everyone will see it the same way. That’s why it’s so important to document your preference.

4. Choosing a health care proxy. Another critical function of an estate plan is to name a health care proxy. If you were to become incapacitated, a written health care proxy would ensure that a designated loved one would have authority to make medical decisions on your behalf. This need not be complicated—in fact, free proxy forms are available on the internet—but it is important. If you became incapacitated, that would be bad enough. You certainly wouldn’t want your family sparring with each other, or with hospital staff, as a result.

5. Picking an executor. The executor’s role is largely administrative and often falls to the spouse or a child. If you have children from more than one marriage, however, you should consider appointing an impartial executor—one who does not have a stake in the outcome. While this impartial individual will need to be paid, it’ll be well worth the cost if that impartiality helps your heirs avoid a costly dispute.

6. Ensuring equity among children. If you died without a will, a court would probably divide your assets equally among your children. But that may not make the most sense. Suppose your children are in different situations financially. Should everyone receive equal shares? The answer, of course, is that it depends. But since you’re in the best position to make that determination, take the time now to think it through.

7. Charitable intentions. If you have substantial assets, perhaps you wouldn’t want everything to go to your children. Maybe there are charities, religious organizations or educational institutions that are important to your legacy. If you don’t put it on paper, no one will ever know.

8. Personal possessions. If you’re like most people, you have items of sentimental value—jewelry, for example. Wouldn’t you want some say over how these items are allocated?

Vacation homes are similarly tricky, often holding great sentimental value for children. But how would they share a home among themselves? How would they share the maintenance costs, especially if they are in different positions financially? What if one of your children wanted to sell the house and one wanted to hold it? A thoughtful estate plan would include mechanisms to handle these questions amicably.

9. Cost savings. In Prince’s case, it’s been more than two years and none of his heirs has received a penny. In the meantime, because it’s such a tangled mess, attorneys and other advisors have collected nearly $6 million in fees. No question, this is an unusual case. But the point remains: It’s hard enough to suffer a loss. Don’t compound that pain by leaving your family guessing about—and possibly fighting over—what you would have wanted.

10. Creditor protection. In the event one of your children has a legal dispute, a well-written estate plan could help protect your assets from that child’s creditors. If he or she gets divorced, for example, a trust structure could ensure that more of your assets stay with your child.

Adam M. Grossman’s previous blogs include Five Messy Steps, Hole Story and Seeking Zero . Adam is the founder of  Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter  @AdamMGrossman .

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