Scott Adams on investing and planning

At MarketWatch, Paul Farrell reproduces the nine-point, 129-word "Unified Theory of Everything Financial" originated by Scott Adams (of Dilbert fame) in "Dilbert and the Way of the Weasel," published in 2002. Farrell suggests that Adams should be considered for the Nobel Prize in Economics:

1. Make a will

2. Pay off your credit cards

3. Get term life insurance if you have a family to support

4. Fund your 401k to the maximum

5. Fund your IRA to the maximum

6. Buy a house if you want to live in a house and can afford it

7. Put six months worth of expenses in a money-market account

8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement

9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio.

You can quibble a bit. Somewhere on the list should be such things as "buy groceries" and "pay the light bill". But it is simple and elegant.

(Adams would be the first to tell you not to take financial planning advice from a cartoonist.)

Small estates

After the filing of a petition in probate court, a personal representative is appointed and given the task of marshaling the assets of the estate, providing for allowances to family, identifying and paying creditors, and distributing estate assets to beneficiaries. The term "estate" simply means the assets and property that belonged to the decedent that did not pass to others by law.

There are simplified administration processes and non-probate alternatives for those estates with very limited assets.

Small estate administration - Under section 3982 of the Estates and Protected Individuals Code (EPIC), if the total assets are less than $21,000 (current amount, annually adjusted for inflation) after payment of funeral and burial expenses, a family member may file a Petition and Order for Assignment and may distribute the funds to the spouse or surviving heirs. No estate is opened and there is no administration, so this method cannot be used to follow the directions under a will. If the recipient is a spouse or minor child, no creditor may assert a claim. For other recipients, the funds are subject to claims of the decedent's creditors for 63 days after the order is entered.

Summary administration - Under section 3987, if the total of the homestead allowance, family allowance, and exempt property allowance, plus funeral costs and the costs of the last illness, exceeds the amount of the decedent's probate assets, distribution may be done immediately after the estate is opened. The personal representative does not have to give notice to creditors. The estate may be distributed immediately and a closing statement filed with the court.

The following do not require any probate court filing.

Sworn statement - If no probate proceedings have been filed because of limited assets, the person who is the successor of the deceased may submit a sworn statement to establish that no probate proceedings have been filed, that the total value of the estate is less than $20,000, that the assets do not include real estate, that 28 days have elapsed since the death, and the names and addresses of all persons entitled to the property. This statement may be submitted to any person having custody of the decedent's personal property or who is "indebted" to him, including a bank or other financial institution. On receipt of the sworn statement and the death certificate, the custodian must deliver the property to the successor. No probate proceedings are required. The custodian may not refuse to follow this procedure. Section 3983 of EPIC.

Motor vehicles and boats - If there is no probate filing, the Secretary of State will transfer the title of any motor vehicle or boat registered to the decedent to his family. This title transfer process is subject to limits of

• $60,000 in value for all motor vehicles, MCL 257.236(2)
• $100,000 for all boats and watercraft, MCL 324.80312(3)

Personal effects - A hospital, nursing home, or law enforcement agency is authorized to release a decedent's clothing and property worth up to $500 to a spouse or other family member on a showing that no probate proceedings have been commenced. Section 3981 of EPIC. 

Decedent's pay - The final wages or salary payable to a decedent may be paid to his or her spouse, children, or other surviving family under MCL 408.480. 

Obama's plan to limit charitable contributions

The recent "Jobs Bill" proposed by President Obama famously includes proposals to increase taxes on "the wealthy" - those earning over $1 million per year. Most news sources do not provide any more detail.

One proposal that it includes, one which Obama has pushed before, is to limit the deduction that may be taken for charitable contributions to 28%. Almost no news source mentions that this limitation would apply to those earning far less than $1 million. It would apply to individuals making over $200,000, couples making over $250,000. It would begin in the 2013 tax year.

As stated by Lisa Chiu in Obama's Job Bill Includes Plan to Limit Charitable Deductions for the Wealthy, The Chronicle of Philanthropy (September 12, 2011), the practical effect would be:

• A donor gives a public library a $1,000 gift.
• Under current law, the $1,000 is a deduction from taxable income
• The net effect is that he saves $350 on his taxes. The net cost of his gift is $650.
• Under the proposal, the savings would be limited to 28%, or $280. The net cost of his gift is $70 higher.

Charitable organizations, predictably, are opposed to this idea, because they are concerned that it will reduce the incentive to give.

A side note: We recently discussed the tax changes in Michigan with respect to the taxation of pension distributions. One other change made in Michigan, effective with the 2012 tax year, is the outright elimination of the credit for contributions made to several recipients, including public radio and TV stations and community food banks. If reduction of a deduction is considered likely to reduce contributions, the complete elimination of the tax credit will undoubtedly have a severe impact on those recipients.

Divorce and IRAs

Under Federal law, an employee's interest in a qualified retirement plan (such as a defined benefit plan or a 401(k) plan) cannot be transferred to another person during the employee's lifetime. A major exception is a transfer under a Qualified Domestic Relations Order (QDRO). These are complex documents which must be drafted in compliance with a number of statutory and regulatory requirements, and must be entered by a court and accepted by the pension administrator before they can become effective.

Because IRAs are not qualified retirement plans (as that term is used in the Internal Revenue Code), they are not proper subjects of QDROs. Many lawyers who do divorce work will try to create a QDRO for an IRA, and many courts will enter them, unaware that the QDRO rules do not apply to IRAs.

The good news is that there is a statutory provision for the transfer of a participant's interest in an IRA, and the rules are much simpler than they are for QDROs. Section 408(d)(6) of the Code governs "transfer incident to divorce". It provides that the transfer does not result in the recognition of income, and that the account thereafter is to be regarded for all purposes under the Code as the IRA of the spouse. That means (among other things) that the funds held in the account cannot be withdrawn before the spouse turns 59½.

The requirements are:

• The account must be transferred, not distributed. If the funds are paid from the account, it is a distribution, and this is a taxable event. A distribution from the account cannot be rolled over, as with an rollover from a qualified plan to an IRA.
• The transfer must be ordered by a court, in

a decree of divorce

a decree of separate maintenance, in states which recognize such decrees

a written agreement "incident to" (incorporated in) a judgment of divorce or separate maintenance

A written separation agreement or a court's support order which is not incorporated into one of the orders identified above is not sufficient to meet the requirements of Section 408(d)(6).

Otherwise, there are no formalistic requirements. The following is satisfactory language for Michigan residents:

"It is further ordered that the interest of the Husband in the Individual Retirement Account number 94-98334 maintained with the Michigan National Bank is hereby transferred to the Wife and shall be held as her account as provided in Section 408(d)(6) of the Internal Revenue Code."

If it is determined that an account should be split between husband and wife, the IRA should be divided before the transfer is made. An assignment of a partial interest is not recognized under the Code.

The transferred account would best be entitled with a notation of the transfer, e.g., "Susan Smith, as transferee of John Smith". The Social Security number of the spouse should be used, since she will be receiving the distributions once she is eligible.

Using life insurance in cottage succession

One of the difficulties with passing ownership of a family cottage to the next generation is that the children of the owners may have different levels of interest and financial ability regarding its use. A child may live far away, making it difficult or impossible to use the cottage. Another may live nearby, and want to use it, but may be financially unable to contribute to the cost of maintenance.

The original purchase of a cottage, as with the purchase of any big-ticket item, is an economic decision. If you are looking at a cottage that will cost you $100,000, you may choose to buy if you want the cottage more than you want to keep your $100,000. You will do so, of course, only if you believe that you have the resources to make the payments that will be needed to keep it in good condition going forward.

Like most owners, you will want your children to enjoy it after you are gone. But what you want and what your children will want, when the time comes, may be very different.

A child who succeeds to the interest of the original buyer through inheritance may not feel he is making an economic decision with immediate consequences. He will soon find, however, that the costs of upkeep are a significant expense to him. And if he is not using it as often as his co-owners, he may resent being expected to share those costs equally.

One way of dealing with the acquisition in an inheritance scenario is to make the issue of succession an immediate economic decision for the beneficiaries by the use of life insurance. Make the beneficiaries decide, at the outset, whether they really want to participate in owning and using the cottage.

Let us assume that D has four children and owns a 100% interest in an LLC whose sole asset is a cottage worth $100,000. He buys insurance on his life with a $100,000 death benefit. The proceeds are payable to the LLC. The LLC is directed to use the funds to buy out the interests of those who do not want to inherit the cottage. The remaining funds will be used to pay for upkeep and repairs.

Using this approach, each child may opt to receive $25,000 in cash if he prefers to do so instead of continuing as a member of the LLC. Each beneficiary will decide at the outset whether a partial interest in the cottage is worth more to him than the $25,000 in cash. The beneficiaries who remain get a better deal: a partial interest in the LLC which owns the cottage and has the remaining funds.

Of course, once the funds are used up, the remaining member(s) will have to contribute to repairs and upkeep.

Focus on a graying America

The Columbia University Graduate School of Journalism's News21 Project has launched Brave Old World, an exploration of the issues and challenges that will be presented as the American population ages. The focus of the site, it appears, will be on health and finance. From the site:

"The team continued to explore the demographic shift that affects the country, traveling to eight states, interviewing gerontologists, economists, biostatisticians and other experts. The stories the reporters produced are told through text, photos, interactive graphics, video and audio. They raise questions about how people in this country live, work and support one another as we age."

The first story of the project is published today at the Washington Post web site: As workforce ages, industries struggle to prepare for wave of retirements