Investor Basics: Embedded Bond Features

Contributed by: Nicholas Boguth

This time around in our “Investor Basics” series, we’re going to take a look at the most common bond features. For a dive into a more complex bond pricing topic, check out our Director of Investment’s Investor Ph. D blog on why buying premium bonds can make sense.

First off, what is an embedded bond feature?

An embedded bond feature is a provision attached to a bond that changes its maturity, risk, or liquidity. A bond issuer may release a bond with an embedded feature in order to make it more attractive to a bond buyer, or to give itself a more favorable debt structure. The most common types of embedded features that you may have seen in the market, and that I will briefly go over in this blog, are call, put, and conversions.

Call features give the issuer of the bond the right to “call” the bond back from the bondholder at a specific date. This provision benefits the issuer because they are able to buy back debt, and then issue new debt at a lower interest rate. A company will typically issue a callable bond when they believe that interest rates will decrease in the future. Since this feature benefits the issuer, the company will have to make the yield or maturity more attractive to entice a buyer.

Put features give the bondholder the right to “put” the bond back to the issuer at a specific date before it matures. This provision benefits the bondholder because it allows him or her to put the bond back to the issuer (maybe interest rates have risen or the company’s credit is deteriorating). Since this option benefits the bondholder, he or she may have to accept a lower yield or longer maturity on the bond.

Another common embedded bond feature is the conversion option. This actually lets the bondholder convert the bond into shares of the company’s stock at a predetermined price and date. A company may issue convertible bonds as a way to issue cheap debt (they may not have to pay as large of a coupon because they are giving the bondholder the option to convert their bond to stock).

Each of these bond features may have a place in an investor’s portfolio, but knowing when and how to include them can be complex and differs from investor to investor. If you have any questions on these bond topics or any others, feel free to reach out to us at any time!

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investments mentioned may not be suitable for all investors. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise.

Asset Flow Watch 2Q 2017

Contributed by: Jaclyn Jackson

One of the most common ways to monitor consumer confidence and investor sentiment is to watch fund inflows and outflows. Market analysts use fund flows to measure sentiment within asset classes, sectors, or markets. This information (combined with other economic indicators) help identify trends and determine investment opportunities.

A new trend may be emerging as international fund flows are outpacing US fund flows in the second quarter. The move towards taxable bonds that began in January 2017 continued as investors have handled high U.S. stock valuations gingerly.

Asset Flows: What Investors Did This Quarter

An even distribution of flows went towards taxable bonds and international equities in April. The fear of France’s exit from the European Union dissipated as Emmanuel Macron won the French presidential elections. Accordingly, flows moved into foreign large blend funds. To boot, MSCI Emerging Markets Index returns (13.9%) increased inflows to diversified emerging markets. On the other hand, first quarter GDP growth (0.7%) and political unpredictability sucked life from post-election US equity inflows. 

By May, US equity deceleration evolved into outflows. International equity flows remained strong.  Taxable bond flows continued in spite of raised rates. Republican tax cut plans created municipals bond outflows; likely because investors don’t think federal tax exemptions will be as advantageous as they have been in the past. 

Early quarter trends have continued through June. As of June 21, 2017, US equity outflows were -$1.205 billion, international equity inflows were $1.467 billion, emerging markets inflows were $0.300 billion, and taxable bond inflows were $3.016 billion.

Is the US Equity Run Over?

While the debate about the end of the US equity run ensues among industry professionals, the discussion may be mute among investors. It appears that many investors, figuring the US recovery is further along than the rest of the world, have opted to either “play it conservative” with bonds or invest internationally where there is seemly more opportunity for equity values to grow.

Jaclyn Jackson is a Portfolio Administrator and Financial Associate at Center for Financial Planning, Inc.®

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This information does not purport to be a complete description of the securities, markets, or developments referred to in this material; it has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Jaclyn Jackson and are not necessarily those of Raymond James. This information is not a complete summary or statement of all available data necessary for making and investment decision and does not constitute a recommendation. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Asset allocation does not ensure a profit or guarantee against loss. Past performance is not a guarantee of future results. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. Please note direct investment in any index is not possible.

Investment Pulse: Q2 Edition

Contributed by: Angela Palacios, CFP®

It has been another busy quarter! Check out some of our meeting highlights!

Andrew Adams, Senior Research Associate to both Raymond James Chief Investment Strategist as well as its Chief Economist

The Center had a chance to hear firsthand from one of Raymond James leading research associates. Andrew Adams paid a visit to our office this month to discuss the global market outlook. Andrew discussed how Raymond James believes that the U.S. equity market is still in the middle innings of a longer-term secular bull market that is more reminiscent of the post-WWII era and the 1982-2000 bull market than that of the 2000s decade. In response to questions about how the market could continue to go up without a major pullback, Andrew discussed that although the market pullback in the winter of 2016 was not technically a bear market (the S&P 500, which is heavily weighted towards large-cap tech stocks, only declined 15.1%), the average stock in the S&P 500 did decline 25% during that period. Andrew explained that Raymond James remains cautiously optimistic about U.S. equity markets going forward.

Scott Davis, Portfolio Manager of Columbia Dividend Income Fund

Scott gave us an update on where he sees markets now. Debt has been steadily expanding which indicates to him it is particularly important not to give up on quality at this stage of the market. Eight straight years of equity market gains make this the second oldest bull market since World War II. The run-up in stock prices also makes stocks expensive relative to corporate earnings growth, a potential risk factor going forward in his eyes. As the margin for safety has narrowed, he believes that any miss on expectations is likely to be punished, which makes careful stock selection even more important. That being said, Scott believes the American consumer is in good shape, and an expanding economy continues to provide a favorable environment for the equity market.

James Cook, Equity Specialist from Hermes Investment Management in London

This was our first conversation with the London-based firm. We were excited to discuss their Emerging Market strategy. This is the only dedicated Emerging Market strategy with an ESG (Environmental, Social, and Governance) mandate available to us. He spoke to us about the importance to remember that Emerging Markets aren’t a homogenous region. The sector is made up of very different countries spread all over the world that are driven by dissimilar factors. Many investors think that it is a space highly correlated to movements in commodities, which is true for some countries and company’s but not all. They apply research held to a developed market standard that they apply to emerging markets giving them a bias for high-quality positions.

That’s what our Investment Department has been up to for the second quarter of 2017. Please stay tuned to other insights throughout our Investment Week!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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Raymond James is not affiliated with and does not endorse the opinions of Scott Davis or James Cook. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Expressions of opinion are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.

The Center Adds More Team Members!

Contributed by: Clare Lilek

Jim Brown and Stephen Robinson

The Center recently welcomed two new team members: Stephen Robinson and Jim Brown. Stephen and Jim come from diverse backgrounds and are taking on very different roles at The Center, but are both excited to join our collaborative and dedicated environment in the world of finance!

Stephen joins us from his previous career as a pediatric nurse at the University of Michigan. He discovered his love for investments and financial planning after trying to navigate his own retirement account. After a lot of self-study, he decided to pursue a Masters in Finance while also working full time at the hospital. We’re thrilled to have him join us and apply his passion for financial markets and the planning field to his new position with us as Client Service Associate.

Jim joins us as our first ever in house IT Manager. Prior to joining The Center, he was a technological consultant working with institutions to troubleshoot problems and implement solutions dealing with various software and hardware systems. He was brought on to help mitigate and manage the fast-growing technology we use to best serve our clients. Jim sought to join the staff because of our diverse technology needs and the culture of our office. As our team continues to expand, we’re excited to have Jim be our go-to-man for technological assistance and expansion.

Next time you’re in the office, stop by and say hi to our growing team! Stephen and Jim are not only excited to join our team, but they’re happy to be on yours as well. Feel free to reach out to them if you have questions. 

Clare Lilek is a Client Service Associate at Center for Financial Planning, Inc.®

Ford Buyout: Knowing your Options

Contributed by: Nick Defenthaler, CFP®

Over the past month, Ford has extended buyout offers to nearly 15,000 of its salaried employees. The offer, in most cases, contains two main components – a severance package or an enhancement of your retirement benefit from Ford.  Below is a high-level breakdown of some of the key points of the offer:

Special Incentive Program (SIP) and Select Retirement Program (SRP)

• Up to 18 months’ severance

• Retirement benefit enhancement

  • Credit for three additional years of age and three years of service for calculating benefits under the General Retirement Plan (GRP), Benefit Equalization Plan (BEP), and Supplemental Executive Retirement Plan (SERP)

  • This can translate into a nearly 15% increase over your normal benefit

• Must retire no later than September 30, 2017

  • This means up to 27 months of income received in 2017 which more than likely means higher tax brackets for those accepting the offer

• Access to reemployment assistance from Ford for six months

• Health insurance – type of coverage will depend on if you were hired before or after 6/1/2001

• Life insurance – eligible to maintain if you were hired on or after 1/1/2004, are age 55 or older with at least ten years of service, or are age 65 with at least five years of service upon termination

• Vacation

  • Regular – accrued through your last day on pay roll, unused accrued vacation is paid out if the last day on pay roll is prior to year-end

  • Purchased – unused days are forfeited

Buyouts from Ford or any of the “Big Three” are nothing new. As always, however, a thoughtful analysis should be completed when ultimately making a decision on whether to stay employed with Ford or to retire early. Many of the offers extended will be virtually the same, but everyone’s situation is different. If you’ve received an offer from Ford and would like our take on how that offer could impact your own long-term financial game plan, don’t hesitate to reach out to us for guidance. 

P.S. I did a webinar on this topic where I dug deep into the nuances of the offer and discussed some planning opportunities you might consider if you decide to retire early. Check out the replay below!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

Talking Bitcoin

Contributed by: Nicholas Boguth

What is it?

Think of Bitcoin as internet cash. It is a currency that does not exist in a physical form - a cryptocurrency.

It is decentralized which means that there is no central authority that manages it. Instead, there is a set number of Bitcoin in the market. The creator of Bitcoin created 21 million bitcoins, and no more will ever be created.

Each transaction is “peer to peer,” and each peer or “user” is anonymous. There is no middlemen such as banks or credit card companies that monitor and clear each transaction. Instead, there are companies, groups, and private individuals who reconcile transactions and are awarded bitcoins in exchange.

“$100 in bitcoin in 2010 is worth $75 million today.”

I love these headlines. Here is another fun fact: the first material items purchased with bitcoin was two pizzas. The “user” paid 10,000 BTC – about $25 at the time. In today’s dollars (6/15/17), that pizza cost over $22,000,000.

You may have seen these headlines, but what drove this value increase? To put it simply: demand. Demand is affected by a number of things (who accepts it as a form of payment, transaction volume, liquidity, tax treatment, security, news articles, etc.), but the demand has rose significantly since 2010 which has driven the price increase. As I mentioned before, there are a set amount of 21 million bitcoin, so the currency is designed to be deflationary. As its demand increases, its price will increase.

Investing in Bitcoin

While the headlines are fun to read, it is difficult to give investment advice regarding the currency. It is relatively new (created in 2009). There are very limited laws and regulations with regards to bitcoin. It is not widely accepted as a form of payment. There has been high volatility in the past. Ultimately the future of bitcoin is still very uncertain, but we will be staying up to date with the currency to keep you informed.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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Any opinions are those of Nick Boguth and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance may not be indicative of future results. Sources: https://www.washingtonpost.com/news/on-small-business/wp/2017/05/23/100-of-bitcoin-in-2010-is-worth-75-million-today/?utm_term=.cce93f146de2 http://www.businessinsider.com/bitcoin-pizza-day-passes-2000-20-million-2017-5

Webinar in Review: 2017 Mid-Year Investment Update

Co-Contributed by: Angela Palacios, CFP® and DewRina Lee

On June 15, 2017, our Director of Investments, Angela Palacios, CFP®, and Portfolio Administrator, Jaclyn Jackson, covered some interesting topics on the current state of the economy, markets, and politics. Overall, it has been a quiet year with markets marching upwards steadily, with a bit of volatility creeping into technology stocks over the past week.

Here is a recap of key points from the “Mid-Year Investment Update” webinar:

• The Fed Meeting Last Week

  • The Fed approved its second rate hike of 2017 even with inflation running below the central bank’s target of 2%.

  • Diversification remains important in fixed income portfolios.

• Auto Industry

  • Despite record auto sales last year, the vehicles on car-dealer lots remained near record highs earlier this year.* The first quarter of 2017 saw nearly a three month supply sitting on lots.

  • Some producers have already offered buyout packages or announced shutdowns over the summer.

  • The automotive industry is known for its volatile nature, and even now is experiencing a lot of disruptions—electric vehicles, driverless vehicles, and companies like Uber are changing the auto industry.

• Markets

  • Are there any indications of an approaching recession? The index of leading economic indicators has been steadily growing since 2009 with no trend of flattening that you normally see when headed into a recession.

  • Markets have been said to be expensive.

    • Valuations of the S&P 500 are slightly above average for the past 25 years (17.5 versus 16 on average).

• Fiscal Policy

  • If tax cuts and infrastructure spending were to occur, they could offset the potential drag that rising interest rates may have on growth in the U.S.

  • How can this be achieved? Tax reform requires 60 votes (the majority vote is currently at 52) or through budget reconciliation, which can only be done once per year.

• Active/Passive Discussion

  • Not an all or nothing choice. The Center utilizes a blend of lower-cost index investments and we select active managers to complement the core investments to achieve a specific goal such as adding potential outperformance or reducing risk.

•  Trade settling cycle will shorten from 3 to 2 days in September.

  • Reducing credit and counterparty risk, increased market liquidity, lowering collateral requirements.

If you missed the webinar, take twenty minutes and please check out the replay below. If you have questions about the topics discussed, please give us a call!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

DewRina Lee is an intern at Center for Financial Planning, Inc.®

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Any opinions are those of Angela Palacios, CFP®, and DewRina Lee and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. *Sources: https://www.edmunds.com/car-news/auto-industry/new-vehicle-inventory-swells-in-february.html

The Potential Impacts of Student Loans on your Credit Score

Contributed by: Josh Bitel

For those of us lucky enough to have entered the work force in the past few years, student loan repayment can cause a significant impact, either positive or negative, on your credit score.

Getting Started

Beginning to repay these loans after the precious six to nine month grace period has expired can affect your ability to obtain other credit if not handled properly. One way to find out how you’re being affected is to pull a copy of your credit report. There are three major credit reporting agencies (Experian, Equifax, and Trans Union) and you should get a copy of your credit report from each one (click here to read our blog on how to get your free annual credit report. Student loan institutions aren’t required to report information to all three bureaus, although many do, which is important to keep in mind. If you're repaying your student loans on time, these disciplined repayments will actually help your credit score. Conversely, if you are delinquent on payments or worse, default on your loans, your credit report can take a beating, potentially crippling your chances of obtaining other credit.

Credit Score Factors

Many different factors are used to determine your credit score. Some of these factors are more crucial than others. Among these critical factors are:

• Your payment history. Meaning the consistency and punctuality of payments and how long your payment history is.

• Your outstanding debt and amounts you owe on these accounts. How close your account balances are to your defined limits is also taken into consideration.

• How long you've had credit. How long specific accounts have been open, and how long it has been since you've used each account

• New credit and new inquiries. This means outstanding applications for new credit as well as additional inquiries for your credit reports, whether by institutions or yourself, can impact your credit score.

• For a deeper look at your credit score composition, check out our blog from last year.

How Student Loans Can Affect your Credit Score

If you consistently make your student loan payments on time, your credit score should not be negatively affected. A nice tip to ensure consistency is to set up an auto-pay from a bank account. Most loan institutions will allow you to set up an automatic withdraw from your bank account, eliminating the need to remember to pay each month. As an added bonus, some institutions may even offer an interest rate discount for setting this up!

Prospective creditors may look at other factors when analyzing your debt, and student loans can make this tricky. One example of this may be if you are in a lower-paying job, this makes your debt-to-income ratio unfavorable for some creditors. Another example may be your principal balances being largely unchanged in the early stages of repayment, which is common with long term repayment schedules, and some lenders may view this as a lack of paying down debt.

It is important to monitor your credit history from all three bureaus regularly. If you find that your repayment history is not being reported correctly, contact your lender to make this correction.

Suggestions to Help Reduce the Burden

Being overburdened with debt can feel suffocating, here are some suggestions to take some weight off your shoulders:

• Pay off your student loan debt as fast as possible. Doing so will help reduce your debt-to-income ratio, even if your income doesn't increase, which can make your credit score more favorable to lenders.

• If you're struggling to repay your student loans and are considering asking for forbearance, ask your lender about any other options you may have. Interest-only payments are a cheaper alternative, although they may not reduce principal.

• Ask your lender about a graduated repayment option. This means making smaller payments in the early years of the loan, with larger payments coming in the later years.

• If you're really strapped, you can explore longer term options. Much like a home, when a longer repayment term is selected, you will likely be paying more in interest over the life of the loan, but the monthly payment can be significantly reduced.

• If all else fails, don’t ignore your student loans. Generally these loans won’t be discharged even in a bankruptcy situation. Talk to your lender about the options available for you, this can be crucial to maintaining a favorable credit history.

If you have any questions about refinancing your student loans or improving your credit score, please contact your Financial Planner here at The Center, we’re always happy to help!

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

Dealing with the Loss of a Spouse

Contributed by: Sandra Adams, CFP®, CeFT™

Whether you have time to prepare for it or it is sudden, the loss of a spouse is one of life’s most traumatic events. For most, it means the loss of one’s soul mate and life partner, one with whom so many past memories and future goals and dreams are woven.  If you have recently lost a spouse or know someone who has, it is an understatement to say that there is an initial feeling of being overwhelmed – there is so much to do at a time when you feel the least capable (and the one with whom you’ve always shared the decision making duties in the past is no longer there to help you). There seem to be lots of people around but you are feeling numb, lost, and alone. 

To make things a little easier to handle at this time, you can break things down into things you really need to do now, things that need to be done soon, and things that can be done later. 

There are very few things that need to be done immediately/now (see my previous blog: Dealing with Death: A Financial Guide). We often encourage clients at this time to do only what is absolutely necessary and leave any bigger decisions for much later when you find yourself in a better place where you can think more clearly and confidently. This space we provide is called the Decision Free Zone – it gives you permission for yourself (and others) to not make any big decisions until you are comfortable moving forward in this time of transition.

Starting soon, it’s important to make sure you are taking care of yourself; eating well, trying to get enough rest, exercising, and trying to stay social. Support groups and counselors can be extremely helpful during this time. You will also need to meet with your professional advisors to make sure needed details and changes are taken care of on financial accounts, legal documents, etc. You will work with your financial planner to determine your income and budget needs for yourself going forward during this transition period, determine how cash will flow, etc. Decisions during this time can take months to years to refine and complete.

Later (and depending on the person this can be a few months or a few years since your spouse’s death), you will be able to look forward and visualize your new life and future. You will be able to work with your advisor to create a Bliss List that will include new goals and a plan for your “new normal.” You will determine: how you want to live your life going forward; what makes you feel joyful and fulfilled; and what is on your bucket list that is left undone? 

The devastation that you feel with a loss of a spouse seems insurmountable. With time, self-care, and the help of your financial planner who can hold your hand through the painful transition, for as long as it takes, you will be able to get through this! If you or someone you know has suffered the loss of a spouse and could use our guidance, please contact us at Sandy.Adams@centerfinplan.com.

Sandra Adams, CFP® , CeFT™ is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Opinions expressed are those of Sandra Adams and are not necessarily those of Raymond James. Raymond James Financial Services and its advisors do not provide advice on tax or legal issues, these matters should be discussed with the appropriate professional.

Planning Ahead: How Having an Estate Plan can avoid a Headache

Contributed by: Matt Trujillo, CFP®

Can you believe 2017 is half over already?! That New Year’s resolution that you had to get your estate planning documents drafted is already getting a little stale. For those procrastinators amongst you, I thought I would write about what happens if you pass without a will or trust in place.

First let’s define what the legal term is for people that pass away without a valid will or trust in place. The term used is “Intestacy.”

What is intestacy?

You are said to have died intestate if you pass without a valid will. Intestacy laws govern the property distribution of someone who dies intestate. Each of the 50 states has adopted intestate succession laws that spell out how this distribution is to occur, and although each state's laws vary, there are some common general principles. The laws are designed to transfer legal ownership of property the recently deceased owned or controlled to the people the state considers their heirs. These laws also control how these individuals are to receive this property and when the property is distributed.

Example:

Frank is a Michigan resident and is married with two minor children. He keeps meaning to write his will but hasn't gotten around to it yet. One day, Frank gets hit by a truck while crossing the street and dies instantly. Because he has no will, the intestate succession laws of Michigan govern how his property is distributed. Under Michigan law, 50 percent of Frank's property passes to his wife, and 50 percent passes to Frank's two minor children (25 percent each). Had Frank had a will, he could have left everything to his wife.

Technical Note:

Real property is distributed under the intestacy laws of the state in which it is located. Personal property is distributed under the intestacy laws of the state in which you are domiciled at the time of your death.

Why should you avoid intestacy?

• Cost

  • Intestacy can be more costly than drafting and probating a will. In most states, an administrator must furnish a bond, where you can often waive this requirement in your will. Also, an administrator's powers are limited, and he or she must get permission from the court to do many things. The cost of these proceedings is paid by your estate.

• You can't decide who gets your property

  • State intestacy laws will determine who receives your property. These laws divide up your property among your heirs, and if you have no heirs, the state itself will claim your property.

  • Unlike beneficiaries under your will who can be anyone to whom you wish to leave property, heirs are defined as your legal spouse and specific relatives in your family. If the state can find no heirs, it could claim the property for itself (the property escheats to (goes to) the state). The laws of your state determine the order in which heirs will receive your property, the percentage that each will receive, and in what form they will receive it, whether in cash, property, lump sum, annuity, or other form.

• Special needs are not met

  • State intestacy laws are inflexible. They do not consider special needs of your heirs. For example, minor children will receive their share with no strings attached, whether they are competent to manage it or not.

• Heirs may be short-changed

  • The predetermined distribution pattern set out by state law can end up giving a larger portion of your estate to an heir than you intended for he or she to have. It may also leave one of your heirs with too little.

• You can't decide who administers your estate

  • If you die intestate, the probate court will name an administrator to manage your estate. You will have no say in who settles your estate.

• You have no say in who becomes a guardian for your minor children

  • A court will appoint personal and property guardians for your minor children, since you didn't specify otherwise. You will also expose the assets you leave your child to the management skills of someone you may not approve of.

• Relations take priority over friends and others

  • State intestacy laws will distribute your property to family members in a preset pattern. These laws do not take your relationship with your family into account when dividing up your estate. As a result, that brother that you haven't spoken to in 20 years may end up with a portion of your assets that you'd rather he not have.

• Tax planning options are eliminated

  • Without a will or some other means of disposing of your property, you can't plan to minimize or provide payment of income or estate taxes.

• Family fights can occur

  • Who gets Grandma's jewelry? Or what about that stamp collection that you began 30 years ago? Distribution by intestacy law provides no answers to specific questions like these. If these questions cannot be resolved peaceably, lawsuits may result or the property in question may end up being sold and the proceeds distributed to the squabbling family.

How is property distributed under intestacy?

The pattern of distribution varies immensely from state to state. You must check with your state to find out what its intestate's will looks like. Generally, the rules are as follows:

• If you leave a spouse, but no children, the spouse takes the entire estate

• If you leave a spouse and children, each takes a share

• If you leave children and no spouse, the children take the entire estate in equal shares

• If you leave no spouse or children, the entire estate goes to your parents

• If you leave no spouse, children, or parents, the entire estate goes to your siblings (or your siblings' descendants)

• If you leave none of the above, the entire estate goes to your grandparents and their descendants (your aunts, uncles, and cousins)

• If you leave no heirs, the next takers are your deceased spouse's heirs

• If there are no heirs on either side, the next to take are your next of kin, those who are most nearly related to you by blood

• If there are no next of kin, your estate escheats to the state

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. While we are familiar with the legal and tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on legal or tax matters. These matters should be discussed with the appropriate professional.