getting married ebook

Getting [email protected]

www.LifeFocus.com

LifeFocus.comT. Young

March 28, 2010

Table of ContentsPrenuptial Agreements ..................................................................................................................................... 7

What is it? ................................................................................................................................................ 7

When can it be used? .............................................................................................................................. 7

Strengths ..................................................................................................................................................7

Tradeoffs ..................................................................................................................................................8

How to do it .............................................................................................................................................. 9

Tax considerations ...................................................................................................................................11

Questions & Answers ...............................................................................................................................12

Money Issues That Concern Married Couples ..................................................................................................13

What is it? ................................................................................................................................................ 13

Budgeting your money ............................................................................................................................. 13

Saving and investing your money ............................................................................................................ 16

Establishing good credit ...........................................................................................................................17

Insurance Issues that Concern Married Couples ..............................................................................................18

What is it? ................................................................................................................................................ 18

Health insurance ...................................................................................................................................... 18

Life insurance ...........................................................................................................................................18

Disability insurance .................................................................................................................................. 19

Other types of insurance ..........................................................................................................................19

Property Ownership Issues that Concern Married Couples ..............................................................................20

What is it? ................................................................................................................................................ 20

Joint ownership ........................................................................................................................................ 20

Sole ownership .........................................................................................................................................21

Community property .................................................................................................................................21

Integrating Employee and Retirement Benefits When You Marry .....................................................................22

What is it? ................................................................................................................................................ 22

Employee benefits ....................................................................................................................................22

LifeFocus.com Page 2 of 74

March 28, 2010See disclaimer on final page

Employer-sponsored retirement plans ..................................................................................................... 23

Filing Status ...................................................................................................................................................... 24

What is it? ................................................................................................................................................ 24

Your filing status depends on whether you are considered married or unmarried ...................................24

Planning considerations for married couples ........................................................................................... 25

Second-Income Analysis (After-Tax Benefit of Both Spouses Working) ...........................................................27

What is a second-income analysis? .........................................................................................................27

What information must you gather to perform an analysis? .....................................................................27

Which tax considerations are especially important? ................................................................................ 27

Unlimited Marital Deduction .............................................................................................................................. 29

What is the unlimited marital deduction? ................................................................................................. 29

How does a gift of property qualify for the unlimited marital deduction? ..................................................30

How do you use the unlimited marital deduction? ....................................................................................31

What if your spouse is not a U.S. citizen? ................................................................................................31

Spousal IRAs .................................................................................................................................................... 32

What is a spousal individual retirement account (IRA)? ...........................................................................32

Traditional spousal IRAs and Roth spousal IRAs .................................................................................... 32

How much can you contribute to a spousal IRA? .................................................................................... 33

Spouse as Beneficiary of Traditional IRA or Retirement Plan ...........................................................................34

What is it? ................................................................................................................................................ 34

The law may give your spouse certain rights in your retirement plan ...................................................... 34

Naming your spouse as beneficiary may not affect required minimum distributions (RMDs) during yourlife ............................................................................................................................................................ 34

Advantages of naming your spouse as beneficiary ..................................................................................35

Disadvantages of naming your spouse as beneficiary .............................................................................36

Merging Your Money When You Marry .............................................................................................................38

Discuss your financial goals .....................................................................................................................38

Prepare a budget ..................................................................................................................................... 38

Bank accounts--separate or joint? ........................................................................................................... 38

Credit cards ..............................................................................................................................................38



Insurance ................................................................................................................................................. 38

Employer-sponsored retirement plans ..................................................................................................... 39

Getting Started: Establishing a Financial Safety Net ........................................................................................ 40

How much is enough? ..............................................................................................................................40

Building your cash reserve .......................................................................................................................40

Where to keep your cash reserve ............................................................................................................ 40

Review your cash reserve periodically .....................................................................................................41

Establishing a Budget ....................................................................................................................................... 42

Examine your financial goals ................................................................................................................... 42

Identify your current monthly income and expenses ................................................................................42

Evaluate your budget ............................................................................................................................... 42

Monitor your budget ................................................................................................................................. 42

Tips to help you stay on track .................................................................................................................. 42

Life Insurance at Various Life Stages ............................................................................................................... 44

Footloose and fancy-free ......................................................................................................................... 44

Going to the chapel ..................................................................................................................................44

Your growing family ..................................................................................................................................44

Moving up the ladder ................................................................................................................................45

Single again ............................................................................................................................................. 45

Your retirement years ...............................................................................................................................45

Life Insurance Basics ........................................................................................................................................46

The many uses of life insurance .............................................................................................................. 46

How much life insurance do you need? ................................................................................................... 46

How much life insurance can you afford? ................................................................................................ 46

What's in a life insurance contract? ......................................................................................................... 46

Types of life insurance policies ................................................................................................................ 47

Your beneficiaries .................................................................................................................................... 47

Where can you buy life insurance? ..........................................................................................................48

Do You Need Disability Income Insurance? ......................................................................................................49



A look at the odds .................................................................................................................................... 49

What would happen if you became disabled? ..........................................................................................49

But isn't disability coverage through an employer or the government enough? .......................................49

Making the Most of Your Group Health Benefits ...............................................................................................51

Understand what you have ...................................................................................................................... 51

Ask before you need it ............................................................................................................................. 51

Be proactive ............................................................................................................................................. 52

What happens when you lose coverage? ................................................................................................ 52

As your lifestyle changes, so do your insurance needs ........................................................................... 52

Planning for retirement .............................................................................................................................53

What can you do if a claim is denied? ......................................................................................................53

What if you are unhappy with your health care? ......................................................................................53

Stay informed ...........................................................................................................................................53

Estate Planning: An Introduction .......................................................................................................................55

Over 18 .................................................................................................................................................... 55

Young and single ..................................................................................................................................... 55

Unmarried couples ...................................................................................................................................55

Married couples ........................................................................................................................................55

Married with children ................................................................................................................................56

Comfortable and looking forward to retirement ........................................................................................56

Wealthy and worried ................................................................................................................................ 56

Elderly or ill ...............................................................................................................................................56

Retirement Planning: The Basics ......................................................................................................................57

Determine your retirement income needs ................................................................................................57

Calculate the gap ..................................................................................................................................... 57

Figure out how much you'll need to save .................................................................................................57

Build your retirement fund: Save, save, save ...........................................................................................58

Understand your investment options ........................................................................................................58

Use the right savings tools .......................................................................................................................58



Choosing a Beneficiary for Your IRA or 401(k) .................................................................................................59

Paying income tax on most retirement distributions .................................................................................59

Naming or changing beneficiaries ............................................................................................................59

Designating primary and secondary beneficiaries ................................................................................... 59

Having multiple beneficiaries ................................................................................................................... 59

Avoiding gaps or naming your estate as a beneficiary .............................................................................60

Naming your spouse as a beneficiary ......................................................................................................60

Naming other individuals as beneficiaries ................................................................................................60

Naming a trust as a beneficiary ................................................................................................................61

Naming a charity as a beneficiary ............................................................................................................61

Choosing an Income Tax Filing Status ............................................................................................................. 62

The five filing statuses and how they affect your tax liability ....................................................................62

You're unmarried if you're unmarried or legally separated from your spouse on the last day of the year 62

Married filing jointly often results in tax savings for married couples ....................................................... 62

You don't have to be separated to choose married filing separately ....................................................... 63

Head of household status offers certain income tax advantages .............................................................63

Qualifying widow(er) with dependent child offers the advantages of a joint return .................................. 63

Am I liable for my spouse's debts? ................................................................................................................... 65

Should I open a joint checking account with my spouse? .................................................................................66

I'm getting remarried. How will this affect my Social Security benefits? ........................................................... 67

Should I sign a prenuptial agreement to protect my assets when I remarry? ................................................... 68

I'm marrying someone with bad credit. How will this affect me? .......................................................................69

Should my spouse and I integrate our health insurance benefits? ................................................................... 70

What's the difference between an "injured spouse" and an "innocent spouse"? .............................................. 71

My spouse and I are filing separate returns. Can we both itemize our deductions? .........................................72

What kind of insurance can I buy to cover my diamond engagement ring? ......................................................73



Prenuptial Agreements

What is it?

Definition

A prenuptial agreement (also known as a premarital agreement, antemarital agreement, or prenup) is a binding contract executed by prospective spouses to define the rights, duties, and obligations of the parties during marriage and in the event of legal separation, annulment, divorce, or death.

What issues are addressed in a prenuptial agreement?

A prenuptial agreement should include you and your spouse's decisions in four basic areas:

• Assets and liabilities--What assets are you each bringing into the marriage? How much are they worth? Who owns them? Which ones will become marital property and which ones will continue to be owned by you or your future spouse individually? Will gifts and inheritances be shared or kept separate? What liabilities do you each have, such as back taxes or other debt?

• Divorce--Will there be alimony or a lump-sum payment? Will you divide or exempt appreciation of assets brought to the marriage? How will you divide assets purchased from joint funds?

• Estates--What will go to children from a previous marriage or children you may have in the future? Who gets what after either spouse dies?

• The contributions of each partner--How will you compensate for special contributions, such as one spouse limiting a career or losing pension benefits due to childrearing responsibilities? How will you compensate for one spouse bringing in more liabilities to the marriage?

When can it be used?

Draw up a prenuptial agreement before you get married

Financial planners generally recommend that couples consider entering into a prenuptial agreement before marriage if they have substantial assets (especially if there is an imbalance in their assets), if one or both may inherit substantial assets, or if they have children from previous marriages. Small-business owners and the elderly are also strong candidates for prenuptial agreements, as well as couples in which one spouse will be supporting the other spouse through professional school (e.g., law or medical) so that the supporting spouse will share fairly in the professional's future income.

If the prospective spouses are young and have comparable net worths, an agreement may provide little benefit. As a precaution, however, most couples should at least discuss the issue with a financial advisor before getting married.

Strengths

Protects your premarital property

If you combine your assets with those of your spouse after you get married, you risk losing them in the event of divorce. To preserve your premarital property, keep all of your assets in your own name after you are married and designate ownership of your property in a prenuptial agreement. Keep in mind that joint ownership can make your assets marital property, which is subject to a property settlement.



Enables you to provide for your family members

A prenuptial agreement can give you the security of knowing that your loved ones will be provided for in the manner in which you intend. If you have children and decide to remarry, such an agreement can ease the fears of your children over how your estate is going to be divided.

A trust is a particularly useful tool in remarriage when you want to provide for your spouse after you die, but make sure your money ultimately goes to your own children, not your spouse's children. When used in conjunction with a prenuptial agreement, a trust eliminates or greatly reduces the possibility of a challenge by your spouse or other heirs, reduces legal costs, and avoids scrutiny by the court.

Reduces or avoids litigation costs

Considerable amounts of money can be lost by both spouses when divorce proceedings turn into a long, messy battle. By explicitly stating how property should be divided in the event of divorce, however, both sides can greatly reduce the fees charged by attorneys, expert witnesses, and appraisers. A prenuptial agreement can also reduce litigation costs associated with contesting the will of a deceased spouse.

Caution: Litigation costs may be a factor, however, if there is a breach of contract claim associated with the prenuptial agreement during divorce proceedings.

Offers you protection against your future spouse's creditors

If your future spouse incurred substantial debt prior to marriage, you may wish to protect your assets from his/her creditors. This can be accomplished in a prenuptial agreement by having your future spouse waive any claims to your assets, except in the event of divorce or death.

Another option is to set up a trust in conjunction with a prenuptial agreement. Assets placed in the trust prior to your marriage would not be owned jointly with your spouse and could not be considered marital property. Your spouse's creditors would therefore have no claim on your assets, but your own creditors might be able to go after them.

Enables you to protect your business assets

In cases where a business is owned by a small number of parties (e.g., a closely held business or a partnership), the owners may wish to prevent a spouse from obtaining voting rights or claims against the business. In such cases, the owners can enter into an agreement that requires each, in the event that they marry, to execute a prenuptial agreement in which the prospective spouse waives all rights to the owner-spouse's interest in the business in the event of divorce or death.

The co-owners may also wish to enter into a buy-sell agreement, whereupon the death of a shareholder or partner, the remaining owners would be required or given the first option to purchase the decedent's interest in the business for a specified amount over a specified period of time.

Tradeoffs

Prenuptial agreements can become outdated

What was fair the day you got married could be completely unfair a few years later. The birth of children that requires one spouse to leave work, or a move that is advantageous to one spouse and detrimental to the other, are examples of changes that could affect the fairness of the agreement. Once the balance shifts, a judge is likely to void the contract, and his or her determination of fairness--not yours--will prevail.

The good news is that, like any legal contract, a prenuptial agreement can be amended or modified to meet your or your spouse's needs as conditions change during the marriage.

Tip: As a precaution, review and update your prenuptial agreement every few years or following



significant events such as a change in economic circumstances or the birth of children.

Relationships between your future spouse or family members may be damaged

Prenuptial agreements are far less likely to damage relationships between couples and their families when they are negotiated for people who have been previously married and who have children from previous marriages. In these cases, each party has loyalties to third parties--usually their children--and each has a legitimate interest in protecting the rights of their children to inherit his or her estate.

A more difficult situation can arise when a prenuptial agreement is negotiated between two people who have never been married before and have no children or third parties they are obligated to support. In such cases, the agreement is often negotiated at the suggestion of the parents, whose concern may be to minimize any financial risk incurred by their child as a result of his or her marriage. In this case, a family's suggestion to create an agreement could be construed as hostility or distrust.

Prenuptial agreements aren't cheap

A lawyer might charge you $750 for a simple prenuptial agreement, but the majority of agreements are fairly complex and cost between $3,000 and $5,000.

Tip: The price may be worth it, since a contested divorce could be far more costly, both in legal fees and emotional strain.

How to do it

Allow plenty of time between the signing of the prenuptial agreement and the wedding

In order for a prenuptial agreement to be valid, it should be written only after you and your future spouse have had enough time to negotiate satisfactory terms. In other words, the longer the time between the signing of the agreement and your wedding, the better. If you wait until the night before the wedding to give your future spouse a prenuptial agreement to sign, it probably won't be considered valid later on, should it be contested. Time may also be needed to properly value assets such as a small business.

Obtain independent counsel

Although there is no requirement that you and your spouse be represented by separate attorneys when drafting a prenuptial agreement, both parties must be offered the opportunity to retain independent counsel. Be aware, too, that a judge may scrutinize the agreement more carefully when one attorney represents both parties. Both you and your prospective spouse should therefore have your own lawyers: If your attorney handles everything for both you and your prospective spouse, a court will probably rule that your spouse was not adequately represented, and the prenuptial agreement will be disregarded.

Prenuptial agreements drawn up without an attorney's help may or may not hold up in court. However, certain variables within a prenup that an attorney would know to look out for could be overlooked by a couple drawing up an agreement alone.

Provide full and accurate disclosure of financial information

The key to a solid prenuptial agreement is full and fair disclosure of you and your future spouse's income, assets, and liabilities. By presenting an accurate snapshot of your respective financial positions before you are married, you will both be able to track the asset gain or loss and come to a fair decision in the event of divorce.

Caution: If you are getting divorced and your spouse uncovers assets that you did not declare in your prenuptial agreement, a court may not uphold the contract. For this reason, lawyers often advise wealthy clients to overestimate their net worth rather than minimize it when drawing up a prenuptial agreement. Usually, both prospective spouses will exchange financial statements listing all assets and sources of income. This information can be obtained from sources such as bank statements, cancelled checks and old check registers, savings account passbooks, income tax



returns (both personal and business), estate and gift tax returns, financial reports, loan applications, and income and balance sheets for a business. Both parties must also be thorough about disclosing any debts and financial obligations, including child support, alimony, or back taxes.

Make sure the agreement is free of any hint of duress

The court is likely to throw out any agreement that it determines was made under emotional stress, physical or mental disability, or threat of force. Many lawyers will videotape the signing of the agreement to show that both sides were fully aware of what they were doing and acted of their own free will.

Example(s): Amusement park developer Ronald Bump has decided to marry his girlfriend Darla, an aspiring acrobat. Having lost a substantial portion of his multimillion-dollar fortune to his first wife, Imelda, however, Ronald has a prenuptial agreement drawn up that would allow him to hold on to his remaining assets if his marriage to Darla fails. Although she is deeply in love with Ronald, Darla feels pressured and is uncertain about signing the agreement. "Why would Ronald do this to me two weeks before our wedding?" she asks Bumpy the Clown. "After all," she rationalizes, "he left Imelda to be with me--and our twins are due in less than a month!" Bumpy tells her that Ronald probably wants to make sure that she and the babies are properly taken care of in the event of his death, and Darla reluctantly signs the agreement two days before marrying Ronald at the Bumptown U.S.A. theme park.

Example(s): Fast forward two years: Ronald and Darla's prenuptial agreement is thrown out during divorce proceedings after the judge decides that Darla signed the agreement under duress.

Be fair

If your spouse is dependent on you financially, the provisions of your prenuptial agreement cannot leave him or her destitute in the event of divorce. It is against the law for the court to violate public policy (i.e., place your spouse on public assistance), and a judge will likely rule against you.

The fairness of an agreement, however, varies from state to state. Although several states have adopted the Uniform Premarital Agreement Act's requirement that a prenuptial agreement not be unconscionable at the time it was executed, other courts have held that the agreement must be fair at the time of divorce. Some states require that it be fair both at the time of execution and at the time of divorce. Determining whether an agreement is unconscionable is based on the circumstances and facts of each case, as certain provisions are more likely than others to be considered unconscionable. In the case of death, most states include a provision in their probate laws preventing one spouse from completely disinheriting the surviving spouse. These laws generally give the surviving spouse the right to elect against what was provided in the will and instead take a set percentage of the deceased spouse's assets. Nevertheless, prenuptial agreements in which a surviving spouse gives up his or her right to an elective share have been deemed enforceable. To ensure that the terms of the agreement will be enforced, the agreement should state that the new spouse agrees to waive all claims against specific assets and instead agrees to satisfy any marital property rights only with other assets in the event of divorce or death.

Distinguish between marital property and separate property

A prenuptial agreement should clearly differentiate between marital property and separate property. Marital property generally includes all assets that were acquired by either or both spouses during the marriage. Separate property falls into three categories: what you bring into the marriage, what you inherit during the marriage, and what you receive during the marriage as a gift. Be sure to familiarize yourself with the laws of your state pertaining to separate property and marital property, since different states have different definitions of what constitutes one or the other.

If you want to keep your assets separate when you marry, a trust is an excellent option. If the trust is set up in conjunction with a prenuptial agreement, assets placed in the trust are owned by the trust and are not considered marital property during the marriage, even in community property states.

Caution: If you set up a trust without a prenuptial agreement, you may have little or no protection, since a court could consider assets in the trust marital property subject to division. Your spouse's signature on a prenuptial agreement would prove that you did not use the trust to fraudulently



transfer your assets out of your spouse's reach.

Consider including a "triggering event" within the agreement

When included in a prenuptial agreement, a triggering event (e.g., the sending of a registered letter) could be used to automatically initiate divorce proceedings. It would also distinguish between marital property and separate property as of the date of the event. Such a strategy could work to your advantage, especially if your agreement is based on providing your spouse with a percentage of your wealth and you are anticipating future earnings or an inheritance.

Tax considerations

Income tax

Executing a prenuptial agreement does not usually result in any immediate tax consequences. Tax consequences do arise, however, after one of two events--divorce or death--activates the terms of the contract. To properly plan for your desired tax consequences, you should be aware of the tax ramifications of all property transfers you made before signing the agreement. These not only include transfers made upon divorce or the death of you or your spouse but also transfers made at the time the agreement is executed and during marriage. For more information, see our separate topic discussion, Tax Issues Related to Marriage.

Tip: Since tax laws are constantly changing, you should have your agreement examined periodically to ensure that it accurately reflects the wishes of you and your spouse.

Clarify tax responsibilities within the agreement

A prenuptial agreement should clarify who will pay to defend a tax audit, if necessary, as well as who will pay any assessed taxes, interest, and penalties. Some agreements stipulate that the couple will file as married filing separately so that the tax problems of one spouse will not affect the other--even though the couple will end up paying more taxes that way.

Tip: Even when spouses file their taxes as married filing jointly, one spouse may be protected against the actions of the other under innocent spouse rules, which were revised by the IRS Restructuring and Reform Act of 1998. Under these rules, although each spouse who signs a joint return is fully responsible for the accuracy of the return as well as the payment of tax, if one spouse failed to report income or reported deductions or other items improperly, the other spouse can sometimes be relieved of the tax, interest, and penalties related to these items.

Filing joint tax returns

If you choose to file as married filing jointly, both you and your spouse should be entitled to receive copies of the return and supporting documents each year. By doing so, you will avoid future problems in the event of divorce negotiations, if either you or your spouse cannot access necessary tax records.

Gift tax

Generally, property transfers made before marriage may have adverse gift tax consequences, whereas transfers made during marriage are not subject to gift or income tax. When drawing up a prenuptial agreement, therefore, you should stipulate that any transfer of property occur after the wedding.

Example(s): Ken and Sue have decided to get married. Ken owns a substantial share in Icy Frozen Foods that he wants to hold on to if the marriage doesn't work out. He and Sue decide to draw up a prenuptial agreement that provides for Ken to transfer $250,000 to Sue in exchange for her release of all marital claims against any of Ken's property in the event of divorce. A month before the wedding, Ken transfers stock worth $250,000 to Sue. Ken had purchased the stock several years ago for $50,000. The transfer of the stock causes Ken to have a taxable gain for income tax purposes of $200,000. In addition, Ken has made a gift (subject to the gift tax rules) of $250,000, and Sue's basis in the stock is $250,000.



Example(s): If the transfer of the stock had occurred after the wedding, Ken would not have recognized gain on the transfer, since property transfers between spouses do not result in recognition of gain or loss. He would have also avoided the gift tax because of the unlimited marital deduction for gifts between spouses.

Estate tax

When a prenuptial agreement takes effect due to the death of a spouse, assets passing from the deceased spouse to the surviving spouse under the terms of the agreement may qualify for the estate tax marital deduction. The deduction cannot exceed the value of the adjusted gross estate, however, and only certain assets qualify for it. For a complete list of property that qualifies for the estate tax marital deduction, see Schedule M (Bequests, etc., to Surviving Spouse) of Form 706.

Questions & Answers

Does a prenuptial agreement mean that the prospective spouses don't trust each other?

Perhaps, but a prenuptial agreement is generally grounded in realism rather than a lack of trust. For instance, an older couple marrying for the second time may simply want to protect the inheritances of their children. Some younger couples, on the other hand, might feel that they will save money in the future if the marriage doesn't work out.

Can a domestic partner agreement that you had drawn up when you decided to live together be converted to a prenuptial agreement?

Yes, by following these steps:

Review your domestic partner agreement and make any changes and updates that you have both agreed upon. Rewrite the contract and call it a prenuptial agreement. Be sure to state that the agreement is in contemplation of marriage and does not take effect until you marry. Since there is no good self-help resource for writing a prenuptial agreement, have your agreement reviewed by an attorney. Even a small mistake on your part can invalidate your agreement. Lastly, sign your new agreement in front of a notary.

Is it possible to write an ironclad prenuptial agreement?

Although you may have done everything correctly, you may still find yourself without an ironclad prenuptial agreement. In New York State, for example, anyone who signs a prenuptial agreement has six years from the time the agreement was signed to contest its contents.

Can a prospective spouse waive his or her right to retirement plan benefits in a prenuptial agreement?

In general, if the retirement plan is covered by the Employee Retirement Income Security Act of 1974 (ERISA), an individual can not agree to waive his or her statutory right to benefits under the plan as part of a prenuptial agreement. While ERISA allows a spouse to waive his or her right to plan benefits (for example, a spouse can waive the right to receive a qualified joint and survivor annuity), only an actual spouse (not a prospective spouse) can exercise those waiver rights. In addition, the waiver must comply with specific statutory procedures. However, it may be possible for a prenuptial agreement to provide that the prospective spouse agrees to waive his or her rights once the marriage is consummated. Consult a qualified attorney if protection of retirement plan benefits is important to you.



Money Issues That Concern Married Couples

What is it?

Marriage is an important step in anyone's life and brings many challenges with it. One of those challenges is the management of your finances as a couple. The money decisions that you make now as a couple can have a lasting impact on your financial future together. Careful planning of your finances can ensure that together, you achieve financial success.

Budgeting your money

In general

When you were single, you managed your finances in a way that was comfortable for you and that you understood--no one had to approve or disapprove of your financial decisions. Now that you are married, however, both you and your spouse have to agree on a system for budgeting your money and paying your bills.

Discuss financial situations

You and your spouse must discuss your respective financial situations and expectations, and take stock of your individual assets (what you own) and liabilities (what you owe). Revealing your financial situation is an important step when budgeting as a couple. If either of you has a financial problem, it is best to identify it now and begin solving it together. This is the time to address questions such as what do each of you earn, and what additional sources of income do you have? What do you own? Will both of you work now that you are married? Who will hold title to property acquired before and after the wedding? In addition, be sure to disclose all of your financial commitments. If you pay child support, let your partner know the amounts. If you have to repay student loans, discuss that as well.

The worksheets that follow will assist you in determining your current financial situation.

Assets

Bank Accounts (i.e., savings and money market accounts) $

Personal Investments (i.e., stocks, bonds, and mutual funds) $

Retirement Plans (i.e., IRAs) $

Real Estate $

Personal Property (i.e., cars, jewelry) $

Other $

TOTAL $

Liabilities

Credit Card Debt $

Personal Loans $

Auto Loans $

Mortgage $

Student Loans $



Other $

TOTAL $

Income

Annual Salary $

Other Sources of Income $

TOTAL $

Expenses

Housing (i.e., rent or mortgage, utilities, etc.) $

Food, clothing, transportation $

Discretionary (i.e., dining, vacations, gifts) $

TOTAL $

Discuss financial goals

After you discuss your financial situations, you should discuss your financial goals. You can start by each making a list of your short- and long-term financial goals. Short-term goals are those that can take anywhere from three to five years (e.g., saving for a down payment on a home or a new car). Long-term goals are those that take more than five years to achieve (e.g., saving for a child's college education or retirement). When you have each determined your individual financial goals, you should review your goals together to achieve common objectives. You can then focus your energy on those common objectives and strive to attain those goals (short- and long-term) together.

Decide on the type of bank account(s) you will keep

Decide whether you and your spouse will have separate bank accounts or a joint account. Advantages to consolidating your checking funds into one account include easier record-keeping, reduced maintenance fees, less paperwork when you apply for a loan, and simplified money management. If you do choose to keep separate accounts, consider opening a joint checking account for household expenses.

Caution: When sharing a checking account, be sure to keep track of how much money is in the account at all times since both of you will be writing checks that draw from the same account.

Prepare an annual budget

The first step in developing a financial future together as a couple is to prepare an annual budget. The budget will be a detailed listing of all your income and expenses over the period of a year. You may want to designate one spouse to be in charge of managing the budget, or you can take turns keeping records and paying bills.

Tip: Make sure that you develop a record-keeping system that both you and your spouse understand. Also, keep your records in a joint filing system so that you can easily locate important documents.

• Begin with your sources of income--list salaries and wages, alimony and child support, interest, and any other form of income that you and your spouse may have.

• List your expenses. It may be helpful to review several months' worth of entries in each of your checkbooks to be sure that you include everything. Put all the expenses that are paid monthly into one category, and put all other expenses (every other month, quarterly, semiannually, annually) into another. Some common expenses are:



• Savings • Major purchases

• Rent or mortgage payments

• Insurance

• Student loan payments • Car repairs

• Groceries • Clothing

• Pet care • Tax payments

• Utilities • Medical expenses

• Car payments • Gifts

• Credit card payments • Automobile gas

• Alimony/child support • Child day care

• Household items • Entertainment/dining out

• Personal care/grooming

• Estimate your expenses for each category. How much money do you spend on these items on a monthly basis and on an annual basis? Try to come up with a realistic amount for what you think you will spend in a year's time. Add another category to the irregular expenses list, and call it Contingencies. This can be a catchall category for expenses that you might not anticipate or budget for. The amount to budget for contingencies should be about 5 percent of your total budget.

• Add your sources of cash and uses of cash on an annual basis. Hopefully, you get a positive number, meaning that you are spending less than you are earning. If not, review your expense list to determine where you can cut your spending. Consider using computer spreadsheets or programs like Quicken for assistance.

Create a cash flow system

After you have developed a budget, you should create a system for managing your monthly inflow and outflow of cash. It is a good idea for both you and your spouse to become involved in this process--at least at first--so that both of you have a clear understanding of the costs of running the family and household.

Cash flow systems like the one described below are simple and painless to operate. Once they are established, you will find that making financial decisions becomes much easier because you have done your homework.

• Separate your regular monthly expenses from irregular expenses (every other month, quarterly, semiannually, annually) by using a different bank account for each. Otherwise, you may be tempted to use money that has been earmarked for something else. You should limit the number of checking accounts that you have in order to avoid confusion.

• Each time you get paid, deposit some money into an account for irregular expenses. The amount of money you deposit should be equal to the total amount needed for the irregular expenses, divided by the number of paychecks you each receive annually. In so doing, you will have the money for the outlay when it arises. The rest of your pay should go into your checking account, to be used for regular monthly expenses and savings.

• One variation to this system of cash flow management is to establish one or two additional bank accounts for one or both of you for personal spending money. Allocate the budgeted amount for personal expenses (e.g., lunches, haircuts, gifts) to this account. This way, you are free to spend the money in this account in any way you like without having to worry about meeting regular monthly



expenses. However, all of these bank accounts may have fees.

Saving and investing your money

In general

At some point in your married life, you will almost certainly encounter some large expenditures, such as a new home, your own business, or a college education for your children. Chances are, you won't be able to meet these expenditures from your current income. You and your spouse must discipline yourselves to set aside a portion of your current income for saving and investing your money to ensure its steady growth or, at the very least, protect it against loss.

Save a percentage of your earnings

When figuring out your budget, savings should be considered one of your monthly expenses. Think of savings as a fixed payment (like a car payment) that must be made every month. If you don't and you wait until the end of the month to save whatever you have not spent, you'll find that nothing ever seems to go into your savings account. A good rule of thumb is for you and your spouse to save 4 to 9 percent of your combined gross earnings while you are in your 20s and then double that savings percentage as you reach your 30s and 40s. In some cases, a dual-income couple may be able to live off one spouse's salary and save the other salary.

Example(s): Mary and Richard, a married couple in their 20s, earn a combined annual gross income of $60,000. Together, Mary and Richard save 5 percent of their combined gross income each year, or $3,000.

Example(s): As another example, Christine and Tom, a married couple in their 30s, earn a combined annual gross income of $80,000. Together, Christine and Tom save 10 percent of their combined gross income each year, or $8,000.

Build an emergency cash reserve

The savings that you accumulate can serve as an emergency cash reserve. Ideally, you should have in savings an amount that is comfortable for you to fall back on in case of an emergency, such as a job loss. A common formula used for calculating a safe emergency fund amount is to multiply your total monthly expenses by 6. When determining how much cash should be in your emergency fund, a major factor is your comfort level. If you and your spouse feel secure with your jobs and are confident that if you lost your current jobs you would be able to find a new one fairly quickly, an emergency fund of three times your monthly expenses should be sufficient. However, if either of you has an unpredictable income, you may want to have an emergency fund that is equal to 12 times your monthly expenses.

Example(s): Christine and Tom, a married couple in their 30s, plan to build up an emergency cash reserve. Both Christine and Tom are attorneys and feel quite secure with their present jobs. Christine and Tom have monthly expenses of $3,000 and plan to build up an emergency cash reserve that is equal to 3 times their monthly expenses, or $9,000 ($3,000 x 3).

Example(s): As another example, Mary and Richard, a married couple in their 20s, plan to build up an emergency cash reserve. Both Mary and Richard are employed as freelance writers and feel that their incomes are at times unpredictable. Mary and Richard have monthly expenses of $1,500 and plan to build up an emergency cash reserve that is equal to 12 times their monthly expenses, or $18,000 ($1,500 x 12).

Investing your money

When you have established an emergency cash reserve, you can begin to invest your money to target your financial goals. There are three fundamental types of investments: cash and cash alternatives, bonds, and equities. Cash and cash alternatives are relatively low-risk investments that can be readily converted into currency, such as money market accounts. Bonds, sometimes called debt instruments, are essentially IOUs; when you invest in a bond, you're lending money to the bond's issuer--usually a corporation or governmental



body--which pays interest on that loan. Because bonds make regular payments of interest, they are also known as income investments. Equities, or stocks, give you a share of ownership in a company. You have the opportunity to share in the company's profits and potential growth, which is why they're often viewed as growth investments. However, equities involve greater risk than either cash or income investments. With equities, there is no guarantee you will receive any income or that your shares will ever increase in value, and you can lose your entire investment. In addition to these three basic types of investments--also known as asset classes--there are so-called alternative investments, such as real estate, commodities, and precious metals.

No matter what your investment goal, your overall objective is to maximize returns without taking on more risk than you can bear. You'll need to choose investments that are consistent with your financial goals and time horizon. A financial professional can help you construct an investment portfolio that takes these factors into account.

Establishing good credit

In general

Establishing good credit is an important step in the path towards a solid financial future. A good credit history can enable you to make credit purchases for items that you might not otherwise be able to afford. Most creditors will require a good credit history before extending credit to you. If you do not have a credit history, it is important to establish one as soon as possible. If you have a poor credit history, you should take steps toward improving it right away.

Individual or joint credit

Married couples can either apply for credit individually or jointly. One of the benefits of applying for joint credit is that both you and your spouse's income, expenses, and financial stability are considered when a creditor evaluates your overall financial picture. However, applying for separate credit has its advantages. If you and your spouse ever run into financial problems (e.g., illness or job layoff), separate credit allows one spouse to risk damaging his or her credit history while preserving the other spouse's good credit. In addition, separate credit can also protect you and your spouse from each other. If you and your spouse cosign a loan or apply for a credit card, you are both responsible for 100 percent repayment of the debt. In other words, if your spouse does not pay his or her share, you can get stuck with paying the whole amount. On the other hand, if your spouse takes out a loan or applies for a credit card on his or her own, generally your spouse is solely responsible for the debt.

Tip: While the general rule is that spouses are not responsible for each other's debts, there are exceptions. Many states will hold both spouses responsible for a debt incurred by one spouse if the debt constituted a family expense (e.g., child care or groceries). In addition, in some community property states, both spouses may be responsible for one spouse's debts, since both spouses have equal rights to each other's incomes. You may want to discuss your state's laws with an attorney if you live in a community property state.



Insurance Issues that Concern Married Couples

What is it?

If you are married or planning to marry, you should determine how marriage impacts your insurance needs. The lack of proper insurance protection can lead a married couple into financial ruin. If you already have disability or life insurance policies, determine whether your existing coverage is adequate and update your list of beneficiaries. If you do not have either a disability or life insurance policy, consider whether or not your marital status changes your need for insurance. You should also review any existing policies held by you and your spouse (or spouse-to-be) and consider pooling them with one company or having multiple policies with one company in order to receive discounts and lower policy rates.

Tip: If your employer does not offer a particular type of insurance or if the amount of insurance offered is not adequate, consider purchasing an individual or private policy.

Health insurance

Because of the high cost of medical treatment, a poorly timed sickness or accident could be financially devastating to your family. To avoid a financial disaster during a medical crisis, you and your family should have health insurance.

Life insurance

In general

While you might not have felt the need for life insurance protection when you were single, it becomes important when you marry. Once married, you may find yourself with a spouse and/or children who are financially dependent on you. If you do not have life insurance, you will want to have a policy in place in order to make sure that your family's financial needs will be taken care of when you die. If you already have a life insurance policy, you should reevaluate the adequacy of your existing coverage.

How much life insurance do you need?

You should have enough life insurance to enable your family to continue the lifestyle they were accustomed to before your death. If you have children, you may want to make sure that your children's college education bills will be paid. At the very least, you will want to ensure that your family will be able to pay for burial expenses and pay off any of your debts. You can purchase the amount of protection that you need from either a term or cash-value policy. While both policies provide your beneficiaries with benefits at your death, they contain important differences. Term insurance provides you with pure death-benefit protection. In other words, if you die while the policy is in effect, the insurance company pays your beneficiary, and the policy does not build any cash value. Since term insurance is low cost, based on age, it is an attractive form of life insurance when you are younger and have minimal cash flow.

Although low-cost term insurance may have provided you with sufficient life insurance protection in the past, it does not provide you with the same type of benefits that come with the more costly cash value insurance. Cash value insurance provides you with protection besides serving as a savings vehicle. Although it is more expensive than term insurance, cash value insurance can be a useful financial tool for a married couple since it builds up cash value over time. The cash value can then help you fund long-term goals, such as buying a house, funding a child's college education, or providing you with savings for retirement.

Tip: When you reevaluate the adequacy of your existing coverage, you should keep in mind whether or not you and your spouse intend to start a family in the near future.

Tip: In addition to making sure you have adequate life insurance protection, you should examine



the beneficiary designations on your current policies, and make sure that they are up to date.

Disability insurance

In general

While life insurance ensures that your family is financially provided for at your death, disability insurance provides your family with income if you are unable to work as a result of a serious illness or injury. Disability insurance is a necessity if you have a family that depends on you for financial support. Although disability coverage can be expensive, depending on your age and the type of work that you do, it allows you to insure your most valuable asset: the ability to earn an income.

Tip: You should consider disability insurance even if your household has two wage earners since most dual-income families have expenses that rely on both incomes.

How much disability insurance do you need?

Generally, you should have enough disability coverage to ensure that you could continue to maintain your current lifestyle if you became sick or injured and could not work for a lengthy period of time. While most insurance companies won't insure you for your entire salary amount, you should look for a policy that provides benefits that replace at least 60 percent of your income. Benefits are received free of income tax for a policy that is paid for by the insured with after tax dollars.

Other types of insurance

Automobile insurance

Chances are that both you and your spouse own separate cars. If you each also have separate auto insurance carriers, you may want to pool your auto insurance with one company. Many insurance companies will give you a discount if you insure more than one car with them.

Homeowners/renters insurance

Whether you and your spouse own or rent a home, you need insurance to protect yourself against either the loss of your property or claims against you if someone injures him/herself on your property. If you already own a home, you may need to add your spouse's name to the policy. Consider having the same insurance company provide coverage for your home or apartment and your car. Many insurers will give you a discount if you carry more than one type of policy with their company.



Property Ownership Issues that Concern Married Couples

What is it?

The way that you as a married couple structure the ownership of your real or personal property is an important step in the financial planning of your future together. Whether you own a piece of real estate or a checking/savings account, the method of property ownership you choose can affect future sales of that property, divorce proceedings, or the distributions of an estate upon your death. If you live in a state that follows the traditional system of property ownership, you and your spouse can choose to either own property jointly or retain sole ownership of the property. If you and your spouse live in a community property state, both you and your spouse share equally any income earned and property that is acquired during marriage. For more information, see Forms of Property Ownership.

Joint ownership

Joint tenancy

A joint tenancy is the ownership of property by two or more persons and where each owner enjoys the same rights in the property. Title to the property is held by the group as a whole and not by the individuals who make up the group. A joint tenancy may come with the right of survivorship, meaning that if one of the joint owners/tenants dies, all rights pass equally to the remaining joint tenants. A joint tenant can sell his or her interest, but the purchaser becomes a tenant-in-common while the other owners remain joint tenants.

Tip: Right of survivorship is not automatic. Sometimes the right of survivorship must be explicitly stated. If you want a joint tenancy with right of survivorship, check whether it is automatic under your state's property ownership laws or whether you must explicitly state it.

Caution: A disadvantage of a joint tenancy is that it could result in an unintentional elimination of ownership.

Example(s): Jane and Hal decide to give the family summer home on Cape Cod, Massachusetts to their children Bob and Ken as joint tenants so that the home can stay in the family. Both Bob and Ken are married and have children. Ken later dies, and the property passes to Bob, the remaining joint tenant. Unfortunately, Ken's widow Sue and their child Fred end up with nothing.

Tenancy in common

A tenancy in common is the ownership of property by two or more persons who have an undivided separate interest in the property with a common right of possession. No tenant in common owns a specific part of the property. Instead, all of the tenants in common have an interest in the entire property. Unlike a joint tenancy, there is no right of survivorship with a tenancy in common. In other words, a tenant in common can transfer his/her interest in the property to anyone upon death.

Example(s): Jane and Hal decide to give the family summer home on Cape Cod, Massachusetts to their children Bob and Ken as tenants in common. As tenants in common, Bob and Ken have an undivided separate interest in the property with a right to possess the whole. Two years later, Ken decides to transfer his interest in the property to his son Fred. Now Bob and Fred own the summer home as tenants in common. One year later, Bob dies. In his will, Bob devises his interest in the summer home to his son Mark. Now Fred and Mark own the summer home as tenants in common.

Tenancy by the entirety

A tenancy by the entirety is one type of the ownership of property by a husband and wife. It is similar to a joint tenancy in that both the husband and wife share the right of survivorship. However, a part interest cannot be



transferred to another individual without the consent of both spouses. Like a joint tenancy, the tenancy by the entirety can result in the unintentional elimination of ownership. If one spouse dies, the property will go to the surviving spouse, regardless of the terms of the will.

Example(s): Jane and Hal own a home as a tenancy by the entirety. Hal has a child from a former marriage, Ron. Hal indicates in his will that he wishes to leave his interest in the home he owns with Jane to Ron. When Hal dies, his interest in the home will go to Jane under the right of survivorship, not Ron, despite the terms of his will.

Tip: Certain states will give the wife a life estate in any real property held at death by the husband, regardless of whether or not the husband and wife held property as tenants by the entirety.

Sole ownership

Sole ownership is when one individual has both the legal and beneficial ownership of property. One of the major advantages of sole ownership is the ease of property transfer during one's lifetime or upon one's death.

Example(s): Hal has sole ownership of a piece of property on Cape Cod, Massachusetts. Hal's wife Jane does not have any ownership interest in the Cape Cod property. In most states, Hal can transfer his entire interest in the property at any time during his lifetime or upon his death to his son from a prior marriage, Ron.

Community property

While most states follow common law rules as to the ownership of property, ten states are community property states: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. If you and your spouse reside in a community property state, property that either you or your spouse acquire during the marriage is considered the property of both of you, with each of you owning an undivided one-half interest in the property. No matter which of you acquires the property, title to half the acquisition passes to the other spouse by operation of law. Any property that either of you brings into the marriage, inherits during the marriage, receives as a gift during the marriage, or together agree is separate property is considered separate property of the owner-spouse.

Example(s): Hal and Jane live in California, a state that follows community property laws. During Hal and Jane's marriage, Hal purchases a house and receives his favorite uncle's gold coin collection as an inheritance. Although Hal purchases the house on his own, Jane receives title to half of the house by operation of law. Hal and Jane own the house together, each having an undivided one-half interest. As for the gold coin collection, Hal is the sole owner, since it was acquired as a result of an inheritance.

Tip: Another form of ownership for married couples is through a trust or QTIP trust.



Integrating Employee and Retirement Benefits When You Marry

What is it?

Marriage is a major life event that can change more than your last name or living situation. Your change in marital status can also alter the benefits you receive from your employer. When you marry, you and your spouse should determine how both of you can obtain maximum employee and retirement benefits at the lowest possible cost.

Tip: Many employers have fixed periods (the length of which varies, depending on the employer) for new spouses to sign up for various types of benefits. For example, you may only have 30-60 days after the wedding to add your spouse to your health insurance at work.

Employee benefits

Health insurance

Generally, health insurance costs less for a married couple than for two individuals. However, some insurance companies may offer only single or full family rates. If both you and your spouse work and have health insurance, you may want to consider integrating your health benefits. You should start by determining which of you has the better of the two plans. Once you determine which of the two plans is more attractive, either you or your spouse should obtain coverage under that plan and drop the less attractive plan. Factors to consider include variety of benefits and costs charged to the employee under each plan.

Example(s): Fred and Susan, a married couple, both work and have employer-sponsored health insurance. Fred's plan provides dental coverage, while Susan's plan does not. Since coverage for a married couple is cheaper than separate coverage for two individuals and Fred's plan provides more attractive benefits, Fred and Susan decide that Susan will obtain coverage under Fred's health plan and drop her existing coverage with her employer's health plan.

Tip: Job security is another factor that you and your spouse will want to consider when deciding whether or not to integrate employee benefits.

Tip: If you plan on having a family and you do decide to integrate your health insurance, make sure that the policy you choose offers pregnancy and maternity coverage.

Caution: If you cancel your health insurance plan in favor of coverage under your spouse's plan, you should be aware of any conditions for reinstatement under the canceled plan. If your spouse loses his or her job, you may want to resume coverage under your old plan. However, your old plan may require you to pass a physical in order for you to regain coverage.

Example(s): Fred and Susan decide that Susan will obtain coverage under Fred's health plan and drop her existing coverage with her employer's health plan. During a routine physical, Susan's doctor diagnoses her with a thyroid condition. A few months later, Fred loses his job and Susan decides to resume coverage under her old plan. Unfortunately, Susan's plan requires a physical as a condition for reinstatement under the plan. Since Susan has a thyroid condition, she is unable to pass the physical and is unable to regain coverage under her old plan.

See Health Insurance for a more comprehensive discussion on the various types of health plans that your employer can offer.



Other types of employee benefits

As a married employee, there are certain benefits you may want to consider that weren't necessary when you were single (e.g., life insurance). When you get married, you should contact your employer's human resources department in order to re-evaluate the benefits that are available to you. Adoption assistance and dependent care assistance can be valuable benefits for a couple wishing to start a family.

Employer-sponsored retirement plans

In general

If both you and your spouse participate in an employer-sponsored retirement plan, you should be aware of each plan's characteristics. Plans may differ as to matching of contributions, investment options, and loan provisions. Together, you should review each plan carefully, determine which plan provides better benefits, and then make that plan the focus of your investment strategy.

Tip: In addition to determining which employer-sponsored retirement plan provides better benefits, you should review and update beneficiary designations accordingly.

Matching of contributions

Some employer-sponsored retirement plans will match your contributions to the plan. If either you or your spouse's plan matches contributions, you should determine which plan offers the better match and take advantage of it.

Example(s): Richard and Mary, a married couple, both participate in employer-sponsored retirement plans. Both plans match employee contributions. Richard's plan matches contributions on a dollar-for-dollar basis up to 3 percent of compensation. Mary's plan matches $0.80 on the dollar up to 7 percent of compensation. Richard and Mary decide that they will fund Richard's plan until they exhaust his employer's match and then fund Mary's plan thereafter.

Investment options

In addition to matching contributions, your plan and your spouse's employer-sponsored retirement plan may differ in the kind of investment options they offer. Plans can offer a wide variety of investments, the performances of which may vary. You should compare the past performances of both plans by requesting performance information (e.g., rate of return) from the plan's sponsor. If the performances differ, you may want to favor the more profitable plan. Another factor to consider is the kinds of investment options the plans offer, such as offering company stock. A plan can also provide you with the opportunity to choose from just a few or among a wide variety of mutual fund investments.

Loans

You may find that some employer-sponsored retirement plans provide loans, while others do not. If you are considering using any contributions that you make to a plan for pre-retirement costs (e.g., a child's college education) or short-term goals (e.g., buying a home), you may want to favor a plan that has a loan provision.



Filing Status

What is it?

One of the first things that you have to determine when filing a federal income tax return is your filing status. There are five possibilities: unmarried (single), married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. Your filing status is important because it determines, in part, the types of deductions and credits available to you, the amount of the standard deduction that you may be entitled to, and the correct tax rate applicable to your taxable income. Depending on your situation, you may or may not have a choice regarding your filing status. If you have more than one option, you should choose the filing status that is most beneficial. Usually, this means the filing status that results in the lowest amount of total tax.

Your filing status depends on whether you are considered married or unmarried

Your marital status is determined as of the last day of the year

Your marital status for the entire tax year is determined according to your status on the last day of the tax year.

Example(s): You got married on December 31, 2009. You are considered married for all of 2009. Let's say instead that you got married on December 31, 2008 and got divorced on December 31, 2009. You are considered married for all of 2008 but unmarried for all of 2009.

Divorce and separate maintenance decrees

You are considered unmarried for the entire year if, on the last day of the tax year, you are unmarried or legally separated from your spouse by a divorce or separate maintenance decree.

Caution: State law governs your legal status under a decree of divorce or separate maintenance. If, under your state's laws, you are deemed married under a separate maintenance decree, you are considered married for purposes of filing federal income tax returns.

Caution: You are still considered married if you are separated under an interlocutory (not final) decree of divorce.

Caution: If you obtain a divorce solely for the purpose of filing tax returns as unmarried individuals (with the intent to remarry) and you remarry the same individual the following tax year, you and your spouse will be treated as if you were married during the tax year.

Legal annulments

If you obtain a court decree of annulment, which holds that no valid marriage ever existed, you are considered unmarried for the tax year, provided that you have not remarried.

Tip: You must also file amended federal income tax returns (Form 1040X) for all tax years affected by the annulment not closed by the statute of limitations for filing a tax return. These amended returns should amend previously filed tax returns to unmarried (or head of household if you qualify) filing status. The statute of limitations generally does not expire until three years after your original return was filed.

Caution: Consider carefully the tax consequences when deciding between a divorce and an annulment, particularly if you have been married for more than one tax year.



Married persons living apart

Generally, if you live apart from your spouse but are not legally separated by a decree of divorce or separate maintenance, you are still considered married. However, you are considered unmarried for the year if you meet all of the following conditions:

1. You file a separate return (meaning that you don't file jointly).

2. You paid more than half the cost of keeping up your home for the tax year.

3. Your spouse did not live in your home during the last six months of the tax year.

4. Your home was, for more than half the year, the main home of your child, stepchild, or adopted child, whom you can claim as a dependent. This qualification is also met if your home was the main home of a foster child (whom you can claim as a dependent) for the entire year.

Tip: Item 4 above is considered satisfied if your home was the main home of your child, stepchild, or adopted child for more than half the year (or a foster child for the entire year) and you could claim the child as a dependent but didn't because:

• You allow the noncustodial parent to claim the child by means of your written declaration, or

• The noncustodial parent provided at least $600 for the support of the dependent and claims the dependent under a pre-1985 agreement, or

• A decree or agreement that became effective after 1984 allows the noncustodial parent to claim the dependent regardless of the provision for support

Tip: If you are considered unmarried because of the above criteria, you probably qualify for head of household status.

Common law marriage

You are considered married if you live in a common law marriage that is recognized in the state where you now live or in the state where the common law marriage began. This is true even if you later moved to a state that does not recognize common law marriage.

Special rules apply when your spouse died during the year

If your spouse died during the tax year, you are considered married for the entire tax year for filing status purposes. Special rules apply, however.

Planning considerations for married couples

Options available to married couples

If you are married, you generally must choose between filing a joint return ( married filing jointly) and a separate return ( married filing separately). While many married couples experience overall tax savings by filing a joint return, situations exist in which a joint return can result in more total tax than separate returns. You should read the full discussion of each filing status before reaching a decision. If you lived apart from your spouse during the tax year, consider whether you qualify for head of household filing status.

Joint return means you're liable (joint and several liability)

When you file a joint tax return, you and your spouse are treated as one taxpayer. This may be an advantage in calculating the amount of tax due, but it comes with a heavy price. It means that you may be held responsible for the information on (and, in many cases, omitted from) that tax return. You may be held responsible, individually,



for taxes, penalties, and interest that result from a joint tax return. You may be responsible even if the other spouse earned all the income and made decisions without your knowledge.

Tip: Some protection from liability is provided to individuals who demonstrate that they did not know (nor did they have reason to know) of a substantial understatement of income on a joint return.

Pending divorce--if joint return filed, consider indemnification clause or escrow arrangement

If you're going to file a joint return while in the process of a divorce or separation, consider utilizing an indemnification clause or an escrow arrangement as a way of protecting yourself from future liability. An indemnification clause is a clause within a divorce decree that states that one spouse agrees to reimburse the other for future tax liabilities. An escrow arrangement can be used to set aside funds for estimated future taxes that will be due as the result of a joint return.

Caution: The IRS doesn't care whether you have an indemnification clause or an escrow arrangement. The IRS may still collect any tax deficiency from you.

If you lived apart from spouse during tax year, don't overlook head of household status

This is the most common mistake when it comes to filing status. If you lived apart from your spouse during the tax year and provided over half the cost of keeping up a home for you and a qualifying individual, you may qualify for head of household status.

Filing status and the timing of a divorce

Married couples sometimes wind up paying more in taxes than they would if they were unmarried filing singly (and sometimes the opposite is true). This is often referred to as the "marriage penalty" (or "marriage bonus"). This can occur when the tax code provides a standard deduction for married filers that is less than twice the amount for unmarried filers, tax brackets that are wider but not twice as wide as those for unmarried filers, and other inequities. Spouses with earnings that are split relatively equally are more likely to experience the marriage penalty, while couples where one spouse has little or no earnings will generally have a marriage bonus.

For divorcing couples, if it would be more beneficial to file as a married couple than as unmarried individuals, you may want to consider postponing the finalization of your divorce until the beginning of the next tax year. Conversely, if filing singly would be more beneficial, you may want to arrange to obtain your divorce decree before the last day of the year. The only way to know for sure which filing status would give you the lowest total tax liability is to do the calculations both ways (jointly and singly) and compare the results.

Tip: The Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the Working Families Tax Relief Act 2004 reduce (but do not eliminate) the marriage penalty for married couples.



Second-Income Analysis (After-Tax Benefit of Both Spouses Working)

What is a second-income analysis?

A second-income analysis involves an evaluation of the net after-tax benefit derived from a second income. For some couples, a second income is a financial necessity. For others, it is simply a means of achieving specific financial goals, such as ensuring a comfortable retirement.

There are two situations in particular that warrant a second-income analysis: (1) when a nonworking spouse considers entering the workforce, and (2) when a retired person considers full- or part-time employment to supplement Social Security and other retirement income.

If you wish to determine whether a second household income is advisable, you need to consider personal ramifications as well as the financial and tax aspects of your decision.

Personal ramifications

How will time spent away from the home impact you, your relationship with your spouse, and your children (if any)? For instance, if an at-home spouse with children is thinking about entering the workforce, the impact of such a move on the children may be a primary concern. In some cases, the economic benefit provided by a second income may not justify the loss in family or personal time. In other cases, of course, personal preference must take a back seat to financial necessity.

Financial aspects

Clearly, a second income can offer financial benefits. These advantages include: additional wages, salary, or self-employment income brought into the household, as well as additional fringe benefits (if any). You'll want to look closely at the potential for saving additional income toward retirement and whether one spouse's employer-provided health plan is more comprehensive than another.

There is also a financial downside to a second household income. Financial costs include possible extra expenses for commuting, parking, meals, clothing, child care, housecleaning, and dry cleaning.

Tax aspects

A second income could trigger certain unanticipated tax consequences, resulting in more or less after-tax income than you may have expected. Therefore, you must evaluate the overall tax impact of the second income, particularly if you're collecting Social Security benefits.

What information must you gather to perform an analysis?

You'll need to obtain information about your current and projected financial and tax position. Regarding your current situation, you can review last year's tax return and a recent pay stub for tax and salary information. You should also gather details about the second income, including estimated hours to be worked, wage rates, and benefits. Then, you'll want to estimate expenses associated with the second income. Finally, you can fill out a worksheet to determine the net economic benefit of a second income. For information about how the net economic benefit of a second income affects your overall financial picture (as a couple), you might want to construct a cash flow analysis.

Which tax considerations are especially important?

Generally, each additional dollar of income is subject to regular income tax, the 1.45 percent Medicare portion of



the FICA tax (or 2.9 percent for self-employment tax), and the 6.2 percent Social Security portion of the FICA tax (12.4 percent for self-employment tax).

You'll want to consider whether extra earnings will push your household into a higher marginal tax bracket (e.g., from the 15 percent bracket to the 25 percent bracket). But you'll also need to consider how your increased adjusted gross income (AGI) affects the amount allowed for certain types of tax deductions. (Your AGI may be defined as your gross or total income minus certain deductions.) Common deductions that are subject to AGI limitations include the following:

• Phaseout of overall itemized deductions based on AGI (deductions reduced by 3 percent of AGI in excess of threshold amount)

• Miscellaneous itemized deductions subject to 2 percent AGI floor

• Medical expenses subject to 7.5 percent of AGI floor

• Phaseout of personal exemptions based on AGI (exemptions reduced by 2 percent of each $2,500 of AGI in excess of threshold amount)

• Phaseout of the child tax credit based on modified AGI

• Phaseout of deductible IRA contributions for certain qualified plan participants based on modified AGI

• Phaseout of exclusion of Social Security benefits based on modified AGI

• Phaseout of Roth IRA and Coverdell education savings account contributions based on modified AGI

Tax impact of second income on earned income credit

The earned income credit (EIC) is a refundable credit available to certain low-income individuals who have some earned income and meet certain other requirements. Because the EIC phases out as modified adjusted gross income increases, a second income may reduce or even eliminate your eligibility for the EIC, resulting in an after-tax benefit from the second income that is substantially less than you had anticipated.

Tax impact on retirees who receive Social Security benefits

Retirees receiving Social Security should consider the impact that supplemental earned income may have on those benefits before making the decision to work. In certain cases, taxpayers may have to include 50 percent to 85 percent of Social Security benefits in taxable income. In addition, Social Security recipients under age 65 who have earnings in excess of an annual exemption amount are subject to a reduction in Social Security benefits.



Unlimited Marital Deduction

What is the unlimited marital deduction?

The unlimited marital deduction allows you to deduct the value of property you give to your U.S. citizen spouse from your estate and may reduce potential federal gift tax and federal estate taxes that may be owed. This deduction, in effect, treats married couples as one economic unit. It can be a powerful estate planning tool because there is no limit to this deduction and you could conceivably leave your entire estate to your spouse tax free.

The unlimited marital deduction allows you to shift wealth between spouses without incurring gift or estate taxes and maximizes the benefits that result, such as:

• Equalizing the size of your estates: The benefit resulting from equalizing the amount of property subject to taxes in each spouse's estate is the product of the estate tax rate schedule being graduated. The best result is achieved when both estates are subject to the same marginal tax rate.

The following example does not take into account the application of the applicable exclusion amount (formerly known as the unified credit):

Example(s): Hal and Jane are married. Hal owns property valued at $750,000. Jane's property is valued at $80,000. Jane dies. Jane's will provides that her property is to pass directly to their children, minus any estate taxes that may be owed. Jane's estate owes $18,200 in estate taxes ($80,000 x the applicable estate tax rate) and distributes $61,800 to their children. Later that year, Hal dies. Hal's will provides that his property is to pass directly to their children, minus any estate taxes that may be owed. Hal's estate pays $248,300 in estate taxes ($750,000 x the applicable estate tax rate) and distributes $501,700 to their children. Together, Hal and Jane have paid $266,500 in estate taxes.

Example(s): Now, let's see what happens if Hal and Jane equalize their estates. Hal transfers $335,000 tax free to Jane. Each estate is now valued at $415,000. Jane dies. Jane's estate owes $126,900 in estate taxes and distributes $288,100 to their children. Later that year, Hal dies. Hal's estate pays $126,900 in estate taxes and distributes $288,100 to their children. Together, Hal and Jane have paid $253,800 in estate taxes.

Example(s): With their estates equalized, Hal and Jane save $12,700 in estate taxes. Hal and Jane's children receive the benefit of the additional $12,700.

Tip: Community property estates are already equalized to the extent of the community property.

• Preserving the benefit of each spouse's applicable exclusion amount: Each spouse is entitled to the applicable exclusion amount, and neither should be wasted. Each spouse should make maximum use of the shelter provided by the applicable exclusion amount.

Example(s): Hal and Jane are married. Hal owns property valued at $7 million. Jane owns no property. Jane dies in 2009. Jane has no estate, so no estate taxes are owed. Hal dies later in 2008. Hal leaves his entire estate to his children. The applicable exclusion amount in 2009 is $3.5 million. Hal's estate owes federal estate taxes on $3.5 million ($7 million estate minus $3.5 million applicable exclusion amount).

Example(s): Now let's see what happens when Hal shifts property to Jane. Hal transfers $3.5 million to Jane tax free. Jane dies in 2009. Jane's estate ($3.5 million) pays no estate tax and uses all of her applicable exclusion amount. Hal dies later in 2009. Hal's estate ($3.5 million) pays no estate taxes and uses all of his applicable exclusion amount.



Example(s): Because Hal shifted property to Jane, each used all of his or her applicable exclusion amount and they saved estate taxes on $2 million.

Tip: A by-pass trust (or credit shelter trust) is an alternative to protect both spouses' applicable exclusion amount.

• Deferring the payment of any estate taxes until the death of the surviving spouse: If you can't avoid paying taxes altogether, at least you can delay them. This can reduce the estate taxes owed and preserve the maximum amount of property for your spouse to use during his or her lifetime.

Example(s): Hal and Jane are married. Each owns property valued at $2.75 million. Hal dies in 1989. Hal's will provides that all of his property passes directly to Jane. Hal's estate pays no estate taxes because his entire estate is deductible under the unlimited marital deduction. Jane does not work and uses the $5.5 million to live on for the next 20 years. Jane dies in 2009. Jane has spent or given away $2 million during the last 20 years, and Jane's estate is now only $3.5 million. After the applicable exclusion amount of $3.5 million is applied, no estate taxes are owed. Jane's estate pays no estate taxes.

Example(s): Because Hal was able to transfer his property to Jane tax free, Hal and Jane saved taxes and Jane was able to use all of Hal's property to support herself during the rest of her life.

Caution: This may not be beneficial if both spouses own a substantial amount of property. If this is the case, the transfer of property to your spouse may increase the total amount of estate taxes ultimately paid because of the progressive nature of the estate tax rate schedule.

Caution: Be careful not to waste your estate tax applicable exclusion amount by leaving all your property outright to your spouse. All of the property may be deductible in your estate under the unlimited marital deduction, but may be includable in your spouse's estate instead.

How does a gift of property qualify for the unlimited marital deduction?

Certain requirements and conditions must be met to qualify for the unlimited marital deduction:

• You must be a U.S. citizen or resident at the time you make the transfer

• Your spouse must be either: (1) a U.S. citizen at the time the transfer is made, (2) a U.S. citizen before the day on which the estate tax return is due and a resident of the United States at all times between the date of your death and the date your spouse became a citizen, or (3) the property must be transferred to a qualified domestic trust (QDOT) at the time of your death

• The recipient of the property must be your spouse at the time you make the transfer

• The property transferred to your spouse must be included in your taxable estate

• The remaining property, at your spouse's death, must be included in your spouse's estate for estate tax purposes, if estate tax is imposed in the year of your spouse's death

• The property transferred to your spouse must not be a terminable interest (this is the terminable interest rule)

Technical Note: A "terminable interest" is a legal term for a property interest that will end or fail upon the happening of an event or with the passing of a given period of time. This means that the property will be in your spouse's hands only temporarily and then will pass to someone else. Life estates, reversions, remainders, annuities, patents, and copyrights are all terminable interests.

Tip: There are exceptions to the terminable interest rule. The most notable exception is qualified terminable interest property (QTIP). The most common example of QTIP is the QTIP trust. A QTIP trust allows you to pass a lifetime income stream to your spouse but also name other family



members as the ultimate beneficiaries.

How do you use the unlimited marital deduction?

For lifetime gifts, the unlimited marital deduction is allowed for the year in which you make the gift for gift tax purposes. Generally, if all the gifts you make in a given year qualify for the unlimited marital deduction, you are not required to file a gift tax return for that year.

What if your spouse is not a U.S. citizen?

The unlimited marital deduction is not available to non-U.S. citizen spouses unless: (1) your spouse is either a U.S. citizen at the time the transfer is made, (2) a U.S. citizen before the day on which the estate tax return is due and a resident of the United States at all times between the date of your death and the date your spouse became a citizen, or (3) the property is transferred to a QDOT at the time of your death.



Spousal IRAs

What is a spousal individual retirement account (IRA)?

If you meet certain conditions, you can set up and contribute to an IRA (traditional or Roth) for your spouse, even if he or she receives little or no taxable compensation for the year of the contribution. Such an IRA is commonly referred to as a spousal IRA. A spousal IRA is not, however, a special type of IRA. It is merely a way of describing the fact that you are making a contribution to your spouse's traditional or Roth IRA. To contribute to a spousal IRA, you must meet four conditions:

• You must be married at the end of the tax year

• You must file a joint federal income tax return for the tax year

• You must have taxable compensation for the year

• Your spouse's taxable compensation for the year must be less than your taxable compensation

Taxable compensation includes wages and salaries, commissions, self-employment income, and taxable alimony or separate maintenance. It does not include earnings and profits from property (such as rental income, interest income, and dividend income), pension or annuity income, deferred compensation received, or any items that are excluded from income.

Example(s): You have taxable compensation of $80,000 for 2010. Your spouse has no taxable compensation. Assuming you file a joint federal income tax return and are married at the end of the tax year, you may be able to contribute up to $5,000 to an IRA in your spouse's name ($6,000 if your spouse is age 50 or older). If you do this and are also able to contribute $5,000 to your own IRA ($6,000 if you are age 50 or older), your total IRA contribution for 2010 to the two IRAs can be as much as $10,000 ($12,000 if you are both 50 or older).

Tip: The 2006 Heroes Earned Retirement Opportunities (HERO) Act allows members of the Armed Forces to include nontaxable combat pay as part of their taxable compensation when determining how much they can contribute to an IRA (their own or a spousal IRA) in tax years beginning after December 31, 2003. Prior to the Act, a serviceman or woman with only nontaxable combat pay was unable to make an IRA contribution.

Tip: Beginning in 2009, the Heroes Earnings Assistance and Relief Tax Act of 2008 provides that differential pay received by service members is considered compensation for IRA contribution purposes. Differential pay is defined as any payment which: (1) is made by an employer to an individual with respect to any period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days; and (2) represents all or a portion of the wages that the individual would have received from the employer if the individual were performing services for the employer.

Traditional spousal IRAs and Roth spousal IRAs

If your spouse is under age 70½ and you meet the above conditions for spousal IRAs, you can contribute to a traditional IRA in your spouse's name. All or part of your contribution to your spouse's traditional IRA may even be tax deductible under certain conditions.

You may also be able to contribute to a Roth IRA in your spouse's name if you meet the above conditions and your combined modified adjusted gross income (MAGI) for 2010 is less than $177,000 ($167,000 or less for a full contribution). Roth IRA contributions are never tax deductible, but withdrawals may be tax free under certain conditions .



If your spouse is age 70½ or older, you can make spousal contributions only to a Roth IRA. This is because traditional IRAs do not allow contributions once the account owner reaches age 70½.

Tip: If eligible, you can contribute to both a traditional IRA and a Roth IRA for your spouse, as long as your total contributions to all of the spousal IRAs don't exceed the limits described below.

How much can you contribute to a spousal IRA?

Unless your spouse is age 50 or older, you can contribute no more than $5,000 to a spousal IRA for 2009 and 2010. To be more specific, the maximum amount that you can contribute to a spousal IRA for 2009 is the lesser of:

• $5,000 ($6,000 if your spouse is age 50 or older)

• The combined taxable compensation of you and your spouse, less any amounts contributed to your own traditional and Roth IRAs

Example(s): You have $6,000 in taxable compensation for 2010. Your spouse has $500 in taxable compensation for 2010. You contribute $5,000 to your own Roth IRA. The maximum amount that you can contribute to your spouse's IRA (traditional or Roth) is $1,500.

If your and your spouse's combined MAGI for the year is more than $167,000 (in 2010, $166,000 for 2009), your ability to contribute to a Roth IRA in your spouse's name is limited, and phased out entirely if your combined MAGI in 2010 is $177,000 or more ($176,000 for 2009). If either you or your spouse is covered by an employer-sponsored retirement plan and your combined MAGI exceeds certain levels, your ability to make deductible contributions to a traditional IRA in your spouse's name may also be limited (or phased out entirely).



Spouse as Beneficiary of Traditional IRA or Retirement Plan

What is it?

Naming a beneficiary for your traditional IRA or employer-sponsored retirement plan may be one of the most important financial decisions you ever make. The beneficiary (or beneficiaries) you name will receive the funds remaining in your IRA or plan after you die, so you should certainly consider your loved ones' future needs. However, choosing the right beneficiary is often more complicated than that. Your choice could have an impact in one or more of the following areas:

• The size of the annual required minimum distributions (RMDs) that you must take from the IRA or plan during your lifetime

• The rate at which the funds must be distributed from the IRA or plan after your death

• The combined federal estate tax liability of you and your spouse (assuming you are married and expect estate tax to be an issue for one or both of you)

If you are married, one of your options is to designate your spouse as the primary beneficiary of your IRA or retirement plan. Naming a spouse is very common, because it is the most logical beneficiary choice in many cases. (In addition, a retirement plan may require such a designation, as discussed below.) However, to make certain that this is the best beneficiary choice for your situation, you should consider all of your options and consult a tax professional.

Caution: This discussion applies only to traditional IRAs and employer-sponsored retirement plans. Choosing a beneficiary for a Roth IRA involves different considerations. For more information, see Beneficiary Designations for Roth IRAs.

The law may give your spouse certain rights in your retirement plan

If you want to name your spouse as the primary beneficiary of your employer-sponsored retirement plan, there is generally no problem with doing so. Simply complete the necessary beneficiary paperwork with your IRA custodian or plan administrator. However, if you are married and want to name a primary beneficiary other than your spouse, there may be restrictions on your ability to do so. No matter which state you live in, federal law may require that your surviving spouse be the primary beneficiary of your interest in some employer-sponsored retirement plans (such as 401(k) plans), unless your spouse signs a timely, effective written waiver allowing you to name a different primary beneficiary. You should consult your plan administrator for further details.

IRAs are not subject to this federal law, although your state may impose its own, similar requirements. For example, if you live in one of the community property states, your spouse may have legal rights in your IRA regardless of whether he or she is named as the primary beneficiary. In addition, if your roles are reversed (your spouse is the IRA owner or plan participant, and you are the primary beneficiary) and you die first, state law may prevent your surviving spouse from changing the beneficiary designation after your death (unless you grant your spouse the power to make these changes in a will or other document). You should consult an estate planning attorney for details regarding these and other state issues.

Naming your spouse as beneficiary may not affect required minimum distributions (RMDs) during your life

Under federal law, you must begin taking annual RMDs from your traditional IRA or retirement plan by April 1 of the calendar year following the calendar year in which you reach age 70½ (your "required beginning date"). With employer-sponsored retirement plans, you can delay your first distribution from your current employer's plan until



April 1 of the calendar year following the calendar year in which you retire if (1) you retire after age 70½, (2) you are still participating in the employer's plan, and (3) you own 5 percent or less of the employer.

Under the final IRS regulations issued in April 2002, naming your spouse as beneficiary generally will not affect the calculation of your RMDs unless your spouse is your sole designated beneficiary for the entire distribution year, and he or she is more than 10 years younger than you (see below for details).

Naming your spouse as beneficiary generally provides the maximum options and flexibility in terms of how the IRA or plan funds can be distributed after your death. See below (Advantages of naming your spouse as beneficiary) for a discussion of the post-death distribution options that may be available to surviving spouse beneficiaries.

Caution: You and your spouse are generally considered married for an entire year if you are married on January 1 of that year and do not change your beneficiary during the year. If you divorce and then change your beneficiary before the end of the year, you are not considered married for the entire year. If your spouse dies before the end of the year, you are still considered married for the entire year, even if you change your beneficiary before the end of the year.

Caution: The calculation of RMDs is complex, as are the related tax and estate planning issues. For more information, see Required Minimum Distributions and consult a tax professional.

Advantages of naming your spouse as beneficiary

Naming your spouse is one way to provide for him or her

You probably want to be certain that your surviving spouse will be financially secure after your death. One way to accomplish this goal is to designate your spouse as the primary beneficiary of your IRA or retirement plan assets. Naming your spouse as beneficiary ensures that he or she will receive the remaining funds after you die. Those funds will pass directly to your surviving spouse without having to go through probate first (unlike possibly assets left to your spouse in your will), and your spouse will generally have more than one post-death distribution option to choose from (see below).

However, bear in mind that your surviving spouse will typically have to pay federal (and possibly state) income tax on distributions of the inherited funds. The income tax treatment of post-death distributions from an IRA or plan is generally the same as for distributions that you take during your lifetime. In both cases, the portion of a distribution that represents pretax or tax deductible contributions and investment earnings is subject to federal income tax, while the portion that represents after-tax contributions is not.

Naming your spouse may minimize RMDs during your lifetime

If your spousal beneficiary is more than 10 years younger than you, the distribution rules provide you the option to spread your lifetime RMDs over a longer period of time (i.e., over the actual joint and survivor life expectancy of you and your spouse) than would otherwise be allowed. This can benefit you in several ways. First, a longer payout period reduces the size of the annual required distributions, resulting in less income tax each year while you're alive. Also, the longer the funds remain in the IRA or plan, the more time they have to continue growing in a tax-deferred environment. Finally, a longer payout period may preserve more of the funds for your surviving spouse after you die.

Surviving spouses have more post-death options than other beneficiaries

The main reason to consider naming your spouse as your IRA or plan beneficiary is that he or she will generally have more options and flexibility in terms of post-death distributions. Under the final regulations distribution rules, one of your surviving spouse's options may be to take required post-death distributions over his or her remaining life expectancy (in some cases, over your remaining life expectancy, if longer). This could result in a long payout period and significant tax deferral if your surviving spouse is relatively young. Of course, your surviving spouse could always withdraw more than required in any year.

Tip: In addition, the rules favor spousal beneficiaries in that the way a spousal beneficiary



calculates life expectancy tends to allow distributions to be taken over a longer period of time than a nonspousal beneficiary of the same age.

Tip: If you die before your required beginning date with your spouse as your sole beneficiary, distributions to your spouse under the life expectancy method can generally begin as late as the year you would have reached age 70½. With other designated beneficiaries, such distributions generally must begin no later than the end of the year following the year of your death.

Your surviving spouse may also have two other options that are not available to other beneficiaries. A surviving spouse may generally opt to roll over inherited IRA or plan funds into his or her own traditional IRA or plan, regardless of your age (or your spouse's age) when you die. Or, your surviving spouse may generally opt to simply leave the funds in an inherited IRA, and treat that account as his or her own account. In either case, the potential may exist for significant estate planning and income tax benefits. This is because your surviving spouse may defer taking distributions of the inherited funds until his or her own required beginning date and also designate new beneficiaries of his or her choice (your children, for example) who could later stretch out distributions even more after your spouse's death.

Caution: Certain restrictions may apply to some of your surviving spouse's post-death distribution options. For example, your surviving spouse cannot roll over RMD amounts (distributions required in the year of your death).

Caution: In the case of post-death distributions from a retirement plan account, the plan may specify the distribution options available. Those options may or may not be identical to the allowable options set forth in the IRS distribution rules. You should consult your plan administrator for details, as this could have an impact on your choice of beneficiary.

Tip: The 2001 Tax Act expanded the ability of a surviving spouse to roll over IRA or plan funds. As of January 1, 2002, the surviving spouse of a deceased participant in a 401(k) or other qualified retirement plan is able to make a tax-free rollover to another qualified plan, a 403(b) plan, or a Section 457 plan (in addition to doing a rollover to an IRA).

Naming your spouse may delay or eliminate estate tax on retirement assets

When you die, your entire interest in an IRA or retirement plan is added to your other assets to determine if any federal estate tax is due. (State death tax may also apply, so check the laws of the applicable states.) When you designate your spouse as sole beneficiary of your IRA or plan, however, your estate may qualify to take an unlimited federal marital deduction for the amount of tax on retirement plan funds. What this means is that even if the value of your taxable estate exceeds the federal applicable exclusion amount ($2 million for 2007 and 2008), no federal estate tax will be due on the IRA or plan funds on your death.

However, federal estate tax may be due from your surviving spouse's estate when he or she eventually dies. If your surviving spouse does not consume all of the retirement funds during his or her life, the remaining funds will be added to your spouse's other assets to determine if any federal estate tax is due (see below--Disadvantages of naming your spouse as beneficiary).

Tip: If your surviving spouse is not a U.S. citizen, a special type of trust called a QDOT (qualified domestic trust) may be utilized to take advantage of the unlimited marital deduction. However, there are special rules and requirements that must be met for this strategy to work. Consult an estate planning attorney for details.

Caution: Estate planning for retirement assets is a highly technical area. Be sure to consult an estate planning attorney for assistance.

Disadvantages of naming your spouse as beneficiary



Your surviving spouse may be in a high income tax bracket

As mentioned, after you die, your surviving spouse beneficiary will generally have to pay federal (and possibly state) income tax on distributions of the inherited IRA or plan funds. The rate at which a post-death distribution is taxed will depend upon your surviving spouse's income tax bracket for the year of the distribution. If your surviving spouse is in a high income tax bracket due to substantial job earnings, investment income, or other factors, he or she may lose a significant portion of the inherited funds to income taxes. In this case, it may be advisable to consider other possible designated beneficiaries for your IRA or plan. Naming your children, grandchildren, or others as beneficiaries may result in the retirement funds being taxed at a lower income tax rate after your death.

Other beneficiaries may be able to take post-death distributions over more years

Although a surviving spouse beneficiary has more post-death distribution options than any other beneficiary, that does not necessarily mean that he or she would enjoy a longer payout period than other possible beneficiaries. Under the final regulations distribution rules, any individual designated as an IRA or plan beneficiary (not just a surviving spouse) is generally allowed to take required post-death distributions over his or her remaining life expectancy, even if you had already reached your required beginning date when you died. (Again, with a retirement plan, check with your plan administrator regarding the available distribution options.)

This means that if you name a young nonspousal beneficiary (such as a child or grandchild) for your IRA or plan, that individual may be able to distribute the inherited funds over more years than your surviving spouse could. In some cases, this may be true even if your surviving spouse were able to exercise one of the other post-death distribution options described above (such as a rollover of the inherited funds into your spouse's own IRA or plan). It depends upon the relative ages of your spouse and other possible beneficiaries. This is something to consider if your goal with your retirement funds is to reduce income taxes and prolong tax-deferred growth after your death.

There may be unfavorable estate tax consequences in the future

One possible downside to naming your spouse as the primary beneficiary of your IRA or plan is that the combined federal estate tax owed by your estate and your surviving spouse's estate may be higher than necessary. This is because the unlimited marital deduction allows you to leave all of your assets to your surviving spouse free from federal estate tax at your death and defer the tax, if any, until your spouse's death (depending on the size of your spouse's estate), so your applicable exclusion amount may be wasted. When your surviving spouse dies after you, the marital deduction will not be available, so your spouse may have only his or her applicable exclusion amount as a shelter against estate tax. If your surviving spouse's taxable estate exceeds that amount, then federal estate tax (or more of it) will be due at your spouse's death. This is more likely to happen if you designate your spouse as beneficiary of your IRA or plan, particularly if the IRA or plan has significant assets.

Tip: Depending on the size of your taxable estate for federal estate tax purposes, an estate-tax-saving trust (known as a credit shelter trust, B trust, or exemption trust) could allow your surviving spouse to benefit from the assets in the trust, while minimizing the amount of your assets to be included in your spouse's taxable estate for estate tax purposes. A downside to this approach is that funding a trust that is exempt from death tax with assets that have a built-in income tax liability reduces the net amount really in this trust. Consult an estate planning attorney for details regarding this and other possible strategies, as estate planning for retirement assets is a highly technical area.

You often cannot control the funds after your death

If you name your spouse as the beneficiary of your IRA or retirement plan, your surviving spouse will be free to use the inherited funds as he or she wishes after your death. This may not be a concern if the two of you trust one another and have agreed in advance on how the funds are to be used after one of you dies. However, nothing is certain. For example, it is possible that your spouse could remarry and then name a new spouse rather than your children as the primary beneficiary (unless restrictions prohibit such a designation after your death).



Merging Your Money When You Marry

Getting married is exciting, but it brings many challenges. One such challenge that you and your spouse will have to face is how to merge your finances. Planning carefully and communicating clearly are important, because the financial decisions that you make now can have a lasting impact on your future.

Discuss your financial goals

The first step in mapping out your financial future together is to discuss your financial goals. Start by making a list of your short-term goals (e.g., paying off wedding debt, new car, vacation) and long-term goals (e.g., having children, your children's college education, retirement). Then, determine which goals are most important to you. Once you've identified the goals that are a priority, you can focus your energy on achieving them.

Prepare a budget

Next, you should prepare a budget that lists all of your income and expenses over a certain time period (e.g., monthly, annually). You can designate one spouse to be in charge of managing the budget, or you can take turns keeping records and paying the bills. If both you and your spouse are going to be involved, make sure that you develop a record-keeping system that both of you understand. And remember to keep your records in a joint filing system so that both of you can easily locate important documents.

Begin by listing your sources of income (e.g., salaries and wages, interest, dividends). Then, list your expenses (it may be helpful to review several months of entries in your checkbook and credit card bills). Add them up and compare the two totals. Hopefully, you get a positive number, meaning that you spend less than you earn. If not, review your expenses and see where you can cut down on your spending.

Bank accounts--separate or joint?

At some point, you and your spouse will have to decide whether to combine your bank accounts or keep them separate. Maintaining a joint account does have advantages, such as easier record keeping and lower maintenance fees. However, it's sometimes more difficult to keep track of how much money is in a joint account when two individuals have access to it. Of course, you could avoid this problem by making sure that you tell each other every time you write a check or withdraw funds from the account. Or, you could always decide to maintain separate accounts.

Credit cards

If you're thinking about adding your name to your spouse's credit card accounts, think again. When you and your spouse have joint credit, both of you will become responsible for 100 percent of the credit card debt. In addition, if one of you has poor credit, it will negatively impact the credit rating of the other.

If you or your spouse does not qualify for a card because of poor credit, and you are willing to give your spouse account privileges anyway, you can make your spouse an authorized user of your credit card. An authorized user is not a joint cardholder and is therefore not liable for any amounts charged to the account. Also, the account activity won't show up on the authorized user's credit record. But remember, you remain responsible for the account.

Insurance

If you and your spouse have separate health insurance coverage, you'll want to do a cost/benefit analysis of each plan to see if you should continue to keep your health coverage separate. For example, if your spouse's health plan has a higher deductible and/or co-payments or fewer benefits than those offered by your plan, he or



she may want to join your health plan instead. You'll also want to compare the rate for one family plan against the cost of two single plans.

It's a good idea to examine your auto insurance coverage, too. If you and your spouse own separate cars, you may have different auto insurance carriers. Consider pooling your auto insurance policies with one company; many insurance companies will give you a discount if you insure more than one car with them. If one of you has a poor driving record, however, make sure that changing companies won't mean paying a higher premium.

Employer-sponsored retirement plans

If both you and your spouse participate in an employer-sponsored retirement plan, you should be aware of each plan's characteristics. Review each plan together carefully and determine which plan provides the best benefits. If you can afford it, you should each participate to the maximum in your own plan. If your current cash flow is limited, you can make one plan the focus of your retirement strategy. Here are some helpful tips:

• If both plans match contributions, determine which plan offers the best match and take full advantage of it

• Compare the vesting schedules for the employer's matching contributions

• Compare the investment options offered by each plan--the more options you have, the more likely you are to find an investment mix that suits your needs

• Find out whether the plans offer loans--if you plan to use any of your contributions for certain expenses (e.g., your children's college education, a down payment on a house), you may want to participate in the plan that has a loan provision



Getting Started: Establishing a Financial Safety Net

In times of crisis, you don't want to be shaking pennies out of a piggy bank. Having a financial safety net in place can ensure that you're protected when a financial emergency arises. One way to accomplish this is by setting up a cash reserve, a pool of readily available funds that can help you meet emergency or highly urgent short-term needs.

How much is enough?

Most financial professionals suggest that you have three to six months' worth of living expenses in your cash reserve. The actual amount, however, should be based on your particular circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you paying for your child's orthodontics? Are you making car payments? Other factors you need to consider include your job security, health, and income. The bottom line: Without an emergency fund, a period of crisis (e.g., unemployment, disability) could be financially devastating.

Building your cash reserve

If you haven't established a cash reserve, or if the one you have is inadequate, you can take several steps to eliminate the shortfall:

• Save aggressively: If available, use payroll deduction at work; budget your savings as part of regular household expenses

• Reduce your discretionary spending (e.g., eating out, movies, lottery tickets)

• Use current or liquid assets (those that are cash or are convertible to cash within a year, such as a short-term certificate of deposit)

• Use earnings from other investments (e.g.,stocks, bonds, or mutual funds)

• Check out other resources (e.g., do you have a cash value insurance policy that you can borrow from?)

A final note: Your credit line can be a secondary source of funds in a time of crisis. Borrowed money, however, has to be paid back (often at high interest rates). As a result, you shouldn't consider lenders as a primary source for your cash reserve.

Where to keep your cash reserve

You'll want to make sure that your cash reserve is readily available when you need it. However, an FDIC-insured, low-interest savings account isn't your only option. There are several excellent alternatives, each with unique advantages. For example, money market accounts and short-term CDs typically offer higher interest rates than savings accounts, with little (if any) increased risk.

Don't confuse a money market mutual fund with a money market deposit account. An investment in a money market mutual fund is not insured or guaranteed by the FDIC. Although the mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.

Note:When considering a money market mutual fund, be sure to obtain and read the fund's prospectus, which is available from the fund or your financial advisor, and outlines the fund's investment objectives, risks, fees, expenses. Carefully consider those factors before investing.

It's important to note that certain fixed-term investment vehicles (i.e., those that pledge to return your principal



plus interest on a given date), such as CDs, impose a significant penalty for early withdrawals. So, if you're going to use fixed-term investments as part of your cash reserve, you'll want to be sure to ladder (stagger) their maturity dates over a short period of time (e.g., two to five months). This will ensure the availability of funds, without penalty, to meet sudden financial needs.

Review your cash reserve periodically

Your personal and financial circumstances change often--a new child comes along, an aging parent becomes more dependent, or a larger home brings increased expenses. Because your cash reserve is the first line of protection against financial devastation, you should review it annually to make sure that it fits your current needs.



Establishing a Budget

Do you ever wonder where your money goes each month? Does it seem like you're never able to get ahead? If so, you may want to establish a budget to help you keep track of how you spend your money and help you reach your financial goals.

Examine your financial goals

Before you establish a budget, you should examine your financial goals. Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., your child's college education, retirement). Next, ask yourself: How important is it for me to achieve this goal? How much will I need to save? Armed with a clear picture of your goals, you can work toward establishing a budget that can help you reach them.

Identify your current monthly income and expenses

To develop a budget that is appropriate for your lifestyle, you'll need to identify your current monthly income and expenses. You can jot the information down with a pen and paper, or you can use one of the many software programs available that are designed specifically for this purpose.

Start by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support. Next, add up all of your expenses. To see where you have a choice in your spending, it helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, transportation) and discretionary expenses (e.g., entertainment, vacations, hobbies). You'll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, and so on. To make sure that you're not forgetting anything, it may help to look through canceled checks, credit card bills, and other receipts from the past year. Finally, as you list your expenses, it is important to remember your financial goals. Whenever possible, treat your goals as expenses and contribute toward them regularly.

Evaluate your budget

Once you've added up all of your income and expenses, compare the two totals. To get ahead, you should be spending less than you earn. If this is the case, you're on the right track, and you need to look at how well you use your extra income. If you find yourself spending more than you earn, you'll need to make some adjustments. Look at your expenses closely and cut down on your discretionary spending. And remember, if you do find yourself coming up short, don't worry! All it will take is some determination and a little self-discipline, and you'll eventually get it right.

Monitor your budget

You'll need to monitor your budget periodically and make changes when necessary. But keep in mind that you don't have to keep track of every penny that you spend. In fact, the less record keeping you have to do, the easier it will be to stick to your budget. Above all, be flexible. Any budget that is too rigid is likely to fail. So be prepared for the unexpected (e.g., leaky roof, failed car transmission).

Tips to help you stay on track

• Involve the entire family: Agree on a budget up front and meet regularly to check your progress

• Stay disciplined: Try to make budgeting a part of your daily routine

• Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the



beginning of the year, as opposed to right before the holidays)

• Find a budgeting system that fits your needs (e.g., budgeting software)

• Distinguish between expenses that are "wants" (e.g., designer shoes) and expenses that are "needs" (e.g., groceries)

• Build rewards into your budget (e.g., eat out every other week)

• Avoid using credit cards to pay for everyday expenses: It may seem like you're spending less, but your credit card debt will continue to increase



Life Insurance at Various Life Stages

Your need for life insurance changes as your life changes. When you're young, you typically have less need for life insurance, but that changes as you take on more responsibility and your family grows. Then, as your responsibilities once again begin to diminish, your need for life insurance may decrease. Let's look at how your life insurance needs change throughout your lifetime.

Footloose and fancy-free

As a young adult, you become more independent and self-sufficient. You no longer depend on others for your financial well-being. But in most cases, your death would still not create a financial hardship for others. For most young singles, life insurance is not a priority.

Some would argue that you should buy life insurance now, while you're healthy and the rates are low. This may be a valid argument if you are at a high risk for developing a medical condition (such as diabetes) later in life. But you should also consider the earnings you could realize by investing the money now instead of spending it on insurance premiums.

If you have a mortgage or other loans that are jointly held with a cosigner, your death would leave the cosigner responsible for the entire debt. You might consider purchasing enough life insurance to cover these debts in the event of your death. Funeral expenses are also a concern for young singles, but it is typically not advisable to purchase a life insurance policy just for this purpose, unless paying for your funeral would burden your parents or whomever would be responsible for funeral expenses. Instead, consider investing the money you would have spent on life insurance premiums.

Your life insurance needs increase significantly if you are supporting a parent or grandparent, or if you have a child before marriage. In these situations, life insurance could provide continued support for your dependent(s) if you were to die.

Going to the chapel

Married couples without children typically still have little need for life insurance. If both spouses contribute equally to household finances and do not yet own a home, the death of one spouse will usually not be financially catastrophic for the other.

Once you buy a house, the situation begins to change. Even if both spouses have well-paying jobs, the burden of a mortgage may be more than the surviving spouse can afford on a single income. Credit card debt and other debts can contribute to the financial strain.

To make sure either spouse could carry on financially after the death of the other, both of you should probably purchase a modest amount of life insurance. At a minimum, it will provide peace of mind knowing that both you and your spouse are protected.

Again, your life insurance needs increase significantly if you are caring for an aging parent, or if you have children before marriage. Life insurance becomes extremely important in these situations, because these dependents must be provided for in the event of your death.

Your growing family

When you have young children, your life insurance needs reach a climax. In most situations, life insurance for both parents is appropriate.

Single-income families are completely dependent on the income of the breadwinner. If he or she dies without life insurance, the consequences could be disastrous. The death of the stay-at-home spouse would necessitate



costly day-care and housekeeping expenses. Both spouses should carry enough life insurance to cover the lost income or the economic value of lost services that would result from their deaths.

Dual-income families need life insurance, too. If one spouse dies, it is unlikely that the surviving spouse will be able to keep up with the household expenses and pay for child care with the remaining income.

Moving up the ladder

For many people, career advancement means starting a new job with a new company. At some point, you might even decide to be your own boss and start your own business. It's important to review your life insurance coverage any time you leave an employer.

Keep in mind that when you leave your job, your employer-sponsored group life insurance coverage will usually end, so find out if you will be eligible for group coverage through your new employer, or look into purchasing life insurance coverage on your own. You may also have the option of converting your group coverage to an individual policy. This may cost significantly more, but may be wise if you have a pre-existing medical condition that may prevent you from buying life insurance coverage elsewhere.

Make sure that the amount of your coverage is up-to-date, as well. The policy you purchased right after you got married might not be adequate anymore, especially if you have kids, a mortgage, and college expenses to consider. Business owners may also have business debt to consider. If your business is not incorporated, your family could be responsible for those bills if you die.

Single again

If you and your spouse divorce, you'll have to decide what to do about your life insurance. Divorce raises both beneficiary issues and coverage issues. And if you have children, these issues become even more complex.

If you and your spouse have no children, it may be as simple as changing the beneficiary on your policy and adjusting your coverage to reflect your newly single status. However, if you have kids, you'll want to make sure that they, and not your former spouse, are provided for in the event of your death. This may involve purchasing a new policy if your spouse owns the existing policy, or simply changing the beneficiary from your spouse to your children. The custodial and noncustodial parent will need to work out the details of this complicated situation. If you can't come to terms, the court will make the decisions for you.

Your retirement years

Once you retire, and your priorities shift, your life insurance needs may change. If fewer people are depending on you financially, your mortgage and other debts have been repaid, and you have substantial financial assets, you may need less life insurance protection than before. But it's also possible that your need for life insurance will remain strong even after you retire. For example, the proceeds of a life insurance policy can be used to pay your final expenses or to replace any income lost to your spouse as a result of your death (e.g., from a pension or Social Security). Life insurance can be used to pay estate taxes or leave money to charity.



Life Insurance Basics

Life insurance is an agreement between you (the policy owner) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die.

The many uses of life insurance

One of the most common reasons for buying life insurance is to replace the loss of income that would occur in the event of your death. When you die and your paychecks stop, your family may be left with limited resources. Proceeds from a life insurance policy make cash available to support your family almost immediately upon your death. Life insurance is also commonly used to pay any debts that you may leave behind. Life insurance can be used to pay off mortgages, car loans, and credit card debts, leaving other remaining assets intact for your family. Life insurance proceeds can also be used to pay for final expenses and estate taxes. Finally, life insurance can create an estate for your heirs.

How much life insurance do you need?

Your life insurance needs will depend on a number of factors, including whether you're married, the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you're young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases.

There are plenty of tools to help you determine how much coverage you should have. Your best resource may be a financial professional. At the most basic level, the amount of life insurance coverage that you need corresponds directly to your answers to these questions:

• What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?

• How much of your salary is devoted to current expenses and future needs?

• How long would your dependents need support if you were to die tomorrow?

• How much money would you want to leave for special situations upon your death, such as funding your children's education, gifts to charities, or an inheritance for your children?

Since your needs will change over time, you'll need to continually re-evaluate your need for coverage.

How much life insurance can you afford?

How do you balance the cost of insurance coverage with the amount of coverage that your family needs? Just as several variables determine the amount of coverage that you need, many factors determine the cost of coverage. The type of policy that you choose, the amount of coverage, your age, and your health all play a part. The amount of coverage you can afford is tied to your current and expected future financial situation, as well. A financial professional or insurance agent can be invaluable in helping you select the right insurance plan.

What's in a life insurance contract?

A life insurance contract is made up of legal provisions, your application (which identifies who you are and your medical declarations), and a policy specifications page that describes the policy you have selected, including any options and riders that you have purchased in return for an additional premium.



Provisions describe the conditions, rights, and obligations of the parties to the contract (e.g., the grace period for payment of premiums, suicide and incontestability clauses).

The policy specifications page describes the amount to be paid upon your death and the amount of premiums required to keep the policy in effect. Also stated are any riders and options added to the standard policy. Some riders include the waiver of premium rider, which allows you to skip premium payments during periods of disability; the guaranteed insurability rider, which permits you to raise the amount of your insurance without a further medical exam; and accidental death benefits.

The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.

Types of life insurance policies

The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods.

Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy in force. Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policyowner discontinue the policy, this reserve, known as the cash value, is returned to the policyowner. Permanent life insurance can be further broken down into the following basic categories:

• Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed. Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer.

• Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value will grow at a declared interest rate, which may vary over time.

• Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. The policyowner selects the subaccounts in which the cash value should be invested.

• Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value goes up or down based on the performance of investments in the subaccounts.

Note:Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

Your beneficiaries

You must name a primary beneficiary to receive the proceeds of your insurance policy. You may name a contingent beneficiary to receive the proceeds if your primary beneficiary dies before the insured. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. You should carefully consider the ramifications of



your beneficiary designations to ensure that your wishes are carried out as you intend.

Generally, you can change your beneficiary at any time. Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company. If you have named someone as an irrevocable (permanent) beneficiary, however, you will need that person's permission to adjust any of the policy's provisions.

Where can you buy life insurance?

You can often get insurance coverage from your employer (i.e., through a group life insurance plan offered by your employer) or through an association to which you belong (which may also offer group life insurance). You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company.

Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. Ratings services, such as A. M. Best, Moody's, and Standard & Poor's, evaluate an insurer's financial strength. The company offering you coverage should provide you with this information.



Do You Need Disability Income Insurance?

People ordinarily buy property and casualty insurance to protect their possessions (houses, cars, and furniture) and life insurance to provide income for their survivors. However, many people don't think about protecting their income with disability income insurance. But how well could you live if you weren't able to work? Disability is an unpredictable event, and if you become disabled, your ability to make a living could be restricted. Although you may have enough money in the bank to meet your short-term needs, what would happen if you were unable to work for months or even years? The real value of disability income insurance lies in its ability to protect you over the long haul.

A look at the odds

Your need for disability income insurance may be greater than you think. Here are some important disability statistics to consider:

• The Social Security Administration estimates that a 20-year-old worker has a 3 in 10 chance of becoming disabled before reaching retirement age. (Social Security Disability Benefits, SSA Publication Number 05-10029, November 2008)

• There were more than 7 million disabled workers in 2008 receiving Social Security disability benefits. (Fact Sheet On The Old-Age, Survivors And Disability Insurance Program, Social Security Administration, July 2, 2008)

As these statistics show, your chances of being disabled are great. Of course, statistics can be misleading--you might never become disabled. But then again, how many of your friends and family members have been in car accidents?

Disability can be caused by illness as well as injury. How many people do you know who have suffered a heart attack or stroke? If you became ill, how would you support yourself or your family?

What would happen if you became disabled?

What would happen if you suffered an injury or illness and couldn't work for days, months, or even years? If you're single, you may have no other means of support. If you're married, you may be able to rely on your spouse for income, but you probably also have many financial obligations, such as supporting your children and paying your mortgage. Could your spouse really support you and your family? In addition, remember that you don't have to be working in a hazardous occupation to need disability income insurance. Accidents happen not only on the job but also at home, and illness can strike anyone. For these reasons, everyone who works and earns a living should consider purchasing disability income insurance.

But isn't disability coverage through an employer or the government enough?

You might think that you are adequately insured against disability because you have coverage through your employer or through government programs such as Social Security and workers' compensation. However, many employers (especially small employers) do not offer disability benefits, and government programs may pay benefits only if you meet a strict definition of disability. Here's an idea of the benefits you may already have, as well as their limitations:

Social Security: Although you shouldn't overlook the disability benefits you may be eligible to receive from Social Security, you shouldn't rely on them, either. Social Security denies many claims, in part due to its strict definition of disability. Even if you are deemed eligible for benefits, you still won't begin receiving them until at least six months after you become disabled because Social Security imposes a waiting period. In addition, your benefit



may replace only a fraction of your predisability income.

Workers' compensation: If you're injured at work or get sick from job-related causes, you may receive some disability benefits from workers' compensation insurance. The amount you receive depends on the state you live in. However, when you review your disability income insurance needs, remember that workers' compensation pays benefits only if your disability is work related, so it offers only limited disability protection. Some states also cover only the diseases or disabilities outlined in that state's workers' compensation laws.

Pension plans: Some government and private pension plans pay disability benefits. Often, these plans pay benefits based on total, permanent disability, or reduce your retirement benefit in proportion to what you have already received for a disability. In addition, remember that these benefits are usually integrated with Social Security or workers' compensation, so your benefit may be less than you expect if you also receive disability income from these government sources.



Making the Most of Your Group Health Benefits

For millions of Americans, group health insurance offers affordable quality health care. To get the most from this valuable benefit, you need to understand what you have, how lifestyle changes can affect your coverage, and what to do if your coverage doesn't meet your expectations.

Understand what you have

Get your plan's summary plan description (SPD) from your plan administrator. It gives a detailed summary of your plan--how it works, the benefits it provides, and how those benefits may be obtained or lost. Look for information on:

• Physician choice

• Accessibility of doctor's offices

• Deductibles

• Co-payment requirements

• Maximum out-of-pocket expenses

• Lifetime benefits

• Incentives for using the plan's network of providers

• Exclusions

• Waiting periods

• Prescription benefits

• Maternity benefits

• Dental and vision benefits

• Preventive care programs

• Member rights, including the right to appeal

• Quality reports and ratings from member-satisfaction surveys

Ask before you need it

Don't wait for a serious illness or injury to learn what to expect from your group health plan. Now is the time to find out. Take the time to learn the answers to the following questions:

• Do you need prior approval to visit a specialist?

• How does the plan define emergency care?

• How do you get care if you are outside the area?

• What hospitals are in the plan's network?



• Is there a time limit on hospital stays?

• Who decides when you will be discharged?

• Will the plan pay for follow-up care, such as nursing home care or home health care?

• If you have a serious medical problem, will the plan provide someone to oversee care and make sure your needs are met?

• Are second opinions required for surgery? If so, who pays?

• How do you get ambulance service?

• Is there an advice hot line to help decide how to handle a problem that may not require a doctor's visit?

Be proactive

Don't be afraid to ask your doctor questions, and insist on clear answers. If you're concerned that you won't be able to understand or follow a doctor's instructions, bring someone with you or take notes. Take responsibility for your own care. Consider:

• Lifestyle choices and changes you can make to lower your risks or prevent illness (e.g., losing weight)

• The risks and benefits of any tests or treatments

• How you would go about obtaining care after hours

What happens when you lose coverage?

The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) allows you to purchase health coverage under your employer's plan if you lose your job, change jobs, get divorced, or upon the occurrence of other qualifying events. Coverage that you obtain under COBRA can last from 18 to 36 months, depending on your situation.

COBRA applies to most employers with 20 or more workers and requires your plan to notify you of your rights. Most plans require you to make an election for coverage under COBRA within 60 days of the plan notifying you. Follow up with your plan administrator if you don't get a notice, and make sure that you reply within the allowed time.

When you buy the insurance under COBRA, you must pay the full premium amount, plus administrative costs of up to 2 percent. If you were accustomed to sharing health insurance premiums with your employer, you may be in for a shock. However, if you or any family member have pre-existing conditions, you may not have any other choice, at least until you get into a new group plan. You must remember to pay your premiums on time, or you will lose your coverage.

The medical coverage under COBRA must be identical to the coverage you had before. However, employers may drop benefits such as dental care and vision care.

The American Recovery and Reinvestment Act of 2009 provides that, for involuntary terminations that occur on or after September 1, 2008 and before January 1, 2010, assistance-eligible individuals will only need to pay 35 percent of COBRA premiums for a period of up to nine months. The remaining 65 percent of COBRA premiums will be subsidized. However, this premium subsidy may need to be repaid in some cases.

As your lifestyle changes, so do your insurance needs

Review your group health insurance benefits and options when you:



• Get married

• Get divorced

• Have a new child

• Have a child who is no longer dependent on you

• Suffer the loss of your spouse

The information provided by your employer should tell you how you can change benefits or switch plans if needed.

Planning for retirement

Find out what benefits are available during retirement. Ask your employer's human resources office, union, and plan administrator. Check your SPD. Make sure that all sources agree about the benefits you will receive and if they can be changed or lost. After you have this information, you can make other important choices, such as finding out if you are eligible for Medicare insurance coverage.

What can you do if a claim is denied?

Your plan administrator has a limited time after you file a claim to tell you if you will receive the benefits. If that is not enough time, you must be notified within a specified time why more time is needed and the date you can expect a decision. Many states regulate claims processing and denial notification to members, so be sure to find out your insurance company's time frames for processing claims, issuing denials, and resolving appeals.

If your claim is denied, you must be notified in writing and given specific reasons why it was denied. If you have no answer in the allotted time, the claim is considered a denial, and you can use the plan's rules for appealing the denial. If you disagree with any claims decision or preauthorization denial, you can request an appeal.

It's important to understand how your plan handles complaints. Check your health benefits package and your SPD to determine who is responsible for handling problems with benefit claims. Keep records and copies of all correspondence.

What if you are unhappy with your health care?

If you are in a managed care plan, you can change your primary care doctor if you are unhappy with the relationship. If the plan itself does not satisfy you, you may be able to switch plans. If you are dissatisfied with the managed care plan but prefer to remain in the plan because you want to remain with your physician, file a complaint. You have the right to a fair and timely process for resolving your complaint. If you are still unhappy, speak to your employee benefits manager to help you match your needs with the available plans.

Stay informed

• Ask for a copy of the member handbook, sometimes called the evidence of insurance or evidence of coverage, to review coverage policies.

• Check to see if your plan has a right-to-privacy policy. Make sure that the plan requires your consent to release any medical information about you to outside agencies not involved with your direct health care or the administration of your health policy, especially your employer.

• Does your plan have a magazine or newsletter? Such a publication can give information on how the plan works and on rules that affect your care.

•



• Talk to your plan administrator to learn more about your policy.

The more information you have, the easier it will be for you to make quality health-care decisions.



Estate Planning: An Introduction

By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you'll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you'll need to use more sophisticated techniques in your estate plan, such as a trust.

To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek professional advice to implement the right plan for you.

Over 18

Since incapacity can strike anyone at anytime, all adults over 18 should consider having:

• A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.

• An advanced medical directive: The three main types of advanced medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

Young and single

If you're young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don't, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).

Unmarried couples

You've committed to a life partner but aren't legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you should consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.

Married couples

Married couples have unique estate planning challenges and opportunities. On the one hand, you can transfer your entire estate to your spouse gift and estate tax free under the unlimited marital deduction. This will postpone taxation until the death of the surviving spouse. While this may be a good outcome for couples with smaller estates, couples with combined assets in excess of the estate tax exemption amount ($3.5 million per person in 2009) may wind up paying more in estate taxes than is necessary because they've wasted the exemption of the first spouse to die. Couples in this situation need to plan in advance to avoid this result (perhaps by using a "credit shelter" or "bypass" trust, or some combination of marital trusts, often referred as an "A/B or A/B/C trust arrangement").

Note: Funding a bypass trust with funds from a retirement plan could have adverse income tax consequences.



Note: In the states that have "decoupled" their death tax systems from the federal system, using a formula provision to fund a bypass trust may increase the chance of having to pay state death taxes.

Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (although a $133,000 annual exclusion, for 2009, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.

Married with children

If you're married and have children, you and your spouse should each have your own will. For you, wills are vital because they can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them.

You may also want to consult an attorney about establishing a trust to manage your children's assets in the event that both you and your spouse die at the same time.

Certainly, you will also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

Comfortable and looking forward to retirement

If you're in your 30s, you're probably feeling comfortable. You've accumulated some wealth and you're thinking about retirement. Here's where estate planning overlaps with retirement planning. It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).

Wealthy and worried

Depending on the size of your estate when you die, you may need to be concerned about estate taxes.

Current federal estate tax law (1) increases the estate tax exemption from $2 million in 2008 to $3.5 million in 2009, (2) imposes a top estate tax rate of 45 percent, (3) repeals the estate tax for 2010 only, and (4) reinstates the estate tax in 2011, with an exemption amount of $1 million and a top tax rate of 55 percent.

There is uncertainty about the exact form the federal estate tax system will take in future years. However, it appears that individuals with estates valued at under $1 million need not worry too much about federal estate taxes, those with estates between $1 million and $3.5 million should have some flexibility built into their plans, and those with over $3.5 million need to implement plans now to avoid having to pay federal estate tax.

TWhether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.

Elderly or ill

If you're elderly or ill, you'll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.



Retirement Planning: The Basics

You may have a very idealistic vision of retirement--doing all of the things that you never seem to have time to do now. But how do you pursue that vision? Social Security may be around when you retire, but the benefit that you get from Uncle Sam may not provide enough income for your retirement years. To make matters worse, few employers today offer a traditional company pension plan that guarantees you a specific income at retirement. On top of that, people are living longer and must find ways to fund those additional years of retirement. Such eye-opening facts mean that today, sound retirement planning is critical.

But there's good news: Retirement planning is easier than it used to be, thanks to the many tools and resources available. Here are some basic steps to get you started.

Determine your retirement income needs

It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity. The problem, however, is that it doesn't account for your specific situation. To determine your specific needs, you may want to estimate your annual retirement expenses.

Use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire. If you're nearing retirement, the gap between your current expenses and your retirement expenses may be small. If retirement is many years away, the gap may be significant, and projecting your future expenses may be more difficult.

Remember to take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 3 percent. (Source: Consumer price index (CPI-U) data published annually by the U.S. Department of Labor, 2009.) And keep in mind that your annual expenses may fluctuate throughout retirement. For instance, if you own a home and are paying a mortgage, your expenses will drop if the mortgage is paid off by the time you retire. Other expenses, such as health-related expenses, may increase in your later retirement years. A realistic estimate of your expenses will tell you about how much yearly income you'll need to live comfortably.

Calculate the gap

Once you have estimated your retirement income needs, take stock of your estimated future assets and income. These may come from Social Security, a retirement plan at work, a part-time job, and other sources. If estimates show that your future assets and income will fall short of what you need, the rest will have to come from additional personal retirement savings.

Figure out how much you'll need to save

By the time you retire, you'll need a nest egg that will provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you find the answer:

• At what age do you plan to retire? The younger you retire, the longer your retirement will be, and the more money you'll need to carry you through it.

• What is your life expectancy? The longer you live, the more years of retirement you'll have to fund.

• What rate of growth can you expect from your savings now and during retirement? Be conservative when projecting rates of return.

• Do you expect to dip into your principal? If so, you may deplete your savings faster than if you just live off investment earnings. Build in a cushion to guard against these risks.



Build your retirement fund: Save, save, save

When you know roughly how much money you'll need, your next goal is to save that amount. First, you'll have to map out a savings plan that works for you. Assume a conservative rate of return (e.g., 5 to 6 percent), and then determine approximately how much you'll need to save every year between now and your retirement to reach your goal.

The next step is to put your savings plan into action. It's never too early to get started (ideally, begin saving in your 20s). To the extent possible, you may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice (e.g., 401(k) plans, payroll deduction savings). This arrangement reduces the risk of impulsive or unwise spending that will threaten your savings plan--out of sight, out of mind. If possible, save more than you think you'll need to provide a cushion.

Understand your investment options

You need to understand the types of investments that are available, and decide which ones are right for you. If you don't have the time, energy, or inclination to do this yourself, hire a financial professional. He or she will explain the options that are available to you, and will assist you in selecting investments that are appropriate for your goals, risk tolerance, and time horizon.

Use the right savings tools

The following are among the most common retirement savings tools, but others are also available.

Employer-sponsored retirement plans that allow employee deferrals (like 401(k), 403(b), SIMPLE, and 457(b) plans) are powerful savings tools. Your contributions come out of your salary as pretax contributions (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn. These plans often include employer-matching contributions and should be your first choice when it comes to saving for retirement. Both 401(k) and 403(b) plans can also allow after-tax Roth contributions. While Roth contributions don’t offer an immediate tax benefit, qualified distributions from your Roth account are federal income tax free.

IRAs, like employer-sponsored retirement plans, feature tax deferral of earnings. If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (unless you've made nondeductible contributions, in which case a portion of the withdrawals will not be taxable).

Roth IRAs don't permit tax-deductible contributions but allow you to make completely tax-free withdrawals under certain conditions. With both types, you can typically choose from a wide range of investments to fund your IRA.

Annuities are generally funded with after-tax dollars, but their earnings are tax deferred (you pay tax on the portion of distributions that represents earnings). There is generally no annual limit on contributions to an annuity. A typical annuity provides income payments beginning at some future time, usually retirement. The payments may last for your life, for the joint life of you and a beneficiary, or for a specified number of years (guarantees are subject to the claims-paying ability of the issuing insurance company).

Note: In addition to any income taxes owed, a 10 percent premature distribution penalty tax may apply to distributions made from employer-sponsored retirement plans, IRAs, and annuities prior to age 59½ (prior to age 55 for employer-sponsored retirement plans in some circumstances).



Choosing a Beneficiary for Your IRA or 401(k)

Selecting beneficiaries for retirement benefits is different from choosing beneficiaries for other assets such as life insurance. With retirement benefits, you need to know the impact of income tax and estate tax laws in order to select the right beneficiaries. Although taxes shouldn't be the sole determining factor in naming your beneficiaries, ignoring the impact of taxes could lead you to make an incorrect choice.

In addition, if you're married, beneficiary designations may affect the size of minimum required distributions to you from your IRAs and retirement plans while you're alive.

Paying income tax on most retirement distributions

Most inherited assets such as bank accounts, stocks, and real estate pass to your beneficiaries without income tax being due. However, that's not usually the case with 401(k) plans and IRAs.

Beneficiaries pay ordinary income tax on distributions from 401(k) plans and traditional IRAs. With Roth IRAs and Roth 401(k)s, however, your beneficiaries can receive the benefits free from income tax if all of the tax requirements are met. That means you need to consider the impact of income taxes when designating beneficiaries for your 401(k) and IRA assets.

For example, if one of your children inherits $100,000 cash from you and another child receives your 401(k) account worth $100,000, they aren't receiving the same amount. The reason is that all distributions from the 401(k) plan will be subject to income tax at ordinary income tax rates, while the cash isn't subject to income tax when it passes to your child upon your death.

Similarly, if one of your children inherits your taxable traditional IRA and another child receives your income-tax-free Roth IRA, the bottom line is different for each of them.

Naming or changing beneficiaries

When you open up an IRA or begin participating in a 401(k), you are given a form to complete in order to name your beneficiaries. Changes are made in the same way--you complete a new beneficiary designation form. A will or trust does not override your beneficiary designation form. However, spouses may have special rights under federal or state law.

It's a good idea to review your beneficiary designation form at least every two to three years. Also, be sure to update your form to reflect changes in financial circumstances. Beneficiary designations are important estate planning documents. Seek legal advice as needed.

Designating primary and secondary beneficiaries

When it comes to beneficiary designation forms, you want to avoid gaps. If you don't have a named beneficiary who survives you, your estate may end up as the beneficiary, which is not always the best result.

Your primary beneficiary is your first choice to receive retirement benefits. You can name more than one person or entity as your primary beneficiary. If your primary beneficiary doesn't survive you or decides to decline the benefits (the tax term for this is a disclaimer), then your secondary (or "contingent") beneficiaries receive the benefits.

Having multiple beneficiaries

You can name more than one beneficiary to share in the proceeds. You just need to specify the percentage each beneficiary will receive (the shares do not have to be equal). You should also state who will receive the proceeds



should a beneficiary not survive you.

In some cases, you'll want to designate a different beneficiary for each account or have one account divided into subaccounts (with a beneficiary for each subaccount). You'd do this to allow each beneficiary to use his or her own life expectancy in calculating required distributions after your death. This, in turn, can permit greater tax deferral (delay) and flexibility for your beneficiaries in paying income tax on distributions.

Avoiding gaps or naming your estate as a beneficiary

There are two ways your retirement benefits could end up in your probate estate. Probate is the court process by which assets are transferred from someone who has died to the heirs or beneficiaries entitled to those assets.

First, you might name your estate as the beneficiary. Second, if no named beneficiary survives you, your probate estate may end up as the beneficiary by default. If your probate estate is your beneficiary, several problems can arise.

If your estate receives your retirement benefits, the opportunity to maximize tax deferral by spreading out distributions may be lost. In addition, probate can mean paying attorney's and executor's fees and delaying the distribution of benefits.

Naming your spouse as a beneficiary

When it comes to taxes, your spouse is usually the best choice for a primary beneficiary.

A spousal beneficiary has the greatest flexibility for delaying distributions that are subject to income tax. In addition to rolling over your 401(k) or IRA to his or her IRA, a surviving spouse can decide to treat your IRA as his or her own IRA. This can provide more tax and planning options.

If your spouse is more than 10 years younger than you, then naming your spouse can also reduce the size of any required taxable distributions to you from retirement assets while you're alive. This can allow more assets to stay in the retirement account longer and delay the payment of income tax on distributions.

Although naming a surviving spouse can produce the best income tax result, that isn't necessarily the case with death taxes. One possible downside to naming your spouse as the primary beneficiary is that it will increase the size of your spouse's estate for death tax purposes. That's because at your death, your spouse can inherit an unlimited amount of assets and defer federal death tax until both of you are deceased (note: special tax rules and requirements apply for a surviving spouse who is not a U.S. citizen). However, this may result in death tax or increased death tax when your spouse dies.

If your spouse's taxable estate for federal tax purposes at his or her death exceeds the applicable exclusion amount (formerly known as the unified credit), then federal death tax may be due at his or her death. The applicable exclusion amount is $3.5 million in 2009 ($2 million in 2008).

Naming other individuals as beneficiaries

You may have some limits on choosing beneficiaries other than your spouse. No matter where you live, federal law dictates that your surviving spouse be the primary beneficiary of your 401(k) plan benefit unless your spouse signs a timely, effective written waiver. And if you live in one of the community property states, your spouse may have rights related to your IRA regardless of whether he or she is named as the primary beneficiary.

Keep in mind that a nonspouse beneficiary cannot roll over your 401(k) or IRA to his or her own IRA. However, a nonspouse beneficiary may be able to roll over all or part of your 401(k) benefits to an inherited IRA (plans are not required to offer this option until 2010).



Naming a trust as a beneficiary

You must follow special tax rules when naming a trust as a beneficiary, and there may be income tax complications. Seek legal advice before designating a trust as a beneficiary.

Naming a charity as a beneficiary

In general, naming a charity as the primary beneficiary will not affect required distributions to you during your lifetime. However, after your death, having a charity named with other beneficiaries on the same asset could affect the tax-deferral possibilities of the noncharitable beneficiaries, depending on how soon after your death the charity receives its share of the benefits.



Choosing an Income Tax Filing Status

Selecting a filing status is one of the first decisions you'll make when you fill out your federal income tax return, so it's important to know the rules. And because you may have more than one option, you need to know the advantages and disadvantages of each. Making the right decision about your filing status can save money and prevent problems with the IRS down the road.

The five filing statuses and how they affect your tax liability

Your filing status is especially important because it determines, in part, the tax rate applied to your taxable income, the amount of your standard deduction, and the types of deductions and credits available. By choosing the right filing status, you can minimize your taxes.

The five filing statuses are unmarried, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. There are six income tax brackets. Your tax rate depends on your filing status and the amount of your taxable income. For example, if you're unmarried and your taxable income is more than $8,375 but not more than $34,000 (in 2010), it's taxed at 15 percent. If you're a head of household filer, though, your taxable income can climb to $45,550 and still be taxed at 15 percent. So, it's clear that some filing statuses are more beneficial than others.

Although you'll generally want to choose whichever filing status minimizes your taxes, other considerations (such as a pending divorce) may also come into play.

You're unmarried if you're unmarried or legally separated from your spouse on the last day of the year

This one's pretty straightforward. And, depending on your circumstances, it may be your only option. Your filing status is determined as of the last day of the tax year (December 31). To use the unmarried status, you must be unmarried or separated from your spouse by either divorce or a written separate maintenance decree on the last day of the year. Unfortunately, you jump into a higher tax bracket more quickly with the unmarried status than with some of the other filing statuses.

Married filing jointly often results in tax savings for married couples

You may file jointly if, on the last day of the tax year, you are:

• Married and living together as husband and wife

• Married and living apart, but not legally separated under a divorce decree or separate maintenance agreement, or

• Separated under an interlocutory (i.e., not final) decree of divorce

Also, you are considered married for the entire tax year for filing status purposes if your spouse died during the tax year.

When filing jointly, you and your spouse combine your income, exemptions, deductions, and credits. Filing jointly generally offers the most tax savings for married couples. For one thing, there are many credits that you can take if you file a joint return that you can't take if you file married filing separately. These include the child and dependent care credit, the adoption expense credit, the Hope credit (renamed the American Opportunity credit for 2009 and 2010), and the Lifetime Learning credit.

Still, this filing status is not always the most advantageous. If your spouse owes certain debts (including



defaulted student loans and unpaid child support), the IRS may divert any refund due on your joint tax return to the appropriate agency. To get your share of the refund, you'll have to file an injured spouse claim and probably have to jump through hoops. You can avoid the hassle by filing a separate return.

You don't have to be separated to choose married filing separately

You and your spouse can choose to file separately if you're married as of the last day of the tax year. Here, you'd report only your own income and claim only your own deductions and credits. Filing separately may be wise if you want to be responsible only for your own tax. With a joint return, by comparison, each spouse is jointly and individually liable for the full amount of the tax due. So, if your spouse skips town, you'd be left holding the tax bag unless you qualified as an innocent spouse.

Filing separately might also be the best tax move if one spouse has significant medical expenses or miscellaneous itemized deductions. Your ability to take these deductions is tied in to the level of your adjusted gross income (AGI). For example, medical expenses are deductible only if they exceed 7.5 percent of AGI. By filing separately, the AGI for each spouse is reduced. Keep in mind that if you and your spouse file separately and your spouse itemizes deductions, you'll have to do the same.

Remember, though, that you won't qualify for certain credits (such as the child and dependent care tax credit) and can't take certain deductions if you file separately. For example, you cannot deduct qualified education loan interest if you're married, unless you file a joint return.

Head of household status offers certain income tax advantages

Those who qualify for the head of household filing status get special tax treatment. Not only are the tax rates lower for head of household filers than for unmarried filers and married filing separately filers, but the standard deduction is larger as well. However, you'll have to satisfy the following requirements:

• Generally, you should be unmarried at the end of the year (unless you live apart from your spouse and meet certain tests)

• You must maintain a household for your child, dependent parent, or other qualifying dependent relative

• The household must be your home and generally must also be the main home of a qualifying relative for more than half of the year

• You must provide more than half the cost of maintaining the household

• You must be a U.S. citizen or resident alien for the entire tax year

Qualifying widow(er) with dependent child offers the advantages of a joint return

You may be able to select the qualifying widow(er) with dependent child filing status if your spouse died recently. This status allows you to use joint tax rates and offers the highest possible standard deduction, the one applicable to joint tax returns. To qualify, you must satisfy all of the following conditions:

• Your spouse died either last tax year or the tax year before that

• You qualified to file a joint return with your spouse for the year he or she died

• You have not remarried before the end of the tax year

• You have a qualifying dependent child

• You provide over half the cost of keeping up a home for yourself and your qualifying child



As you can see, choosing the correct filing status is not always easy. You might want to speak with a professional tax preparer or consult IRS Publication 17 for more information.



Am I liable for my spouse's debts?

Question:

Am I liable for my spouse's debts?

Answer:

The general rule is that spouses are not responsible for each other's debts, but there are exceptions. Many states will hold both spouses responsible for a debt incurred by one spouse if the debt constituted a family expense (e.g., child care or groceries). In addition, community property states will hold one spouse responsible for the other's debts because both spouses have equal rights to each other's income. Also, you are both responsible for any debt that you have in both names (e.g., mortgage, home equity loan, credit card).



Should I open a joint checking account with my spouse?

Question:

Should I open a joint checking account with my spouse?

Answer:

The answer depends on several factors. Among them are how you and your spouse feel money should be handled, your respective spending and saving habits, and whether there are any reasons to keep your money separate. Many couples find that the best solution is to have a joint account in addition to each keeping an individual account.

When used wisely and monitored carefully, a checking account can be an excellent way to keep track of your expenses. This is easiest to do when the account is held in one person's name only, although that may leave the other person without ready access to funds. When two people have access to the same account, keeping track becomes more difficult and requires more communication between the parties involved. Therefore, it is very important to keep a master account register up to date, recording all deposits, checks, and withdrawals. You don't want your spouse to bounce a check because you wrote one or made a withdrawal and didn't record it. Banks and check-printing companies offer duplicate checks--each comes with a carbon copy--that you may find helpful when sharing an account.

For various reasons, many couples prefer to have a joint checking account. Since most banks now charge monthly service fees, the fewer accounts you have, the smaller your fee expense. Moreover, you and your spouse may feel that you want to pool your money, particularly that spent on shared expenses--housing, utilities, groceries, and perhaps the car(s). Doing so not only gives you more of a sense of "being in this together" but also makes keeping a record of these expenses much simpler.

However, you may still prefer to have access to some money you can call your own, and for which you are not accountable to your spouse. In some cases, this may be simply a cash allowance for which you may not need a separate checking account. In other cases, particularly if you are both working, you may continue to handle some of your expenses separately. For example, you each may be responsible for your own car payments and insurance, or for your own credit card payments. If this is your situation, you may want to have a joint account for what you together consider the common (usually household) expenses, and separate accounts for handling your individual responsibilities.

If either of you wants to establish credit individually, you may decide to maintain separate checking accounts at least until you have done so. Separate checking accounts can be used as a lever to help you obtain credit. If either of you has poor credit, you may wish to keep your funds separate to circumvent attachment of joint funds to pay one spouse's bad debt. If your money is pooled in a joint account, the entire amount is legally available to either of you. A creditor is then justified in attaching those funds to pay a debt that only one of you may have incurred. If your marriage is foundering or if you have severe disagreements about how to manage money, you may want to maintain separate accounts. With joint accounts, either party can "clean out" the other simply by withdrawing all the funds in the account.



I'm getting remarried. How will this affect my Social Security benefits?

Question:

I'm getting remarried. How will this affect my Social Security benefits?

Answer:

If you're receiving benefits based on your own work record, your benefits will continue. If you're receiving spousal benefits based on your former spouse's work record, those benefits will generally end upon your getting remarried, but you may be able to receive benefits based on your new spouse's work record, or on your own.

If you're a widow(er) under age 60, or you're disabled but under 50, remarriage ends any benefits based on the record of your deceased spouse. However, if you remarry after age 60 (or after 50 and are disabled), those benefits remain intact, unless you choose to receive the spousal allowance through your new spouse. If your second marriage ends as a result of death, divorce, or annulment in less than 10 years, you will again be eligible to collect benefits on your first spouse's record. Benefits paid to a disabled widow(er) are unaffected by remarriage.

Note, too, that if you were the working spouse during your first marriage, your remarriage does not change the Social Security benefits paid to either your new spouse or ex-spouse. Because the rules surrounding payment of benefits are complicated, and depend on your particular situation, contact the Social Security Administration at (800) 772-1213 for more information.



Should I sign a prenuptial agreement to protect my assets when I remarry?

Question:

Should I sign a prenuptial agreement to protect my assets when I remarry?

Answer:

Even if you never thought about signing a prenuptial agreement the first time you married, it's wise to consider it now, because marriage is often more complicated the second (or third or fourth) time around. You may have more assets now, or you may own a business or have children to protect. And because you've been through it before, you may be worried about the financial consequences of divorce or widowhood.

A prenuptial agreement can ease your mind by spelling out what assets and liabilities each partner is bringing into the marriage, and by determining how money or property brought into the marriage or acquired during the marriage will be divided if the marriage ends either in death or divorce.

A prenuptial agreement addresses some or all of these points:

• Assets and liabilities: What assets are you each bringing into the marriage? How much are they worth, and who owns them? Which ones will become marital property, and which ones will continue to be owned individually? Will gifts and inheritances be shared or separate? What liabilities do you have (e.g., back taxes or other debt)?

• Divorce: If you divorce, how will you divide assets brought into the marriage or acquired during the marriage? Will either spouse receive a lump-sum cash settlement or alimony?

• Estate planning: What will go to your children from previous marriages? What will go to children you have together?

• Special contributions of partners: If one spouse contributes to the marriage in a special way (e.g., limiting his or her career for the benefit of children or the other spouse), will that spouse be provided for? What if one spouse brings more liabilities to the marriage than the other?

Because it's difficult to write an ironclad prenuptial agreement, don't try doing it yourself. Instead, you and your future spouse should hire separate attorneys to help you negotiate an agreement that will protect your financial interests without causing mistrust between the two of you.



I'm marrying someone with bad credit. How will this affect me?

Question:

I'm marrying someone with bad credit. How will this affect me?

Answer:

You are not responsible for your future spouse's bad credit or debt, unless you choose to take it on by getting a loan together to pay off the debt. However, your future spouse's credit problems can prevent you from getting credit as a couple after you're married. Even if you've had spotless credit, you may be turned down for credit cards or loans that you apply for together if your spouse has had serious problems.

You're smart to face this issue now rather than wait until after you're married to discuss it. Attitudes toward spending money, along with credit and debt problems, often lead to arguments that can strain a marriage. Order copies of both of your credit reports from one or more major credit reporting bureaus. Then, sit down and honestly discuss your past and future finances. Find out why your future spouse got into trouble with credit.

Next, if there is still outstanding debt, consider going through credit counseling together. Credit counseling may help your future spouse clean up his or her credit record and get back on track financially. One nonprofit organization, Consumer Credit Counseling Services (CCCS), sponsors money management seminars that can help you plan your financial life together. CCCS can also help you negotiate with creditors and can set up a budget you both can follow to pay off outstanding debt. Look in your telephone directory for the number of a local office. Be aware, however, that CCCS is paid for by lenders. Once it starts negotiating for you, your creditors will withdraw any lines of credit you have, including overdraft protection.

Finally, seriously consider keeping your credit separate, at least until your spouse's credit record improves. You don't have to combine your credit when you marry. For instance, apply for credit by yourself instead of applying for joint credit after you're married. You can have separate "associate" cards issued for your spouse to use. Even if your spouse has bad credit, your credit rating will remain unaffected. However, keeping separate credit can be complicated. For one thing, your spouse may resent that you control all of the credit in the household. It's also possible that you'll have a harder time qualifying for loans (e.g., a mortgage) alone than if your spouse's income could also be counted.



Should my spouse and I integrate our health insurance benefits?

Question:

Should my spouse and I integrate our health insurance benefits?

Answer:

When you and your spouse are making this decision, it may be useful for you to focus on three key areas: (1) the out-of-pocket cost of each plan, (2) the levels of service and coverage offered, and (3) the coverage offered to any dependent children, if applicable.

Employers will sometimes pay some or all of their employees' health insurance premiums. If this is true in your case, there may be no reason to consider a change in your health insurance plans. If you pay the premiums yourself, however, compare the costs. Check into whether family coverage through one of the plans is less expensive than two single policies. If you have no children, two single policies are typically less expensive than one policy with family coverage. Many large group plans offer two-person coverage (an employee plus spouse, partner, or child) for less than the price of a family plan. However, insurance carriers will not allow you to bill two companies for the same medical service.

Other important cost factors to consider are out-of-pocket deductibles and co-payments. Even if the premium you pay at your company is lower than that paid by your spouse, you may discover that your deductibles and co-payments for health problems and routine doctor's visits are substantially higher. Despite the higher premiums, you may decide that it is better to join a family plan through your spouse's employer because of its lower deductibles and co-payments.

Be aware that the services and coverage that one plan provides, including the choice of doctors and hospitals, could outweigh the lower costs of the other. You might decide that your family is better off to pay higher premiums, deductibles, or co-payments while receiving specific services (such as rehabilitation, psychiatric therapy, or free eye exams) that the other plan does not offer.



What's the difference between an "injured spouse" and an "innocent spouse"?

Question:

What's the difference between an "injured spouse" and an "innocent spouse"?

Answer:

From the viewpoint of the IRS, an injured spouse and an innocent spouse are quite different. You may qualify as an injured spouse if your joint income tax refund was held back and applied toward your spouse's past due liability for certain debts, including defaulted student loans, taxes, or child support. In contrast, you may qualify as an innocent spouse if you signed a joint income tax return but were not aware that your spouse understated the tax liability.

To qualify for injured spouse relief, you must report income (such as wages) and make payments (such as federal income tax withholding or estimated tax payments) regarding your joint return. Part or all of your overpayment must have been applied to your spouse's past-due debt. If this is the case, you may be eligible to claim your share of a refund by filing Form 8379 (Injured Spouse Claim and Allocation). On this form, you break down your allocable share of items reported on your joint return. The IRS then calculates the refund (if any) that you are due.

You and your spouse are individually responsible for the entire tax due on your joint return. However, if taxes were understated because your spouse omitted income or claimed improper deductions or credits without your knowledge, an exception may be made: You may qualify as an innocent spouse. You may be entitled to innocent spouse relief if you did not know (and had no reason to know) of the understatement of tax and if, considering all the facts and circumstances, it would be unfair to hold you responsible for the understatement.

To request innocent spouse relief, you must file Form 8857. If you do not qualify for relief under the general innocent spouse rule, other forms of relief (such as equitable relief or the separate liability election) may still be possible. See IRS Publication 971 for details, or consult a tax professional.



My spouse and I are filing separate returns. Can we both itemize our deductions?

Answer:

When spouses file separately, both must use the same method of claiming deductions. That is, either both parties must itemize, or both parties must take the standard deduction. If you choose to itemize, it's important to know how to divide your deductions.

If your filing status is married filing separately, you typically report on your income tax return only your own income, expenses, credits, and deductions. Therefore, if you paid for a doctor's appointment out of your separate checking account, you would claim that deduction on your return. Any medical expenses paid out of a joint checking account in which you and your spouse have the same interest are considered to have been paid equally by each of you, unless you can show otherwise. Different rules may apply in community property states.

You should also be aware that the amount of your total itemized deductions will be limited or phased out if your adjusted gross income exceeds a certain level: $83,400 if you file separately in 2009, $166,800 for all others.

Note: For 2010, the limitation on itemized deductions for higher-income individuals is repealed by the Economic Growth and Tax Relief Reconciliation Act of 2001.

Often, married couples have a lower overall tax liability if they choose to file jointly. This is not always the case, however. If you are unsure which filing method results in the lowest tax liability, you should determine your tax liability both ways before filing your return.

For more information, see IRS Publication 17 or consult a tax professional.



What kind of insurance can I buy to cover my diamond engagement ring?

Question:

What kind of insurance can I buy to cover my diamond engagement ring?

Answer:

If you have homeowners or renters insurance, you already have some coverage for your ring. A typical homeowners or renters policy will offer protection (up to a specified dollar amount) for jewelry and other forms of personal property. If the value of your ring exceeds these coverage limits, you can purchase a floater that will provide you with additional coverage for your diamond ring, based on its appraised value.

You can also purchase an insurance policy specifically designed to protect jewelry and other valuables. It's likely that a certified jeweler would have to appraise your ring for the insurance company. If you're interested in such a stand-alone policy, ask your insurance agent for more information.



getting married ebook

Documents

married couples

health insurance

life insurance

types of insurance

ownership issues

tax considerations

good credit