April 6, 2009
Vol 2, Issue 4
Jean Keener
Jean KeenerWhat a difference a month makes.  When my newsletter came out last month, the S&P 500 was down 24% year to date and was back to 1996 levels.  The pundits were seeing only more gloom and doom ahead.  Since then, the S&P 500 is up 23% and the Dow had its best single month in 6 years.  Suddenly there's a lot more optimism out there.
 So what's next?  It would be nice if this were the beginning of a nice quick recovery in the economy and our investment accounts.  But the reality is, none of us can predict whether the worst is past or yet to come.  The job losses are still coming, and many are still experiencing personal hardship in their financial situations.  So I urged you to focus on the fundamentals of your financial situation last month when the future seemed bleak, and I'll encourage you to do the same again this month even as things may feel a little better.
In this newsletter, we have details on the Cobra subsidy, budgeting how-to's, a conversation with parents about balancing saving for retirement and college, and some other tips on tax and estate planning.  As always, feel free to e-mail me at jean@keenerfinancial.com with requests for newsletter topics you'd like to see covered.  Thank you, and Live Well.
In This Issue
Cobra Subsidy Details
Establishing a Budget
Writing Off Worthless Securities
Retirement V. College
Estate Planning Pitfall
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Cobra Subsidy Details
hand writingThe American Recovery and Reinvestment Act (the Act) provides COBRA premium assistance, which offers a temporary 65% reduction in COBRA premiums for eligible beneficiaries. This new provision will affect former employees receiving or eligible to receive COBRA health insurance coverage and their families, as well as employers.
COBRA is a federal law that allows employees, their spouses, and dependent children who lose health insurance benefits due to involuntary termination of employment to elect to continue that coverage for up to 18 months. Qualified beneficiaries are obligated to pay up to the full cost of coverage plus a 2% administrative fee. However, under the COBRA premium assistance provisions, the employee's cost of COBRA insurance premiums is reduced to 35% of the total premium cost, including the 2% administrative fee. However, if the employer pays any portion of the premium, no subsidy is payable on that portion.
The COBRA premium reduction is available to assistance-eligible individuals (AEIs). These include the employee (and members of his or her family) whose employment is involuntarily terminated between (and including) September 1, 2008 and December 31, 2009, and is otherwise eligible for, and elects COBRA continuation coverage. The coverage subsidy is payable for a maximum of 9 months and is not available prior to February 17, 2009.

There are other provisions for this program for both employers and assistance-eligible individuals. If this program is relevant to you, please see the details at www.KeenerFinancial.com.
Establishing a Budget
woman and daughtersDo you ever wonder where your money goes each month? Does it seem like you're never able to get ahead or reach the milestones you've envisioned? 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
Writing Off Worthless Securities on Your Taxes
smilingmature  womanIt's a classic good news/bad news situation. If you're holding a stock that has become worthless, the bad news is obvious: you've lost your investment. The good (or at least better) news? You may qualify to deduct the investment as a loss on your tax return.  Worthless stock or bonds are those that are completely--the key word here being completely--without value. A company's filing for bankruptcy does not necessarily mean that the stock is worthless; the stock may still trade and retain at least some of its value.
The mechanics

If you own stock in a company that liquidates, you may receive at the end of the year a Form 1099-DIV, which lists the liquidating distribution made during that year. For tax purposes, you should treat this distribution as if you had sold the stock, using the distribution date on the form as the date of sale. You would subtract your cost basis from the amount of the distribution.

If you don't receive a 1099--and it's highly likely you won't--you may still be able to take a deduction for worthless stock, but the process becomes more challenging. You'll need to be able to present proof that the stock became worthless during the year in which you're deducting the loss. Examples of documents that might be considered proof include a letter from the company stating that it has shut down and there are no assets to pay shareholders, or a letter from a broker stating that the stock no longer has value. For tax purposes, worthless stock is treated as though you sold the shares on the last day of the year in which they become worthless.

Abandoning a stock
You may also be able to claim a stock as worthless if you abandoned it after March 12, 2008. To do so, you must relinquish all rights to it and receive nothing in return; however, you should consult a tax professional to ensure that the transaction is not considered a sale, exchange, contribution to capital, dividend, or gift, which could change the tax implications.
Don't ignore timing
In general, you must claim a loss on a worthless stock in the year in which it becomes worthless. (However, if you do neglect to claim the loss in the appropriate year, you can do so later by filing an amended tax return within 7 years.) IRS Publication 550 includes more information about recognizing capital gains and losses.

What if a stock is worth almost nothing?

If a stock is no longer traded but is not formally defunct, there's another (though more complicated) possibility for milking tax value from an investing mistake. You could sell the shares in an arm's length transaction (to a willing, unrelated buyer for fair value). Be sure that ownership of the shares transfers to the new owner.

You also could check with your brokerage firm to see whether it purchases virtually worthless shares from customers for a nominal amount to supply them with a trade confirmation for tax purposes.

Writing off worthless securities is far more complex than this brief discussion might suggest. Consult a tax professional to ensure you don't make any missteps.
Retirement V. College
Family portraitSo many parents struggle with the dilemma of whether they should prioritize saving for kids' college or their own retirement.  Some parents believe that children benefit the most from being responsible for their own college funding through personal work, savings, scholarships, and borrowing to get hrough college.  Other parents have a strong desire to fully fund at least an undergraduate degree for their children because they believe their children will enjoy college the most and be best positioned for success in life by not being responsible for these costs.  Both viewpoints are valid. 
Which category you fall into seems to have a lot to do with your personal experiences and the affect you feel they had on you - if you worked your way through college and felt it contributed to your personal responsibility and character, you probably think it would be good for your kids too.  If you worked your way through and felt like you missed out on parts of college life or graduated with crippling debt, you probably want to help your children have a different experience.  Or if your parents supported you through college and you felt that support made an important difference in your later success, you probably want to do the same for your children.  But regardless of your motivation, if you want to help fund your children's education, you are likely faced with a dilemma.
If you're currently juggling these priorities, go to www.KeenerFinancial.com for list of questions to ask and "financial levers" you can pull to balance these two important goals.
Estate Planning Pitfall: Accidental Disinheritance
Retired CoupleIt's easier than you might think to accidentally disinherit someone with your estate plan.   Here are some of the most common ways it can occur and how to avoid them.
One of the biggest causes of accidental disinheritance is the simplest: failure to make a will. In this case, property passes according to the intestacy laws of the state in which you're "domiciled."  For information on what happens in Texas and a link to a short State Bar Association pamphlet, visit my website.

Making an ineffective or faulty will can also result in misdirected allocations. For example, you may fail to provide for children born after you make your will (this is what happened to Anna Nicole Smith and Heath Ledger). The lesson here is to forgo the do-it-yourself kit and hire an experienced estate planning attorney to draft and execute your will, and review it every year or two.

Failing to update your will can result in allocations that are made according to an old will. This can lead to unwanted allocations (for example, the disinheritance of children when Mom or Dad remarries and everything passes to the new spouse). Make it a rule to review and update your will periodically, especially after major life events such as marriage, a birth or adoption, divorce, or death. Also, update beneficiary designations (for life insurance policies, retirement accounts, payable on death accounts, etc.) annually. And, remember that beneficiary designations trump provisions made in your will.

A fourth cause of accidental disinheritance is what's known as ademption. Big word which basically just means you got rid of the property you willed to someone before you died.  For example, you might leave your car to your son in your will, and then sell or gift it to someone else before you die. A similar situation can occur when a life insurance policy is allowed to lapse (so check that your elderly parents don't forget to make their premium payments).
Avoid these four pitfalls, and you're well on your way to an effective estate plan.
I hope you found this newsletter informative.  KFP offers a free, no-obligation initial consultation to start the financial planning process.  To learn more or schedule a time, call 817-993-0401 or e-mail jean@keenerfinancial.com.
Jean Keener, CRPC (Chartered Retirement Planning Counselor)
Keener Financial Planning

Keener Financial Planning provides hourly, as-needed financial planning and advice on a commission-free basis to people at all financial levels.