Serving as a Personal Representative: The Good, The Bad, and the Ugly

 

Earlier this year, my brother passed away. Recently, I was appointed by the Surrogate’s Court of Suffolk County, New York as his estate’s personal representative and provided Certificates of Appointment indicating my authority to collect, manage, and distribute assets of the estate.

 

Under New York law, estates with assets under $50,000 are considered “small.” My brother’s estate, with just an $11,363 bank account and about $90,000 of unsecured debts is virtually “micro”… and insolvent (i.e., estate assets are insufficient to pay debts, let alone make any bequests to heirs).

This is the situation that I have been tasked with administering and, needless to say, it has been a huge learning experience. Below are five things I have learned along the way that may be useful if you are ever asked to serve as the executor or administrator (when someone dies intestate without a will) of someone’s estate:

 

Forensic Accounting is Difficult- My brother left little information about his finances and never discussed money with me or his partner of 16 years. Drawing on my CFP® training, there was only one way to begin: a thorough examination of his assets and debts. It took me days to construct a pro forma net worth statement using data from bank and billing statements, a checkbook register, and tax records. Needless to say, his partner and I were both shocked when I finished doing the math.

 

Legal Advice is Necessary- A Long Island lawyer charged the estate a $1,500 fee for small estate legal services. It is well worth the cost to have a legal professional process required court paperwork and advise on process steps and state laws (e.g., the order in which debts are paid and the fact that creditors in New York cases have seven months from my appointment as personal representative to submit claims).

 

Handling an Out-of-State Estate is Manageable- A personal representative has a legal duty to administer an estate according to state law. One of my fiduciary duties was establishing an estate bank account. Living 1,200 miles away from my late brother's New York home, I was worried this would be costly (read: require expensive travel expenses) and/or problematic. Instead it was “easy peasy.” A big gratitude shout out to Bank of America's estate planning division which seamlessly transferred the $11,363 from my brother’s New York bank to the Florida based estate account.

 

Vultures Are Out There- My brother co-owned a house with his partner through a legal titling arrangement known as joint tenancy with right of survivorship. When he passed, the house automatically passed to her as the surviving co-owner. This has not stopped over a dozen vulture realtors and house flippers (to date) from contacting both of us  by mail and phone with offers to buy the house for “quick cash.” Apparently, these vultures scour probate court filings to get data about a deceased person's home address and contact information for their personal representative. Some of the vultures have been exceptionally cruel including one that sent a fake check made out to my deceased brother.

 

Spreadsheets are Your Friend- I created an Excel spreadsheet to manage the distribution of limited estate assets to creditors after the seven-month waiting period (for creditors to submit claims) is over in February. There is now $8,174 left in the estate account after paying the lawyer and reimbursing funeral expenses (the top two priority claims) and a check printing fee. There are also already tens of thousands of dollars of formal debt claims. Since the estate is insolvent, each unsecured creditor will receive pennies on the dollar based on the percentage of their debt claim to the overall debt total. My spreadsheet makes this math very easy and will also serve as a final accounting document to submit to the New York court system when the estate is closed.

There were other learning lessons as well, but I choose not to share them in a public forum. Suffice to say, things that I learned about how estate planning is supposed to take place in an ideal world may not happen with an insolvent estate in the real world. 

Bottom line: If you are asked to serve as the personal representative of someone's estate, know what you are getting into and get assistance from an attorney who specializes in estate planning. Also, you have the right to say "no" by filing formal declination documents. In this case, the surrogate's court will find someone else.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Mid-Year Financial Tweaks and Tasks

It’s halftime for your 2023 finances and a perfect time to review where you stand, make mid-year adjustments, and complete recommended financial planning action steps.

Below are ten mid-year financial tweaks and tasks:

Tax-Deferred Savings Tweak- Perhaps you will get a raise on July 1. Consider completing the paperwork needed to save more money from July to December in your employer’s tax-deferred retirement savings plan. Even 1% more of pay in savings adds up over time.

Health Savings Account (HSA) Tweak- By mid-year, you know what you already spent for health care services through June. This information can help inform decisions about how much more to save up to the 2023 limits of $3,850 (self-only) and $7,750 (family coverage).

Flexible Spending Account (FSA) Tweak- Like HSAs, you know your health care spending so far. Use this information to adjust payroll deductions for a health care FSA (up or down). The 2023 maximum pre-tax contribution is $3,050. Ditto for child care FSA contributions.

Tax Withholding Tweak- The IRS Tax Withholding Estimator can determine if withholding is on track based on estimates of remaining 2023 income. Also, apply the IRS safe harbor rules to 2022 income and a “best estimate” of 2023 income to avoid an under-withholding penalty.

Savings Account Refresh- While “brick and mortar” banks pay less than 0.05% (i.e., half of 1%) on savings and money market accounts, online banks now pay about 3.75% to 4.5%. Search for banks that offer attractive rates and FDIC insurance and consider moving your money. Another cash equivalent asset to consider is FDIC-insured certificates of deposit (CDs) sold by online banks and brokerage firms.

Budget Refresh- During the first six months of 2023, inflation increased many household expenses including auto and homeowner’s insurance premiums, utilities, rent, child care, and food eaten at and away from home. Rework the numbers in previous budgets to better reflect current costs.

Net Worth Calculation- If you haven’t tallied the value of your assets and debts in a while to calculate net worth (assets - debts), now is a good time. Why? You have six months left in 2023 to make positive changes; e.g., saving more and accelerating debt repayment using PowerPay.

Financial Self-Assessments- Rutgers Cooperative Extension has six online financial self-assessment tools to help users identify strengths and weaknesses of their personal finances. Quiz results can identify opportunities for financial self-improvement during the remainder of 2023 by taking action on quiz items with a “never” or “seldom” response.

Investment Analysis- Now is the time to review investment performance during the first half of 2023. Why? To inform investment decisions going forward and to identify poorly performing securities that might be good candidates for potential tax-loss harvesting at year end.

Tax Bracket Analysis- By mid-year, it is easier to make more accurate projections of annual income. Consider doing a proforma 2023 tax return. This information can inform decisions made during July to December to avoid moving up to a higher tax bracket or triggering the net investment income tax (NIIT) and, for older adults, higher IRMAA Medicare premiums.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Are You Wealthy?

The words “wealth” and “wealth management” are used frequently in advertisements for financial products (e.g., exchange-traded funds or ETFs and cryptocurrency) and financial services (e.g., specific investment advisory firms). This begs the questions “what, exactly, is wealth?” and “how do people know when they, themselves, are wealthy?” 

One online dictionary defines wealth as “an abundance of valuable possessions or money.” Another states that wealth is “plentiful supplies of particular resources” and notes that wealth can be held by individuals, communities, and countries. 

Other sources describe different categories of wealth including financial wealth (income and assets), time wealth (freedom), social wealth (strong relationships and social capital), and physical wealth (good physical and mental health). 

The remainder of this post will focus on financial wealth, specifically three ways to measure it to provide an answer the second question, above. Specifically, three wealth-measurement metrics will be explored and explained.

 

Net Worth Calculation

 

A common way to measure wealth is with a net worth statement. Net worth is calculated by subtracting debts from assets.  For example, $200,000 of assets minus $100,000 of debt equals a net worth of $100,000.

Three categories of assets are cash assets (e.g., bank accounts, money market funds, and certificates of deposit), investment assets (e.g., stocks, bonds, mutual funds, and ETFs), and property assets (e.g., house, car, home furnishings, and electronics). Two categories of debt are current debts (e.g., medical bills, credit card balances, and other debts expected to be repaid within a year) and long-term debts (e.g., car loans, student loans, and mortgages).

A good financial goal to strive for is to increase net worth by at least 5% a year through increased savings and/or reduced debt. Use the Net Worth Calculation Spreadsheet (in Excel) or this “paper and pencil” print worksheet to keep track of your progress. Some people also set specific net worth attainment goals such as $1 million before retirement.

 

The “Wealth Test”

 

In the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko, the authors outline a simple “How to Determine If You’re Wealthy” formula to determine the adequacy of a person’s net worth at any point in life. The formula works as follows: multiply your age times your realized pretax annual income from all sources, excluding inheritances, and divide it by 10.

For example, a couple, both age 50, with a combined annual income of $80,000 should have a net worth of $400,000, calculated as follows: 50 x $80,000 = $4,000,000 ÷ 10 = $400,000. 

The authors state that the figure derived from the formula is what the minimum net worth should be for a particular age and income combination. The more people exceed their formula-based figure, the better.

 

Online Calculators

 

A third metric for wealth considers, not only an individual’s or couple’s age and income, but where they live. After all, there is big difference in living costs between, say, Manhattan, Kansas and Manhattan, NYC.

 

The New York Times What Percent Are You? tool asks users to enter a household income. Then they click “Go” and results indicate where they place, income-wise, in percentile among U.S. residents. For example, household incomes of $30,000, $50,000, 100,000, and $200,000 are in the bottom 29%, bottom 49%, top 21%, and top 5% of incomes, respectively. Users can also hover over the U.S. map to get household income rankings for over 300 metro areas.

 

Another interesting calculator is Wealthometer, where users compare their estimate of the percentage of Americans with less wealth than they have. Users enter numbers for real assets, financial assets, and debt (ideally taken from a current net worth statement) and the number of household members. Results are presented in a bar graph showing the position of the user’s estimate of their comparative wealth with their actual position based on government wealth data.

 

What Not to Do

Some people judge their wealth in comparison to neighbors with expensive cars, clothes, and houses. This is a mistake. The neighbors could be in over their head in debt or, as Stanley and Danko describe in their book “ Big Hat, No Cattle.”

The best way to measure financial wealth is with objective metrics and to always remember that net worth ≠ self-worth.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.