In my last few blog posts, I have discussed the importance of managing financial risks and offered some sensible strategies to protect against catastrophic loss. In this fourth, and final post on managing risk, I will examine two other areas that can pose significant threats to an individual’s or family’s finances.
Employer 401(k) type plans and IRAs are the single largest component of most families’ financial capital. Although these two retirement savings vehicles share similarities, they differ substantially in the shelter afforded against creditor claims. Most employer retirement plans are covered by the federal Employee Retirement Income Security Act (ERISA) and provide broad protection from creditors. Protections for IRA assets, on the other hand, are more limited and depend upon several factors including your state of residence and the source of the IRA funds. Understanding the nuances of federal and state laws that apply to your situation can prevent an innocent but potentially costly misstep, including rolling over or mixing assets from one type of account to another.
The most likely and potentially dangerous threat to a family’s wealth comes from within. No parent wants to leave an inheritance only to have it later lost in a divorce. The high incidence of multiple marriages and divorces make this scenario increasingly probable, especially when several heirs are involved. Although there are no absolute ways to protect an intergenerational transfer of assets from this risk, a variety of relatively simple trusts has proven effective in providing at least some measure of protection.
No matter how well we prepare, the future is beyond our control. No one can predict the risks we will face, but we can prepare for those we may face. Most people will become motivated to act only after they experience a crisis, but by then it may be too late. The smarter ones will act during more predictable periods with a clear head and devise a risk management plan that includes the right balance of smart lifestyle and career decisions, along with insurance, asset, and estate planning. The odds are good that such a plan will allow you to enjoy a fuller life with greater peace of mind.