PLANNING FOR WEALTH & SECURITY
By attorneys Jennifer & Jeff Hawkins
 
Cash Management in Financial Crisis

MSNBC investment guru Jim Cramer advised on NBC’s Today show last fall that anyone who may need access to their money within the next five years should get out of the market right away. Mr. Cramer’s critics complained that many people panicked on his advice and helped drive down the stock market. On Tuesday, February 24, 2009, Mr. Cramer appeared again on Today and announced that the market had already dropped too far now and that people should stay in the market until the market recovers. He explained that asset values had dropped so low that sellers would lose too much wealth by selling now. He advised holding the assets until the values rise to a more reasonable level. We all need to keep cool heads and act thoughtfully in these trying times.

Here is a tough question: When should you sell assets to pay bills and which assets should go first? The answer depends upon what kind of assets you have, the value of the assets you have right now, and whether your expenses are great enough that you really must dig into your savings to pay bills. If a person has money in volatile assets like stocks and mutual funds, Mr. Cramer’s advice would indicate that you should only sell those assets to the extent that you need money to pay bills. If you need $5,000 and your stock is now worth $20,000, it might be sensible to sell $5,000 worth of stock and keep the other $15,000 in place. However, if you can afford to pay the bills out of your checking account or some other source of cash, it may be better to pay the bills that way instead of selling off your deflated investment portfolio.

You normally pay income tax on every dollar that you withdraw from an IRA or other tax-deferred savings plan. However, if you cannot pay your medical expenses out of your regular income, then it may be sensible to take extra distributions out of your retirement plan. Medical expenses can be deductible expenses if they are high enough and those deductions can offset some or all of the income tax. In a sense, this strategy gives you a tax-free way to pull money out of your IRA.

Many people have no IRAs or investments in the stock market, but they have savings bonds and high medical expenses. For those people, it may be better to cash out the government savings bonds from time to time instead of cashing out certificates of deposit or spending too much readily available cash. Once again, medical expenses can offset income tax that you would otherwise have to pay on the accumulated bond interest when you cash out those savings bonds and it may not add significantly to your income tax bill. This strategy also spares your family the bond interest tax burden after you die.

Families must be aware that Medicaid assistance can help some disabled, aging people remain at home or pay uninsured medical expenses. Medicaid assistance is much more difficult to get now than it used to be, but careful planning with an experienced attorney can help make it less burdensome for everyone.

These are tough times for all of us. Careful, thoughtful planning are more important than ever to prevent a crisis from becoming a tragedy.

THIS ARTICLE IS NOT LEGAL ADVICE. ALWAYS CONSULT AN ATTORNEY DIRECTLY BEFORE RELYING UPON THIS ARTICLE OR CHANGING AN ESTATE PLAN.

© 2009 by HAWKINS LAW PC, Estate, Trust & Business Attorneys. All rights reserved.