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Now, on to living matters: Focusing on protection, we need to maintain an emergency cash account. Some think this requires running money for a year, but that's hard to do. Regardless, having some available cash is a good idea. This, by the way, does not mean credit card resources and after Katrina, when there were no machines or banks available, real cash may be the answer.

After working through our section on Planning you should have a good idea as to your financial status. If you are married with dependent children, this insurance stuff can become even more important. But, who in the family needs it and how much insurance should there be? Starting with life insurance, we normally recommend a "term" policy. And, that insurance should be on each of the parents. You ask, how much? First, assume that your surviving family will need 75-80% of its current operating income. Next, we identify other resources that will become available. These could be company benefits and/or Social Security. Yes, SS in its present form may well step in to help but you would need to be in the program at the time of the incident. We had a 26 year old client, who was married, pregnant, and had one child. Her husband was killed in a farm accident. Her SS benefits were around $27,000 a year for her and the kids. That income stream continues until the oldest child turns 16, at which point, it will begin to be reduced. If she remarries, some or most of those benefits will stop. Of course, there is more on this under the Social Security topic. The planning worksheet can help with these computations.

To compute how much insurance you need to maintain your standard of living, plan on using 5% of the principle amount. A $100,000 policy benefit could provide $5,000 a year income and should be able to pay that amount for the survivor's life expectancy if properly invested.

Disability insurance should be considered, but if your job is risky, it is almost impossible to get and expensive in any event. Health insurance goes with out saying. See the insurance section for more on both types.

Trusts
Do you need a trust? The answer is maybe. To get to the answer, we need to work through the world of trusts. There are many kinds designed for different jobs, and have been around far longer that the USA, having started in Europe in the middle ages. They assume a legal identity, and, although not a person, trusts can own assets and conduct legal affairs. They can be revocable, meaning they can be terminated or irrevocable, which means they cannot be terminated. They can be a taxable entity or a flow through trust which has the income go to the owners (trustees) of the trust for taxation.

The most common trust for our purposes and, the one you have likely heard about, can be called the "A B" Trust or Living Trust and is most likely a revocable trust. We have used them in our family to good advantage, but it is important to know what a Trust will and will not do. A revocable trust is not an asset protection tool. A lawsuit ruling against you will ignore the trust. It is, however, useful as an estate planning tool. It is appropriate when a couple has accumulated wealth to a sum that would create an estate tax. This is a nasty tax for those with assets above the following varying asset amounts as this tax starts high and quickly and becomes very large very fast. In 2005, the first $1,500,000 is excluded, in 2006 and 2007 the exclusion goes to $2,000,000, working its way up to $3,500,000 in 2009, and does not exist in 2010 but then starts down and in 2011, without congressional action it goes to $1,000,000.

Here is what happens all too often. In our story, grandpa and grandma have considerable wealth and we assume that grandpa goes first. This is not a rule but he is likely to be 3 years older and she will live 4 years longer. That average couple statistic again. When grandpa dies, grandma gets everything and there is no estate filing or tax due; titles are simply moved to grandma. (This is fine if their wealth were under the above numbers when he dies and is not expected to exceed those limits in her remaining 7 years). This wealthy couple should, however, have a trust because when she dies, the estate may be worth well in excess of the taxable limits. She will have that excludable amount of say 1.5 million but her estate will perhaps be worth 3 million. Tax on that amount would be $555,800. But, what happened to grandpa's exclusion? It was lost when the money went to grandma. To avoid this, the trust should have been the beneficiary of the amount that grandpa could have excluded, thus utilizing his exclusion. Grandma can still be in charge of the trust dollars as explained in the trust instrument. With this plan in place, the family and not the feds will get the $555,800. We don't know where the law is going to go on this matter so we recommend that protective steps be taken now by planning for the worst case scenario.

Some asset protection specialists suggest that there be two trusts for this use. One owned by each spouse with certain assets having only one owner. The theory here is that if one spouse is sole owner and the other is sued, the trust then provides a level of protection for the spouse and therefore the family wealth. If he is sued, and the home belongs to her, it is less likely to be lost.

There are special trusts for many purposes, to include the following:

The use of most of these trusts is beyond the scope of this section. If your wealth is substantial or if there are special needs within your family, you should explore trusts more thoroughly. But remember that they are primarily an estate tool used to avoid probate. Little asset protection is provided by using a trust, and there are no income tax advantages. Generally we do not recommend the use of an irrevocable trust as they are potentially filled with future complications.

Asset Protection
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