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Posts by mlbyrne4

Overdraft Protection: Know the Risks

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What is overdraft protection? It can be helpful in a pinch, but it comes with risks.  Be sure to weigh the pros and cons before deciding to use it.

Recently, I was speaking with a person who was unable to open a checking account, due to owing money to another banking institution. When I asked how he got into the situation of owing the bank money, he replied, “Overdraft fees.” These resulted from a combination of ATM withdrawals, debit card purchases, and writing checks to pay monthly bills.

Having past banking experience, I know that it is easier than ever to rack up high overdraft fees. Not only does it affect your ability to open a checking account with a new bank, it can also weaken your credit score. In this blog we discuss overdraft protection fees and the various ways you can overdraft your account. The following examples would happen only if a person chooses to have the bank turn on their courtesy pay/overdraft protection. I usually tell people it’s a good thing to have in case of an emergency, but it can be costly. However, if you do not have credit or savings, this may be your only option in an emergency situation.

  • Monthly or Balance Requirement Fees: Some checking accounts have monthly maintenance fees regardless of the balance, or charge you a fee for dipping below the minimum required balance . When automatically deducted from your account, these fees could potentially bring your account into the negative. Most banks will not charge an overdraft fee in this case, but will charge a fee once the account has been overdrawn for more than five days. This is referred to as an extended overdraft fee. For every five days that your account stays negative, you will incur another fee, up to five times.
  • Unavailable Funds: There could be times when you may deposit money but technically the money is not available for use yet. A great example of this is depositing a check through the ATM machine. Although you see and know you deposited a check, it may not clear until the next day because it still needs to be manually processed. If you use those unavailable funds prior to the check clearing, you could incur fees. This is why it’s a good habit to always be aware of your available balance. Most ATM machines will print out your balance and your available balance. Always make sure to use available balance, because this includes pending debit card purchases, automatic drafts, processing checks or other debits from your account, and will not include unavailable funds not yet cleared by the bank.
  • Overdraft Protection for Checks: This service will pay for a check, even when you do not have enough money in your account to cover the check. Here’s an example: You have $300 currently in your checking account, and write a check for your car payment for $295. This all seems fine, except that your monthly checking fee of $15 comes out the day before your check is processed. You now only have $285 in your checking account, so when your check is processed, you will be charged an overdraft fee of $35
  • Electronic or ACH (Automated Clearing House) Overdraft Protection: This covers your debit card and electronic payments. Most banks charge a fee for each overdraft item, so let’s say the overdraft charge was $35. In this example, I used my card seven times in a day for small purchases. I then forgot that my car payment was set to automatically come out on the same day. If my car payment gets pulled first, and I have overdraft protection cover the seven items, I would incur $175 in fees. (That’s $35 per item up to five items per day!) I may not get paid again soon enough, so I would not be able to make a deposit to bring my account positive within five business days. I would then incur another $35 extended overdraft fee. As I mentioned above, this could happen up to five more times, leading to another $175 in fees. When you make your next deposit you will be paying $350 in fees.

Now that you are aware of the many ways you can easily incur overdraft fees, you also know that you have the option of Opting Out of both check and electronic, and ACH overdraft protection. Check Opt Out means that if there is not enough money in your account, the bank will not cash a check written off that account.  Electronic/ACH Opt Out means if there is not enough money in your account at the time you swipe your debit card, the transaction will not go through, and you will not pay a fee. Your card will show up as declined when you swipe.

Overdraft protection fees can be a very expensive lesson while learning to manage your accounts.  In my next blog, I will discuss better alternatives for overdraft protection.

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Basic Estate Planning: A Will, a Trust, or Both?

In my last blog, I reviewed easy, affordable options available to start planning your estate, including creating a will. However, there is an additional option that many people don’t think of, the trust.

For some people, a trust can be more useful than a will. For others, a will is better. Some will decide they need both.

Most people assume that creating a trust is a more expensive option, only for the very rich, but this is not necessarily the case.  According to AARP, the fee to set up a trust could be as little as a few hundred dollars (but can run several thousand dollars or more). 

Similar to a will and last will and testament, a trust document details how you want your assets distributed upon your death and how to take care of your minor children financially.  Simply put, a trust appoints a trustee to carry out very specific wishes for your assets.

The major benefit of a trust is that that assets do not have to go through probate court. Probate is proving in court that the will is valid. (To understand more of what this entails, download AIER’s free book, The Executor’s Roadmap.)

There are two different types of trusts: revocable (living) and irrevocable (upon death). The major benefit of a living trust is that it goes into effect before death. This means that you can retain control over your money and property while you’re still alive. (You can even serve as your own trustee and appoint someone else, a successor trustee, to take over after you die.)

With a revocable living trust, the person creating it can later change his or her mind regarding not only the property placed into trust, but also whether to keep it or to end the trust altogether.

With an irrevocable trust it’s exactly as it sounds: It is NOT revocable. Once you put property into it, you cannot retrieve it, as it belongs to the trust. Placing assets into an irrevocable trust may reduce your estate for tax purposes. This is one big potential benefit of an irrevocable trust.

Setting up a trust could potentially save your estate thousands of dollars after you die. While the upfront cost of setting up a will is generally cheaper than setting up a trust, it could cost an estate more money after settlement.

There are also risk factors to consider when using just a will. Provisions in a will do not cover the cost of administering your wishes after your death.  If your will is contested, loved ones may need to hire an attorney, which would then add additional fees. Plus, a will does not offer any possible reduction to the estate tax burden, whereas some trusts may offer that.

However, since a trust does not have to go through probate, your survivors will avoid probate fees.  Your trustee will not have the hassle of going to court or hiring an attorney to settle the estate, and has the immediate right to distribute your property according to the plan described in your trust.

You can be very detailed in your trust and formulate your plan to take care of things like the future care for beloved pets or managing specific needs of an aging parent, a spouse left behind, or a relative with health issues.

These are many reasons why you may want to consider establishing a trust. While a living trust makes sense for some people, wills are sufficient for others. Both have different advantages and disadvantages depending on your situation. Trust and wills are not necessarily mutually exclusive and depending on one’s specific estate planning needs, having both may be appropriate. The chart below can provide some insight on that question.

 

Will Trust
Appoints agents to act after death No Yes
Appoints guardians for dependent children Yes No
Provisions for pets No * Yes
Controls when beneficiaries receive assets No * Yes
Helps assets avoid probate No Yes
Reduces Estate Taxes No Potentially
Typical cost to create $50-$1,500 $300-$5000
* Unless a testamentary of trust is created

 

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What If Something Happens? Basic Estate Planning

Prior to joining AIER, I worked for various banks in my community, first as a teller, and then as a financial services representative. The one thing that struck me early on in my banking career was how many people had no clue about their need for estate planning. I must admit, I only learned the importance of estate planning from my initial bank training and witnessing what happened to those who didn’t plan. This certainly was not a topic ever mentioned by my parents, and looking back, it should have been.

According to AARP, more than 50 percent of Americans do not have a will. I know that no one wants to recognize their own mortality, but why are half of us leaving our loved ones without guidance and our assets to the unpredictability of a probate court?

So what is estate planning?

Everyone works hard for their money. They acquire assets and investments with the money that they earn, and hopefully those assets and investments appreciate as they get older. Often times, inheritances from other family members add to the value of an estate. Estate planning is protection of everything you and your family have worked so hard to achieve. Estate planning is not only for the extremely wealthy.

It’s never too early to have an estate plan in place. You can start the moment you turn 18. Most people won’t think about their estate until they experience a major life event, like a marriage, death, the birth of a child, or the purchase of a house. However, there is no need to wait. Estate plans can help manage health care decisions, distribute personal belongings, and keep peace in your family during an extremely tough time.

If you are looking for a good place to start, AIER has an easy-to-follow estate planning guide called “If Something Should Happen- How to Organize Your Financial and Legal Affairs.”  It’s available for free download here. It has useful worksheets where you can record your own personal estate information and give direction to the people that will take care of your affairs if something happens to you. A print version is also available in the AIER Bookstore.

In the meantime, here are two valuable documents everyone should have:

Durable Power of Attorney (POA)

A durable power of attorney names someone to make health care or financial decisions for you in case you become too ill or incapacitated to do so yourself. Everyone over the age of 18 should have one in place, because once you’re no longer a minor, your parents lose the authority to tell a hospital how to treat you. They would also have no access to your bank accounts for funds needed to cover emergency medical expenses or everyday household expenses while you recuperate. The individual holding power of attorney can make these decisions and access your money. Free Power of Attorney forms are available here.

Living Will

A living will and power of attorney usually go hand in hand. This document goes into detail about how you want health professionals to treat you should you become unable to communicate. For example, a living will indicates whether you want a hospital to leave you on life support, and if so, for how long. Aging with Dignity for Five Wishes is a non-profit that allows you to make a free living will which you may access, change and print for one year.

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