3 Ways to Avoid a Financial Entanglement

On Friday, July 10, Jada Pinkett Smith took herself to The Red Table to address rumors regarding her alleged relationship with the singer, August Alsina. Since the series focuses on intimate, and often difficult, conversations, Jada’s sit down with herself made sense.  

Not surprisingly, this episode racked up more than 15 million views in the first day of airing, a record for Facebook live. In the episode, Will Smith, her husband of 23 years, questions her about what happened with August to which she responded, she was in an “entanglement.”

Entanglement- n. a complicated or compromising relationship or situation

Admittedly, Jada’s characterization might be fair based on the definition. IDK but that’s not why we’re here. We are on the subject of how to avoid “a complicated or compromising situation,” in your finances that could cost your family thousands.

One: Have a Will

It is estimated that dying without a will, or intestacy, reduces what a family receives when a family member dies by 30%. The culprit? Administration fees. The heirs, usually close family members, are entitled to a portion of the deceased’s estate. But without a Will which names an Executor, the heirs have to agree to who is going to run, or administer, the business of the deceased. If the heirs cannot agree, then the family has to go to Court, spend time and money for the Court to decide who will be the Administrator.

To make matters worse, the laws of the State where the person dies dictate what the heirs are entitled. These laws are typically outdated and result in big surprises because the result is not what most people expect nor what the deceased likely would have wanted.  For example, in Pennsylvania, a surviving spouse can receive as little as one-half of their deceased spouse’s estate.

Because estates can be difficult to administer, many people ignore it. Unfortunately, ignoring it can cause more problems and additional expense. Most notably what’s referred to as a “tangled title.” A tangled title is when the owner of the property has died and their heirs, often the second or third generation, live in the property without obtaining title to the property because the estate has not gone through probate, the appropriate court process.

The number of possible heirs, after two or three generations, can be staggering.  In most cases, all heirs have to agree on who will receive the property which in many cases does not happen, at least not easily.

Untangling a title is time consuming and costly. It can take an attorney more than thirty-five (35) hours to clear title which does not include multiple court appearances and administration costs.

Tangled titles reduce familial wealth in two ways. First, because the person living the property does not own it, they are unable to obtain financing for costly, but necessary, home repairs. In many cases, the resident of the property is unable to enter into an agreement to prevent foreclosure. As a result, the property is either lost to Sheriff’s Sale or sits vacant in disrepair.

To avoid the problems associated with dying without a will, people should work with an attorney to discuss their wishes and memorialize them in a will. In addition to a will, many attorneys might suggest a durable Power of Attorney and a healthcare proxy. Non-probate assets, which include retirement accounts, insurance policies, and some real estate are not controlled by the will and should be discussed to ensure those assets are in-line with your overall estate plan.

Two: Establish and

maintain good credit

In 2017, Stephen Brobeck, president of the CFA, Consumer Federation of America, shared, “[l]ow credit scores can cost consumers hundreds, and sometimes thousands, of dollars a year in higher loan and service costs.” Completely understand Stephen’s point because ten years prior, in 2007, I financed a 2007 Volkwagen Jetta but with poor credit, the best interest rate available was an 18% APR, almost four times the rate someone with good credit would have paid for the same car.  

Beyond flatout credit denial there are some not so obvious effects of bad credit.  Because statistics show that drivers with bad credit file more claims, your credit score can affect your car insurance premiums unless you live in California, Massachusetts, or Hawaii. If you are approved for an apartment, you may be forced to pay a higher than normal deposit. Utilities can also require a deposit. It goes without saying that those with bad credit will pay more interest and receive less favorable terms for credit cards.

Three: Maintain an

Emergency Fund

A well-funded emergency fund is the key to a strong financial foundation.  In the past, I’ve suggested at minimum $2000. Although I still suggest $2000 as your “zero,” having more such as three to six months of expenses saved is critical, especially in these uncertain times.  

         The emergency account is for the emergencies you cannot anticipate including loss of income due to disability and unexpected car and home repair. I caution against using credit for unexpected expenses because it, quite literally, compounds a bad situation with interest.

         Your emergency fund should be readily accessible but not too easily accessed that you are tempted to use it for non-emergencies such as vacations.

Conclusion

In short, avoiding financial entanglements requires being real with yourself, assessing your financial goals and putting a plan in action.