Is there a way that parents can give children money without ruining their lives?

That may seem to be a strange question. Most of us would assume the effect would be just the opposite, that a pile of cash would solve a bucket-load of problems. Yet the issue isn’t that simple. There are a lot of misconceptions and misinformation about inheriting money.

First, receiving a lot of money can certainly have harmful consequences. Studies have shown that 43% of people who come into a large sum of money (whether by inheritance, lottery winnings, or other windfalls) have spent it all within five years. Sixty percent of inherited wealth is completely blown by the heirs, and on average, 90 percent of an inheritance is gone by the time the grandchildren die. Stories abound of those whose lives were literally ruined by inheriting money.

Of course, not every child is going to squander an inheritance. Forty percent—a substantial minority—don’t mishandle their inheritances. I would guess a good number of those kids inherently understand the value of a dollar and have a healthy relationship with money.

Still, how to give away the money and possessions you’ve accumulated over a lifetime in ways that will help and enrich the lives of the recipients is an issue many parents need to consider. This is true even for those who don’t consider themselves wealthy. Life insurance, accumulated retirement benefits, and assets such as a small business or a paid-for home can add up to a larger amount than one might think.

If parents don’t want their children’s inheritances to cause problems for them, what are they to do? Leave everything to charity? That’s exactly what Warren Buffet is doing. The second richest man in the world is leaving little of his billions to his children.

This, based on my experience as well as an ABC report aired by John Stossel last year, is not common. Less than half of people with money to leave bequeath anything to charity. The majority of inheritances go to family members. There are several things parents can do if they want to make sure those inheritances will be used well.

First, have a will. This may seem obvious, especially for the wealthy. But it would shock you to know, in my 30-plus years in finance, how many millionaires I’ve encountered who had no wills. If you want to control the disbursement of your estate, you’ve got to have a will. Otherwise, your state law and a judge will decide who will get what.

Second, begin today to educate yourself about how money works. It’s going to be difficult to give away money in a helpful and healthy way if you don’t understand the basics of investing, money psychology, and the creative estate planning options available to you.

Third, evaluate your children’s money skills. The older they are and the more responsible they’ve been in adulthood, the greater the chance they will use an inheritance wisely. All children are not created equal in this regard. You may do as one of my clients did, which is to leave money outright to the more responsible children while putting funds in trust for those that don’t handle money well.

And finally, explore and improve your own relationship with money. My experience is that most people have a difficult relationship with money—whether they have a little or a lot. Your financial beliefs and choices are what your children learn from. The money behavior you model for them is one of the most important ways you can help insure that what they inherit from you will be a blessing rather than a burden.

Insurance is often described as protection for a rainy day. If you really want to protect yourself against the worst rainstorms, maybe what you need is an umbrella.

Umbrella insurance is personal liability coverage that extends beyond the limits of your homeowner’s and auto insurance policies. A common minimum amount is one million dollars, with amounts up to five or even ten million not that unusual.

Umbrella insurance is an important asset protection strategy for those who have a net worth of several million dollars and want to protect themselves against frivolous lawsuits or possible sky-high judgments. George Frear, of First Western Insurance in Rapid City, South Dakota, recommends having an umbrella policy that covers at least half of your net worth.

For those who aren’t wealthy, umbrella coverage may at first glance seem excessive or unnecessary. Yet when you look more closely at the numbers, that minimum of one million dollars doesn’t seem like so much. For example, the highest amount of liability coverage currently available through standard auto insurance policies is $500,000. Suppose you were in an accident where two new cars were totaled and several people were seriously injured. Just the out-of-pocket costs for medical expenses could easily eat up the $500,000. That’s not even considering the possibility of a lawsuit for damages over and above those costs.

The only possible downside to a large umbrella policy is that it may create exactly the “deep pockets” that make someone more likely to be the target for a lawsuit or a claim for unreasonably high damages. Since judgments are often awarded for the maximum amount of someone’s policy, having an umbrella policy for more than your net worth isn’t necessarily the best option.

On the other hand, of course, someone could certainly sue you for more than your net worth. Nor does the insurance company consider your net worth as a factor in approving the amount of coverage. Policyholders wouldn’t have anything to gain from over-insuring, as they might from insuring a house or other tangible property for more than its value. There isn’t exactly a high risk that someone would burn down his investment portfolio in order to collect on an umbrella policy.

The question of how much coverage you might need through an umbrella policy would be best answered after a discussion with both your insurance agent and your financial planner.

Most major insurance companies offer umbrella policies, and this type of coverage is relatively inexpensive compared to the benefits it offers. You may get discounted rates if you get a policy from the company that already carries your auto or homeowner’s insurance.

Most companies require you to have specific minimum amounts of liability coverage through your homeowner’s and auto insurance policies before you can get an umbrella policy. It is important to make sure you coordinate your policies so you don’t have a gap in coverage. Since the umbrella policy doesn’t kick in until the maximum has been paid on your other policies, any liability between those maximums and the minimum of your umbrella insurance would come out of your own pocket.

I need to express my appreciation to George Frear for discussing umbrella insurance at one of our recent teleclasses. Thanks to his information, I checked my own coverage and discovered I didn’t have an umbrella policy—an omission that I promptly remedied.

I certainly don’t advise clients to carry more insurance than they reasonably need. Having a big enough umbrella, however, is one good way to make sure you aren’t caught unprotected by one of life’s downpours.

What do money and meditation have in common? Find out when you listen to our teleclass with Rick Long, Clinical Supervisor of Onsite Workshops. Rick explains the scientific functioning of our brain and how meditation can help anyone make sound money decisions. Before joining Onsite, Rick was in private practice as a therapist. He is one of the pioneers in the field of integrating experiential therapy and money. His personal story of financial transformation has been featured in the Wall Street Journal and most recently in the book, The True Cost of Happiness, by Stacey Tisdale.

To listen to our guest Rick Long, click here to go to the KFG Client Only section of our website. Use your password to log in, then search under “Teleclass.” If you do not have a password or are having trouble with your current password, call Lindsay at 605-343-1400 and she will assist you.

I recently scheduled a teleclass with my insurance agent and learned some interesting things about what’s new in personal insurance. According to George Frear of First Western Insurance in Rapid City, South Dakota, here are several things you might want to consider as possible updates to your insurance coverage:

1. Credit rating. The current industry trend is for insurance companies to verify an applicant’s credit score before issuing a policy. In some cases, a good credit score can reduce premiums by as much as 30%.

2. Vehicle loan gap coverage. If you lease a vehicle or buy a new one with no down payment, there may be a period of time when the car has a cash value less than the amount you owe on it. You can get gap insurance that will pay the difference in case the car is totaled.

3. Insurance for a short-term rental vehicle. Most travelers know that buying insurance on a rental car is usually unnecessary, as you are generally covered under your auto policy. This coverage, however, would not extend to anyone not listed on your policy who may drive the rental car. It also does not cover foreign countries except Canada. You may have some coverage in a foreign country through your credit card insurance, but it would only cover damage to the car, not liability.

4. Liability limits. Traditionally, liability limits are split between damage and liability and into varying maximum amounts per person and per accident. Some companies now also offer a single-limit option, with a maximum of $500,000 per accident for whatever combination of liability and property damage may be needed.

5. Ownership of vehicles by a trust. In recent years as this has become more common, insurance companies generally don’t have a problem covering both the trust as the owner of the vehicle and you as the driver.

6. Homeowner replacement coverage. A crucial issue with homeowner’s insurance is to make sure you have high enough coverage in case you have to rebuild your home. Most companies now offer an option of 25% or 50% more than the policy amount. The cost for this increased coverage is relatively small, with the 50% option increasing the premium by about 5%.

7. Contents of a home. Again, the crucial issue is whether you have coverage for actual cash value or replacement value—the difference between getting garage-sale prices or retail prices for your furniture. You also should talk to your agent about scheduling separately any valuable items such as jewelry, furs, firearms, or collectibles. And, of course, a photographic inventory of the contents of your home is extremely useful in case you ever need to file a claim for a catastrophic loss.

8. Homeowner’s coverage for people who don’t live in your home. Children who are full-time students but older than the age limit specified in your policy can still be covered. For a relatively small increase in your premium, you can add them to your policy so they will have liability coverage and protection for their personal property up to 10% of the amount of your coverage. In the same way, you can cover elderly parents or other relatives (such as grandparents, in-laws, aunts and uncles) who live in a retirement apartment, assisted living facility, or nursing home.

These are the highlights of what’s new with insurance; the complete audio of George’s presentation is available in the client-only section of our website at www.kahlerfinancial.com. His overall recommendation, of course, is to talk with your agent periodically to make sure your coverage is up to date and is appropriate for your needs.

Learn why coupon-clipping can make you spend more instead of less, why the newspaper is a bargain-hunter’s best friend, and how the “pause” can save you money. Join us at 4:00 p.m. MST on Thursday, January 24, 2008, for a tele-class with Kathleen Fox on “Conscious Spending.”

Kathleen, who is co-author with Rick of Conscious Finance, describes herself as congenitally thrifty. She has years of experience in managing with limited funds, first as a single mom and later for a blended family of seven. Kathleen shares her dollar-stretching skills with creativity and humor, so this class is sure to be entertaining as well as enlightening. Click Here to register.

For someone with a pattern of financial chaos, a first step toward better money management is getting organized. This requires creating a clear picture of where you’ve been and where you are in terms of income, expenses, and debt. To accomplish this, you will need to set up a bookkeeping system to track your income and expenses and pay bills.

This task can be overwhelming and can stop people cold before they even get started on controlling their spending. As a result, I recommend using the services of a professional bookkeeping firm.

Work with your bookkeeper to do the following:

• Set up a computerized bookkeeping system appropriate to your needs. I recommend QuickBooks Online.

• Document your spending for the past twelve months.

• Develop and print a month-by-month spending plan for the upcoming year.

• Have your bookkeeper print a monthly report of your actual spending, and meet with them every month to review that report and compare it to the spending plan.

For those with a severe pattern of overspending, I suggest setting up two bank accounts. The first, for paying bills, is accessible only to your bookkeeper. This means your bookkeeper needs to be of the highest integrity, probably a CPA firm that has strict ethical and regulatory oversight. Paychecks or other designated income will be directly deposited into this account wherever possible. Bills will go directly to the bookkeeper and be paid from this account. A designated amount for discretionary spending is transferred regularly to a second account, which is freely accessible to you.

If you are not comfortable turning over check-signing power to someone else, it can also work to require two signatures—yours and your bookkeeper’s—on the bill-paying account so neither can spend money without the consent of the other. This only works as long as your bookkeeper is clearly the primary authority on the account, with the power to say “no” and make it stick.

In setting up the bookkeeping system, it is important to be as thorough as necessary but not needlessly complicated. The key is to have a system that isn’t too intimidating and to have a bookkeeper who is willing to explain it. One of the goals of this process is to help you learn how to manage your finances, which for most people includes learning how basic bookkeeping works and how to understand financial reports.

There are advantages to using a software program such as QuickBooks Online. Both you and your bookkeeper can easily access the information, it is easy to prepare various types of reports, and the program is compatible with tax-preparation software.

Setting up a system that works well may take some trial and error. It is important to be patient and to make a commitment to learn the system and work in cooperation with the bookkeeper. Sometimes what a client perceives as a problem with the system is, instead, the client’s reluctance to use the system.

Part of the value of working with a bookkeeper is getting help with the daunting task of setting up a system to manage cash flow. Another benefit is having your financial information clearly laid out by someone who is objective. Simply acknowledging the reality of your situation can be an important step toward financial balance.

Plain, old-fashioned bookkeeping may seem out of sync with my commitment to integrated financial planning, with its emphasis on emotions and building a healthy relationship with money. Yet the whole idea of “integration” is to combine the emotional aspects of money and the factual, exterior aspects. One of those important exterior tools is an accurate set of books.

After reviewing a lot of homeowners and auto insurance policies recently and growing concerned that clients are not keeping up to date with their policies, I thought it might be time to bring in an expert on property/casualty insurance for this month’s tele-class. To listen to our guest,George Frear, a property casualty expert with First Western Insurance, click here to go to the KFG Client Only section of our website. Use your password to log in, then search under “Teleclass.” If you do not have a password or are having trouble with your current password, call Lindsay at 605-343-1400 and she will assist you.

Dave Ramsey, a well-known talk show host, is brilliant when it comes to managing spending, debt, and real estate. I recommend his books in my books and frequently hand out his DVD’s on budgeting and cash flow management.

However, when it comes to understanding investments and portfolio withdrawal rates, Dave could use a little education. I listen to Ramsey on my 11-minute commute home each day. Over the past month, I’ve caught enough incorrect information that I thought it was time to respond in writing instead of talking back to my radio.

On the October 22nd show, a caller asked Dave his opinion of real estate investment trusts. While Dave likes real estate as an investment class, he trashed REITs as having terrible returns, mainly because of excessive management fees. He said there wasn’t a REIT around that garnered anywhere near a 12% return over the past 10 years, like “good growth mutual funds,” which according to Dave easily return 12 to 15% a year.

During another program that same week, a listener asked him if value funds had overall returns in excess of growth funds. Dave quickly responded no, that growth oriented mutual funds out-perform value oriented funds.

Unfortunately, Dave didn’t check the facts, which directly contradict his advice.

Over the past 10 years (ending 9/30/07), the Vanguard REIT Index fund averaged 11.91% annually, while “good growth mutual funds” (I used the Morningstar U.S. Growth Index) have averaged 2.6%. Wow! Mutual funds that held value oriented stocks returned three times more than growth stocks, at 8.91%. Of the 2,014 growth mutual funds that have been around 10 years or more, the REIT Index had a higher return than 89% of them.

Let me put this another way. If you had $100,000 in the REIT index fund 10 years ago, today you would have $308,098. Had you followed Dave’s investment advice and invested in “good growth mutual funds” you would have just $129,263.

Giving Dave the benefit of the doubt, I thought that perhaps he was looking at the five-year stats and just got confused. So I checked. The Vanguard REIT Index fund earned an annual return of 20.81%, “good growth mutual funds” still lagged REITs but earned a respectable 14.63%. The Vanguard REIT Index fund had a higher return than 80% of all growth mutual funds. Also, value mutual funds thumped the “good growth funds” again, earning 18.5%.

Maybe the three-year picture was better? Nope. The REITs did 18.59%, while the “good growth funds” lagged again with just 12.83% and the value funds trumped growth again with 15.6% return. Once again, the REIT index fund beat 79% of all the growth funds.

The facts would seem to suggest just the opposite of Dave’s advice: buy a “good REIT mutual fund” and forget about those underperforming, poor-returning “good growth mutual funds.” Of course, long-time readers of this column know that isn’t sound advice, either. It is essential for a good portfolio to be diversified in order to reduce volatility and balance risk. This means including at least five asset classes, including US stocks (growth and value), international stocks, REITs, market neutral funds, natural resource funds, and bonds.

Dave Ramsey does a great job of helping you minimize your debt and maximize your cash flow. If he weren’t so popular and well respected, I could have easily been content to groan at my car radio and forget about it. However, because so many listeners value his advice, he owes it to his audience to do more thorough research before giving them investment information.