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Don't miss this month's timely story ideas, direct dial phone numbers, and E-mail addresses of these accessible experts!
INVESTMENTS AND WEALTH MANAGEMENT
Trends from Ink&Air, Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com , 508-479-1033
If You Plan to Sell Real Estate as Part of your Retirement Planning, Talk to Financial Advisors Who Understand Tax Deferral Strategies. Boomers, who reach 60 this January, are beginning their search for a second or retirement home will fuel the demand for resort property for some time to come. Many professional advisors, attorneys, CPAs, real estate brokers, and financial advisors operate in their own silos, isolated from the expertise of other professionals who give advice to retiring Boomers. A frustrating truth is that many attorneys and CPAs don't fully understand the significant benefits to a Boomer couple of tax deferral strategies around buying and selling real estate. Too many Boomers will get the very bad advice to pay the capital gains tax due at the sale of real estate, and "get it over with.” Many real estate brokers do understand the tax deferral strategies that can be undertaken when Boomers sell a primary residence and buy a dream or vacation home on Cape Cod or other resorts, but when real estate buyers go to their CPA and attorney, who may or may not be familiar with important tax deferral strategies, the subject may never come up because there has been no preparation by any of the parties. “Much of the planning should be done as soon as people start thinking about buying or selling their property," says Nat Santoro. Kinlin Grover, Orleans. Nothing is likely to stop the demand by Baby Boomers for property on Cape Cod or other resorts in the U.S. in the near future. In these areas the demand is very strong and it is just beginning. In January of 2006, the first wave of Boomers will turn 60. They are not waiting until retirement to own their dream home. They are buying now, trying to keep from being shut out of a rapidly appreciating second and retirement home market in these resort areas. They are high net worth and self-qualified by the current price of real estate. In most cases, they will be selling a highly appreciated piece of property they currently own and downsizing when they buy a resort property. The National Association of Realtors says that in 2004, 37% of all homes sold were either second homes or for real estate investment. For instance, a decade ago, for the year 2004, 2736 Cape Cod single family properties sold at an average price of $152,000 and in 2004, 4403 properties sold at an average price of $506,000, according to the Cape and Islands Association of Realtors, Multiple Listing Service The Boomers will experience a wide variety of financial and tax issues with the sale of existing property and the purchase of any retirement or investment property. Here are several strategies that can save Boomers significantly by deferring taxes and ultimately, eliminating them. • A 1031 Exchange allows Boomers to exchange an existing business or home for resort area retirement home and defer capital gains taxes indefinitely. • A 1031 Exchange allows Boomers to exchange an existing business for a different kind of income producing investment that could be real estate or stocks and bonds and even CD's, deferring capital gains taxes indefinitely • Options for accessing real estate equity to use in any way the homeowner chooses, whether for long term care, home maintenance, or property taxes. • Private Annuity Trusts do an excellent job of deferring taxes and protecting assets from creditors and divorcing spouses. Private annuity trusts allow families to pass property to children tax free. • Charitable Remainder Trusts. If a transfer of any property is part of your retirement planning, see a financial planner before you visit your broker. The savings to your retirement finances can be substantial. Find a realtor who partners with a financial advisors familiar with and specializing in strategies for highly appreciated real estate, either a primary residence. a vacation home, or a business and the Boomer’s best interests will be served. Pearson Financial Services, Dennis, MA, is the author of "The Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, their families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP 800-385-7925
Complications Arise when Unmarried Couples Re-Title Real Estate Assets and Make Inadvertent Gifts. Unmarried couples stay unmarried for many reasons, but one of the reasons is not because it allows easy financial planning. Quite the contrary, according to Debra Neiman, co-author of the new book Money Without Matrimony: The Unmarried Couple's Guide to Financial Security. "Good financial planning for unmarried couples requires a close attention to detail and the law, or innocent and loving actions can blow up in their faces, particularly around the issue of inadvertent gifting of real estate which can disinherit children and leave a large tax bill," she says. Take Caleb and Allison. Caleb is in his mid-seventies and Allison is in her late 50s. Caleb's children do not approve. Problems surfaced when the couple decided to remodel Caleb's house that they are sharing. Caleb's $300,000 equity in the home was his largest asset. He earned $20,000 a year in retirement income and could not qualify for a new $400,000 mortgage needed for the remodel. Allison out earned Caleb significantly. The only way the couple could refinance was to apply jointly for a mortgage, and the only way Allison agreed to assume responsibility for the mortgage was if her name was added to the deed. This seemingly common sense decision on the couple's part was the beginning of a financial mess. The problem was not caused by death or illness, but by Caleb's generosity. By refinancing the mortgage with Allison and re-titling the property in joint ownership to correspond with the mortgage, Caleb inadvertently gave Allison 50% of his $300,000 equity in the home, a major financial blunder. Tax Implications of the Inadvertent Gift Not only has Caleb's "gift" exceeded the $11,000 gift-tax exclusion, he has just given away $139,000 or a big chunk of his lifetime gift-tax exclusion ($150,000 minus the $11,000 gift-tax exclusion.). When Caleb dies, his estate will lose that amount of the exclusion, and Allison -- or Caleb's heirs if Allison dies first -- could face a hefty tax bill. Remember, unmarried partners don't qualify for the unlimited marital property transfer between spouses. This is a perfect set up to pit Caleb's disapproving children against his younger partner who in this scenario is "stealing" the family home. Adding insult to perceived injury, Caleb's children also need to use part of their inheritance to pay a hefty tax bill because no proper financial planning was done when their father put Allison's name on the deed to the property. Gift Tax Return With Caleb's gift to Allison of $139,000, inadvertent or not, he's required by law to notify the IRS by filing a gift-tax return. Worse still, if he does not realize he's given the gift, no one else may discover the blunder, possibly for decades, when Allison is prepared to inherit the house. If owned jointly, the entire house goes to her. However, at that juncture, the gift would not be considered a completed transaction and consequently, the estate is penalized and the entire value of the home would be included in Caleb's estate, This may require the payment of excessive estate taxes by the heirs, whether Allison or Caleb's children or both. In all likelihood, the home's value will have appreciated by then, so his estate will face a bigger tax bill. Money without matrimony is a financial mine field that must be addressed. Ask your financial planner to help you navigate the difficult terrain, so that generous loving decisions do not disinherit your children or leave your heirs with a larger tax bill than necessary. Debra Neiman, CFP®, Neiman & Associates Financial Services, LLC, Watertown, Mass., helps traditional and non-traditional couples and families make smarter financial decisions so that they can achieve peace of mind and pursue their life dreams. SHE IS THE CO-AUTHOR OF “MONEY WITHOUT MATRIMONY: THE UNMARRIED COUPLE’S GUIDE TO FINANCIAL SECURITY.” Neiman provides fee-only financial planning, tax preparation and investment advisory services. deb@neimanonline.com 617-744-1816.
Are Your Local Real Estate Values in a “Bubble”? Here are five questions to help you determine the answer. A real estate bubble, like any other bubble, must be a by-product of excessive speculative activity and unsustainable prices. Otherwise, it is simply sustainable price adjustments reflective of the actual levels of supply and demand in the real estate marketplace. While it is incorrect to generalize regarding real estate values nationwide as being in a “bubble”, there are undoubtedly some pockets of the US where speculation is causing unsustainable price appreciation. Here are five questions homeowners should ask to determine whether local real estate values are sustainable or whether they will likely come down as a result of a "bubble" effect in price appreciation: 1. Was the increase in property values the result of speculation by investors, or the natural supply and demand of homeowners and buyers? 2. Was the increase in property values the result of first time homeowners entering the market; and if so, is first time homebuyer demand in the area likely to increase, level off, or decline in the coming years? 3. Are prices at current levels affordable for homeowners in the area? In other words, can the type of homeowners who live in the area still afford to buy homes in that area? 4. What local economic factors are likely to affect jobs and housing demand in the area? 5. If the area has a high concentration of resorts or vacation homes, is tourism and/or vacation home demand likely to be weak or strong in the coming years? Fluctuations in real estate values are primarily a local phenomena, making the assumption of a general US real estate "bubble" more fiction than fact. In other words, stock prices went up in the late 1990s for no good reason other than the fact that investors were gambling that stock prices would continue going up and they would make a profit. Contrast this with the real estate market of the last several years. As interest rates came down from the abnormally high levels of the 1970s and 1980s, a record number of first-time homebuyers entered the market. In fact, just in the last few years, the home ownership rate in the US has gone up from 65% to 70%. This is a 5% increase in the homeownership rate in just a few years! This equates to literally millions of new homeowners entering the market, increasing the demand, and lowering the supply of available housing on the market. At the same time, the general population has experienced considerably more wealth than previous generations. The homeowners who sold their homes to the first-time homebuyers have all bought or built more expensive homes to fit their higher living standards now that they are in their prime money-making years. Furthermore, people who only owned one home, now own one or several vacation homes. The dramatic increase in property values over the last several years is not the result of people speculating on property values. It is simply the result of supply and demand in the real estate marketplace. Once homeowners and buyers are able to intelligently answer five questions about real estate speculation in their region, they will likely discover that price appreciation may either level off or increase at a slightly slower pace than the past several years. However, it is unlikely that home values will actually decrease in value unless local market conditions are indicative of unsustainable values due to excessive speculative activity or abnormally high unemployment Gibran Nicholas, the author and developer of the Wealth Equity, a DVD educational course, is CEOand founder of Nicholas & Co. Mortgage Planners, a mortgage lender and broker based in Ann Arbor, MI. Gibran specializes in working with home owners and home buyers to enhance wealth by successfully managing their cash flow and their home equity. Phone: 888-608-9800 Email: Gibran@NicholasCity.com Web Site: WealthEquity.com.
Doctors, Lawyers and CPAs Can Increase Tax-Deferred Retirement Savings. Qualified 401(k) plans and defined benefit plans have limits. However, most professional organizations, of doctors, lawyers and CPAs, have theimproper structure in place to maximize their contributions. The rules state that the highly-compensated professionals can only put away dollars into retirement plans at a relative percentage to what their non-highly compensated workers are saving. While this is true,most organizations do not have the most efficient structure in place. Simply, there are strategies that allow professional groups to put up to $200,000/owner (depending on the individual’s situation) of pre-tax dollars into a tax-deferred vehicle. Using one group practice of physicians (5) as an example; each doctor was currently putting away $28,000. The total contribution for the owners was $140,000/year. To make this contribution, the owners also had to make contributions for their employees that totaled over $258,000. Integration of a hybrid approach, using elements of both defined contribution and defined benefit plans, allowed the doctors as a whole to put away over $703,000. The new plan was also better for their employees; with total employer contributions increasing to a little over $339,000. In addition, the employees had the ability to make additional elective 401K contributions. Previously, the owners were simply paying themselves more and losing growth potential by investing in taxable accounts. The doctors increased their contribution by over 400%, while increasing their contributions to their employees by about 30%. This situation was win/win for both the owners and the employees. What makes this plan so unique is thatall contributions are in self-directed accounts. While there are some limits on the type of investments one can make, this system mitigates the over/under funding issues of typical defined benefit plans. To understand if this system may work for you, please seek the advice of a knowledgeable financial advisor. Gary K. Hager, CFP, Founder and President, Integrated Wealth Management, Edison, New Jersey, a full service wealth advisory firm, serves as the primary financial resource for affluent families and closely-held business owners, providing state of the art planning solutions which effectively integrate the disciplines of Wealth Accumulation and Wealth Preservation. Contact:ghager@iwmco.com, 732-510-1611.
Potential Cutbacks in Employer-sponsored Defined Benefit Plans Should be Investigated Now. The data suggesting a shortfall is likely in payout of retirement assets at many companies should get your attention if you are near retirement after years of service at a corporation and your retirement assets are in an Employer Sponsored Defined Benefit Plan (DB Plan). It is important that you understand the data and find out whether you are at risk in any way. In 2008, the first baby boomers will turn 62 and be eligible for Social Security. According to recent statistics from the Department of Labor, existing corporate DB Plans are under-funded by about $450 Billion and the liabilities of under-funded plans that are likely to terminate are $96 Billion. The Pension Benefit Guaranty Corporation, the quasi-government agency charged with taking over terminated DB Plans, has assets of about $37.5 Billion. Simple math shows us that we face a potential crisis that may require either a large government bailout of these DB Plans or large cuts in the benefits for many retirees. With the popularity of 401(k) plans and other defined contributions plans, DB Plans cover a small percentage of our workforce; but that still means 22.6 million active American workers. Don’t play head in the sand about this issue. If you are fearful at the mention of a pension cut, or reject the notion that it is extremely unlikely, take heart. A talk with your financial planner now, could ease your mind, or help you with a strategy to survive the possibility of losing a sizable portion of your expected pension. The conversation should cover issues such as the current and future business outlook for your corporate employer, your expected Social Security benefits, how you can expand current personal retirement savings whether in taxable or tax-deferred accounts, and how to create a second or fall back retirement scenario that reduces expenses, gifts and charitable contributions in the event of a cut in pension benefits. Most important is to take an action step today, even if you feel the likelihood is small that you will experience a cut in expected benefits. If you are wrong, you could face a dramatic cut to your retirement security. It is far better to know and prepare now. Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. pfshim@usinternet.com.
NEW BOOK "MONEY WITHOUT MATRIMONY"
You Promised You Would Not Leave a Financial Mess for Your Children Like the One You Cleaned Up from Your Parents. Hey, where is that marriage certificateanyway? You promised. Remember the overwhelming emotion, chaos and frustration when you were met with an urgent need to locate important documents necessary at the time of the death of a parent, and vital to settle their estate. You swore you would not leave a mess like this for your heirs. But you have been distracted. No one gave you a system to use. Everyday life simply takes over and your well intentioned goal of organizing your important documents to guide your beneficiaries gives way to the immediacy of today. Important documents seem simple enough -- take your marriage certificate: * If you are married or have been married, the most important thing you need is the original marriage certificate or a replacement issued by the municipality in which the couple was married. How could you lose that, you think? * If you or your parents don't have a marriage certificate, get it replaced now. * A marriage certificate is key to accessing spousal defined benefit plan retirement assets and spousal social security, as well as transferring title to cars, RVs, or motorcycles now in the deceased's name. What you experienced with your parents will be nothing compared to what your children will need from you to settle your affairs. Today, Boomers have more complex financial estates than their parents. Despite good intentions, the system has not existed that provides the structure to allow you to do what you promised to do. You must be able to answer four questions: What documents will be needed? How will my heirs find these documents? Who should have access to these documents and when? Who will best advise my heirs? You need one file, located in one location that your heirs can access with one call. Here is how to start to identify the documents you may need. Categorize your documents into major categories:
It is the documents we don't think about very often whose absence will cause, for your children to experience the same kind of chaos and emotional trauma that you promised you would have happen to your own children. The time to get organized is now. Where is that marriage certificate anyway? Remember, you promised. Mark Kaizerman, CPA, CFP, is the author of "Beneficiary Directory: Your Personal System to Organize Your Important Documents and Guide Your Beneficiaries, a step-by-step to putting the most significant documents in your life in order. www.beneficiarydirectory.com, Kaizerman can be reached at 508-647-0830 x 13, or for a copy of the book, contact the author at mark@beneficiarydirectory.com
INVESTMENTS AND WEALTH MANAGEMENT What REITs, TIPS, and IEQs Mean for Your Portfolio A short investor quiz as your portfolio nears the halfway mark in 2005: Question: What do real estate investment trusts (REITs), inflation-protected bonds (TIPS) and international equities (IEQs) have in common? Answer: The power of diversification Question: What makes now an opportune time to include these investments in your portfolio? Answer: The volatile market environment of 2005. The power of diversification lies in its ability to raise the expected return on your portfolio at each level of portfolio risk. In the investment business, risk is defined by the volatility, or variability, of portfolio returns around the return that the investor can reasonably expect based on historical data on stock and bond returns. Consider the volatility of the market thus far. Heading into Memorial Day weekend, the performance of the major indices stacked up as follows:
All of this data spells volatility and thus, risk, for your portfolio. Research has confirmed the diversification power of including REITs, TIPS, and IEQs in your portfolio — a power that stands investors in good stead heading into the second half of a year that has shown no shortage of twists and turns to date. Paula Chauncey, CFA, Managing Partner, être llc, 617-716-0257 works with individuals, and their closely held businesses, to develop and execute wealth-building strategies. pchauncey@etrellc.com.
Many Factors Must be Sorted in Search for Advice Provider for 401(k) Participants. When Jordan's Furniture, headquartered in Avon, Mass., recently selected a vendor to provide investment advice and managed accounts to their 1300 employees, located in Massachusetts and New Hampshire, it took some serious sorting through options. Christopher McNeil, Director of Compensation and Benefits, was assigned responsibility to administer the benefits plans for his company. Chris had been reading in trade journals about the lack of 401(k) investing education for plan participants and what companies were doing about it. He also discovered that the 2001 DOL opinion letter had lessened the exposure and liability for companies who chose to move beyond education and provide advice to their participants. In fact, he says, what really got his attention was the idea that if a company is not providing appropriate advice service, it may not be fulfilling its fiduciary responsibility to its participants. The company chose to make the executive committee the investment committee for the plan, adding the Director of Compensation and Benefits and the Controller. The company's plan vendor has been N.Y. Life Retirement Plan Services for the last two years. McNeil said that as plan administrators and record keepers they were top notch, but education had been limited to direct mail from N.Y. Life about enrollment, increasing deferrals and maximizing the employer match. It included basic information on risk tolerance and how different investments worked. At the same time, one of the members of the investment committee introduced Straightline Advisors, a firm that provided top level, one-on-one advice services with a price point comparable to that level of service. McNeil then hired HRH Investment Advisors of Aliso Viejo, CA, a subsidiary of Hilb Rogal & Hobbs, to help them sort out their advice vendor options. The firm currently analyzes the performance of Jordan's plan, providing quarterly analysis of the fund performance for the investment committee, in compliance with their written investment policy statement. HRH had McNeil and the Investment Committee look at a total of eight education and advice providers. Before McNeil went into his first meeting with 401k Toolbox, he had felt that to achieve his goal of providing two levels of service he would have to hire two firms --possibly Straightline Advisors to provide the high level, one-on-one advice and New York Life for managed savings for participants. Then McNeil met with 401k Toolbox. "All across the board, with every decision factor, Toolbox blew everyone away," says McNeil. Toolbox won out against finalists Straightline Advisors, and New York Life's managed investment and savings service. Financial Engines and Morningstar were also considered. It quickly became clear to McNeil that 401k Toolbox could provide one set of roll out meetings, offered three options for the participants, that their price was competitive, and that they had the most experience in separately managed accounts for plan participants. What Jordan's 401(k) participants will receive when the program launches in June are the following services: A. Employees who choose 401k Toolbox's "Manage-it-for-Me" management service will have their retirement accounts professionally managed for them by PMFM, Inc., the RIA that offers the 401kToolbox service. PMFM offers two investment strategies in their Manage It for Me service, Active and Passive Asset Allocation. B. 401k Toolbox's “Do-it-Yourself” service provides the more investment savvy do-it-yourselfers with a regularly updated review of the markets, and an independent review of the investment options available in the plan utilizing 401k Toolbox's proprietary ranking system, as well as strategic asset allocation portfolios. The rollout will include group meetings at all of Jordan's New England locations that will be conducted by 401k Toolbox. In addition Jordan's participants can sign up for a 30 minute one-on-one personalized financial planning meeting with one of 401k Toolbox's investment professionals. At that meeting Toolbox will review their goals and retirement expectations, review their situation and provide a detailed plan designed to help them reach their goals. Trends from Ink&Air, Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com , 508-479-1033
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