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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 • How to Make the Most of Highly Appreciated Real Estate in Retirement. • Why Your Portfolio Needs a Good Set of Brakes. • A Mortgage Planning Consultant Can Help Real Estate Investors Increase their Return on Investment. • Have REIT’s Had Their Run? • Federal LTCI Program Offers Government Workers Protection During Claims Process. • Family Meetings Can Clarify Family Financial Values. • Preventing Estate Planning Glitches Requires Careful Attention. • A Checklist for 401(k) Plan Fiduciaries Should Include Process, Performance, and Protection. • Hyper-vigilant Compliance and Related Job Loss Comes as a Shock to Brokers Once Prized for their Book of Business. • Media: Sign Up for Free Subscription to In-Depth, Financial Education Resources.
How to Make the Most of Highly Appreciated Real Estate in Retirement. The upswing in real estate values in the U.S. may change the retirement planning strategies for many couples who should explore ways to avoid capital gains taxes so those assets can be preserved for the couple and their family. The 65-year-old couple in this example have been looking at their retirement income. At this stage in their lives, they have become concerned about inadequate savings to cover long term care or excessive medical costs. Their annual retirement income from a variety of investment properties and a pension is adequate for now, but looking ahead they got worried. They began to make plans to sell their highly appreciated $2.2 million water front home that included a nearby rental cottage, with the thought that downsizing was their only option. This was despite the $250,000 in capital gains they would pay in a straight real estate sale. In fact they have several other options that they discovered in talking with their financial planner that protect them from the capital gains tax losses they could incur. • A reverse mortgage or home equity line can provide additional funds, as needed, so they can stay in their home. Most children of parents who made it through the Great Depression are averse to debt in retirement, but many financial advisors working with highly appreciated property can show hypothetical charts with the hard data. As property appreciates, it is more than possible that the appreciation will be greater than the withdrawals used to cover additional expenses. Ownership does not change until death, when children who inherit the property may have to take out a mortgage to cover the value deducted from the property to create the income their parents needed in retirement. If the children decide to sell the property after the death of their parents, they still are likely to acquire a substantial inheritance because the property continued to appreciate, but their inheritance will not be at the expense of their parents' comfortable retirement. • A private annuity allows the couple to transfer their home to their children in return for a promise the children make to pay the parents an income for the rest for the parents' lifetime. The children then sell the house and place the assets in a trust for safekeeping, from which they pay their parents the required amount. By using this strategy, the capital gains tax is deferred over the parent's lifetime, but they get a private annuity payment from the children providing them with current income. • A sale and downsizing to a smaller house for this couple also opens up the possibility of a 1031 exchange. Assume that the rental cottage is worth $300,000 of the $2.2 million appraised value of the property. That $300,000 can be exchanged for another rental property to add to the couple’s rental property portfolio and save them 20% capital gains on that portion of the sale, or $60,000. The couple bought the house for $400,000 and will get the Federal credit of $500,000 for a married couple, so these three factors reduce the taxable price by $1.2 million, allowing the Federal Government to tax only $1 million at the cap gains rate, not the $2.2 million of the full value of the house. • If this couple with highly appreciated property wanted to fund a charity rather than give money to their children, they could put a portion of the sale into a charitable remainder trust. The income from the CRT goes to the couple throughout their lifetime and their income will increase because they have not paid the cap gains tax. The charity gets the assets when the couple dies and taxes to the U.S. Government are deferred. • Any existing mortgages can be refinanced into interest-only mortgages, dramatically cutting this couple’s annual payments and freeing up needed cash. Clearly, highly appreciated property requires a careful look at a number of different strategies. Always the largest part of most retiree’s net worth, highly appreciated property now offers opportunity for cash flow during retirement seldom used in the past. Pearson Financial Services, Dennis, MA 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
Why Your Portfolio Needs a Good Set of Brakes. Short-term perspectives regarding how well, or how
poorly, a portfolio has performed, can vary dramatically depending
on which week or month you evaluate. A race car that wins the pole
position by qualifying with the fastest lap time can still finish
in the middle of the pack at the end. A race car driver can lead
the other cars for 50 laps during a race and crash before reaching
the checkered flag. Likewise, owning the hottest performing investment
available does not guarantee that you will reach your long-term
retirement goals. NASCAR, the governing body of car racing, has mandated the use of "restrictor plates" at certain racetracks in an attempt to protect the drivers from dangerous crashes. Most mutual funds today are simply high horsepower engines with no brakes. A buy and hold investing strategy (supported by the SEC's current efforts to make it harder for shareholders to sell their funds) is akin to keeping the pedal to the metal with no regard for stopping or turning. "Slow" returns are not necessarily a bad thing. If there is trouble in the road, or if you are headed straight for the wall, traveling more slowly offers the portfolio manager the opportunity to maneuver around trouble. In investing, a good set of brakes is just as important as a powerful engine. Portfolio managers practicing tactical asset allocation will not hit all the highs, but they work diligently to avoid the lows to smooth out your portfolio performance. PMFM, Inc. principals are Tim Chapman and Don Beasley, with
offices just outside Athens, Georgia. Jud Doherty, CFA, manages
the marketing and distribution of 401k Toolbox, a service that
provides discretionary management as part of its advice product.
PMFM provides money management services for its own clients,
for the asset held by plan participants in their 401(k) plans,
as well as for the clients of other asset managers. The firm
has always offered a tactical asset allocation strategy and has
a lengthy
A Mortgage Planning Consultant Can Help Real Estate Investors Increase their Return on Investments. Investors with rental or commercial real estate portfolios may not be getting the best return on their investments because of their debt structure. Normally busy people, most multiple property investors need an annual review with a mortgage planning specialist for whom handling investment property financing is a niche. If the investor is relying on a mortgage broker whose primary expertise is in the 30-year fixed rate residential mortgage market, they may not be getting the best return on their investments. A mortgage planning consultant, directing the refinancing of multiple properties in a portfolio, should be able to help an investor calculate their before and after tax Internal Rate of Return (IRR) on each investment and recommend ways to increase the IRR using sophisticated strategies such as interest-only mortgages, higher leverage, and various other mortgage financing techniques. In one example, an investor spent $40,000 on closing costs to refinance
12 properties in order to increase annual cash flow by $60,000.
In this scenario, the closing costs were recovered in 8 months,
the net cash flow savings was $20,000 the first year and can
increase each year the real estate portfolio retains the same mortgages.
The closing costs were rolled into the mortgages, so the investor
did not pay anything out of pocket. In fact, the investor was
left with an additional $65,000 in cash to reinvest. Furthermore,
the before tax IRR of the properties more than doubled from an average
of 12% annually to 28% annually. Gibran Nicholas is the President and founder of Nicholas & Co. Mortgage Planning Solutions, a full service mortgage lender and broker in Ann Arbor, MI. Phone: 888-608-9800 Email:Gibran@NicholasCity.com Web Site: NicholasCity.com
Have REIT’s Had Their Run? Love ‘em, hate ‘em, or punt ‘em from your portfolio — what’s an investor to do with REIT’s after a spectacular year of double and, in some cases, triple digit returns? REIT’s, or Real Estate Investment Trusts, are companies that engage in the direct ownership and management of real estate assets; think office buildings, shopping centers, apartment complexes and other categories of commercial real estate. A fairly young industry (circa 1991), REIT’s have witnessed strong growth over the past decade, racking up a 13.0% compound annual return (as measured by the NAREIT Composite Index) over the 10-year period ended March 31, 2004 and eclipsing the NASDAQ (10.4%), Dow Jones Industrials (11.3%), and S&P 500 (11.7%) indices along the way. In 2004’s first quarter, REIT’s returned a solid 12.1%, eclipsing, and significantly, the NASDAQ (-0.46), Dow (-0.02), and S&P (1.69) indices. Ah, but here the story takes a turn… In April, amid the gathering storm of higher interest rates, REIT’s tumbled 15.3% through month-end and 4.6% when measured on a year-over-year basis (NAREIT Composite Index). The downdraft was accompanied by a litany of talking heads in the investment world echoing one of two sentiments: 1) head for the exit (i.e., unload REITS wholesale); or 2) hang tough because the best is yet to come (i.e., add to your REIT position at attractive valuations). Whither thou goest? The answer to this question has everything to do with how REIT’s came to be in your portfolio in the first place. Did you add REIT’s to boost portfolio yield (REIT Composite boasts a 6.19% current dividend yield)? To capitalize on the low correlation of REIT returns vs. those of stocks and bonds as a diversification play? To capture the growth “dividend” of a recovering economy and its impact on commercial real estate values? Or in hopes that 2003’s top-performing REIT, which returned roughly 106%, might bag another triple in 2004? In other words, how you got there in the first place has everything to do with what you do now. So, get to work: revisit the rationale upon which you included, or not, a REIT element in your portfolio and determine, within the context of a rising rate environment, whether that rationale continues to hold water over the long-term. Take action accordingly. 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. Federal LTCI Program Offers Government Workers Protection During Claims Process. Traditional, private long-term care insurance offers no independent third-party appeals process. The Federal Long Term Care Insurance Program (FLTCIP) does. Here’s why that matters. Most people buy insurance because they can’t bear the financial catastrophe of needing coverage, and not being insured. But there is one thing worse than not being insured when a claim hits. That’s the insured’s nightmare of having insurance that doesn’t pay at claim time. Or having a claim that drags on and on before you finally receive a check. When there’s a claim against a life insurance policy, there’s
little room for interpretation. The same is true with a dental
insurance claim, or theft of a car. But there are certain types
of insurance which, by their nature, have a more subjective claims
process. Disability insurance, for example, and long-term care
insurance. To be eligible for LTC benefits under a tax-qualified
LTC policy, the insured must suffer from severe cognitive impairment OR trhey
must need assistance in at least two activities of daily living (ADLs). Every LTC insurance policy has a claims appeals process – which allows the insured to appeal a claims denial to the insurance company. However, once an insurer has denied an appeal, the policyholder has few options. He can litigate, often at great out-of-pocket expense. Or he can appeal to his state’s insurance division. These departments are not known for their speedy resolution of claim disputes. People who have coverage through the Federal Government’s LTC insurance program have a benefit that should inspire envy. Any claims decision appeal goes to the Director of Claims. If further appeal is requested, it goes to an Appeals Committee. If still unsatisfied witht eh results, the claimant appeals to an independent third party review organization (MCMD in Boston, Mass.). This final, independent decision is binding on the FLTCIP, but not the claimant. The claimant may still choose to pursue options in the courts. In an increasingly cynical society, this consumer-friendly claims appeal process for Federal LTCI policy holders provides peace of mind. Marilee Driscoll, President, Long Term Care Learning Institute, (508) 641-9393, Plymouth, Mass., www.ltc123.com, author of "The Complete Idiot's Guide to Long Term Care Planning," is the nation's leading consumer authority on strategies to pay for long term care. She is President of the Long Term Care Learning Institute.
Family Meetings Can Clarify Family Financial Values. For the best possible financial planning, investors
should ask for a meeting between all the generations of their family
with their trusted advisers. The financial professionals are eager
to develop a deep understanding of family issues to be able to
prepare a plan that makes sense makes sense for the family. A family meeting can discuss the values the grandparents are bringing to the table, their wishes for their children, and their hopes that their grandchildren will seek professional advice in handling any bequests. It is all too common for a family to run through bequests in short order for immediate gratification because they have developed little or no financial education. Family financial meetings offer a chance for all three generations to come together to discuss a family financial roadmap and to receive some education on options. It may be that the parents' bequest to their Boomer children can substantially boost the second generation's retirement savings and should be carefully protected. Ask for a meeting with your advisor. Donald W. Nicholson, Donald W. Nicholson & Associates, Ltd., Wilmington, Delaware, is a fee-based financial planning firm serving the retirement and wealth management needs of professionals and business owners for almost 30 years. His son, Donald W. Nicholson, Jr., is a partner in the business. Contact them at 302-529-1500. E-mail dwnicholson@unitedplanners.com -- http://www.nicholson-associates.com.
Avoiding Estate Planning Glitches Requires Careful Attention. Financial advisers frequently are visited by clients -- both widows or heirs -- when their spouse or parents' estate planning didn't quite work as expected. Promised a "seamless" plan that would avoid probate, the financial adviser's client , or clients' children now find themselves in the middle of a complicated and lengthy probate experience, which, for most mortals, is more than they can handle alone. Most issues that throw a plan into probate can be avoided. Here is a list of common problems: • Fund the trust carefully. When a family does not re-title such things as real estate limited partnerships so that they belong to the trust, the death of the owner throws those assets into probate, because their transfer was not included in the estate plan. • Consider a family member or family friend as trustee to maintain control over the assets. Banks as custodians usually put the estate into probate because of their own cautionary and expensive internal rules. Many estates are probated only for the reason that the bank requires it. • Refinance your primary or vacation property but don't forget to put it back in the trust through correct titling. If the house is not titled properly to belong to the trust, all family assets will go to probate. • Give away or liquidate your DRIP portfolio before death. Building a portfolio of stocks purchased over time in incremental portions directly from a company is an interesting and valid way to build equity but it is extremely difficult to analyze as to the cost basis. Unless you have been fanatically careful about keeping every transaction from the company whose stocks you have been buying directly someone will have a mess on their hands. Even if you do have every piece of paper, it is a very difficult
thing to establish a cost basis of a DRIP portfolio. Plan to work
with a CPA and transfer the portfolio before death so questions can
be answered by the accumulator and the transfer does not turn out
to be a giant headache for someone. Henry I. Montgomery, CFP -- 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.
A Checklist for 401(k) Plan Fiduciaries Should Include Process, Performance, and Protection. Every plan sponsor must take fiduciary responsibility
very seriously, fulfilling both the letter and the spirit of the
law. Each plan sponsor can be audited by the Department of Labor
for technical and operational compliance with existing statutes
and regulations. The complexity of responsibility does not make
compliance easy without help. An overall compliance process from
the plan provider’s relationship managers should be able
to confirm for the plan sponsors, as fiduciaries, that they are
performing their duties correctly, affording protections for the
participants, themselves as sponsors and the plan provider. Setting up a globally encompassing fiduciary compliance system is a complex task, but plan sponsors will benefit from a checklist that can be updated annually. Every plan sponsor needs to have the following in place: • A review committee made up of plan sponsor and participants must meet
and keep minutes regularly. In each case, the provider of a plan should be a co-fiduciary to
that plan and be able to offer significant assistance in maintaining
fiduciary compliance. For a PDF copy of ABN AMRO’s 401(k) P3 (Process, Performance and Protection) Checklist, send an e-mail to beth_chapman@inkair.com with the word “Checklist” in the subject line. ABN AMRO Asset Management has an enviable and long history in investment
management in the U.S. since 1887. Formerly known as Chicago Trust,
ABN AMRO Retirement Services has managed retirement assets since
1947 and has been active in the defined contribution business for
21 years.
Hyper-vigilant Compliance and Related Job Loss Comes as a Shock to Brokers Once Prized for their Book of Business. The Wall Street witch hunt is trickling down and has caused Broker/Dealers to fire excellent, up and coming, very successful brokers and broker teams this spring because of market timing activities and other infractions that, in some cases, occurred more than a year ago. Infractions which would have been overlooked in the past are cause now for dismissal and put a permanent mark on the SEC U4 compliance form. Oftentimes, three "dings" on the U4 makes it impossible for a major firm to hire these brokers. Fired brokers can be placed, but may have to settle for second or third tier firms. The job search process becomes an increasingly difficult and lengthy process, even for highly qualified candidates, well-received at the branch level. When approval is sought from B/D's headquarters compliance, the decision is out of the manager's hands. When a broker is hired, despite a problematic compliance record, it is with a requirement of "increased supervision" which broker/dealers are hesitant to enter into because it increases their costs and raises the potential for legal liability down the line. Many brokers do not know that they are their own worst enemy, nor are they prepared for what has become an increasingly hyper vigilant compliance process in place at this time. When terminated, the first thing a broker should do is call a securities attorney immediately. The terminating firm has 30 days to produce the language that is used on the SEC U5 "Record of Resignation" which the broker/dealer must file. The attorney's input into the U5 language is critical for a broker's future career opportunities. The broker must avoid "Violated Firm Policies" or "Terminated" language and use a securities attorney to negotiate for language such as "Permitted to Resign". There seems to be no wiggle room when it comes to compliance these days. Keeping your own records of client complaints or any issues requiring discussions with branch managers are essential, even when these issues do not result in a U4 mark. Mindy Diamond is President of Diamond Consultants, Chester, New Jersey, a search firm specializing in recruiting wirehouse and regional firm brokers with trailing 12-month’s production between $200,000 and $5 million. Her firm assists these financial consultants in evaluating opportunities in the industry and introduces them to other wirehouses, regional firms, banks, or independent broker-dealers. Mindy can be reached at 908-879-1002, or mdiamond@diamondrecruiter.com. Media: Sign Up for Free Subscription to In-Depth, Financial Education Resources. Members of the media may contact Forefield.com to receive full time access to Forefield's educational resources on financial planning topics. If it's a financial topic that a client would ask a financial planner about, Forefield has a written explanation, many with illustrations, in their web-based, client-centric financial planning and advice product. Forefield's information is current, concise, compliant, and available to the media at no cost. Simply e-mail William Davenport at wdavenport@forefield.com to be included on the permanent subscription list and you will receive your complementary password shortly.
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