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A Monthly Newsletter Source of Financial Sources • Private Equity Real Estate in Senior and Student Housing Makes Sense for a Portion of an HNW Real Estate Portfolio • When Your Advisor Thinks Outperforming the Market is a Basic Goal of Investing, He is a Gambler • Buying Affection is Common Gift Giving Pitfall for Divorced Parents • Stark Realities Face Gay and Lesbian Couples Planning Long Term Care • 16 Strategies for Saving Estate Taxes #2 – Lifetime Gifts • Qualified Default Investment Alternatives (QDIAs): What Executives Need to Know Before Selecting Between Managed Accounts or Life Cycle (Target Date) Funds Private Equity Real Estate in Senior and Student Housing Makes Sense for a Portion of an HNW Real Estate Portfolio Today, the single-family home market is in serious disarray. Commercial real estate, specifically senior independent living facilities and private student housing, is driven by quite different supply and demand factors than single-family homes. Many investors seem to confuse the asset classes and have little or no portion of their investments allocated to commercial real estate. Research suggests that an alternative niche real estate position would have increased a portfolio’s yield, reduced its volatility, and even somewhat increased its typical IRR. Seniors looking for independent and assisted living facilities and the dramatic growth of private housing for college students are both driven by demand created by demographics that are not going to change soon.As a result of the demand and the differences in the structure of the investments developers use to build senior and student housing, a high net worth investor's investment in senior and student housing is insulated from the much publicized troubles in the sub prime mortgage market. Confusion about real estate investments and fears about interest rates have caused REIT’s to sell off and in the process generate significantly increased volatility. Neither is something that will give short-term comfort to financial advisors and their clients. So where should an investor go who is seeking the increasedyield, decreased volatility, added diversification and higher IRR that major pension fund managers believe they get from a direct real estate allocation? The values generated by sales of first class US commercial property have been holding up well this year. Part of the reason first class US commercial real estate prices have done so well is the dramatic streams of investment are flowing into US real estate from both Europe and the mid-east. Direct real estate investments are an option investors should consider, but typically the major real estate funds sponsored forpension funds by major investment banks require minimum investments in the tens of million dollars. They simply are not an option for even the financial planners’ accredited clients. However, private equity development of senior and student housing is one area of real estate that individual investors can access. It has a stable and growing occupancy, and thus far, no overbuilding. When demand outstrips supply, as is the case now in this market, it is easier to generate stable, durable, long term yields for investors. One way advisors can help clients participate in real estate is to buy REIT's, but REIT's typically invest in fully-priced, completed properties, and investors pay a higher price they would if they were to invest in a property under development. When investors can invest in a private equity property during development, their return on equity may be higher. Finding the private equity opportunity requires finding companies with an excellent track record for building, developing, and operating such properties. It requires a particular strength to know what to build and where to position that property for maximum occupancy. The key is finding a real estate developer with a track record who understands the market. Millennium Credit Markets, LLC, a division of United Group of Companies, Troy, New York, offers a product line of private equity opportunities in commercial real estate with a predictable / durable income stream and superior total returns to investors including brokerage houses, investment advisors, individual investors, and institutions. Michael Dowd, 781 264 2678, dowdboston@aol.com, www.ugoc.com When Your Advisor Thinks Outperforming the Market is a Basic Goal of Investing, He is a Gambler The advisor or broker who answers yes to any of the questions below reveals a larger assumption about the investment advice they believe they are offering. • Do they pick mutual funds based on past performance? • Do they shop for popular fund managers ortrendy funds? If you want to say goodbye to the confusion that equates investing with gambling, that is, if you want to stop speculating and would rather capture the market returns that are there for the taking, you will not want to work with an adviser who answers any of the previous five questions with a “yes.” The assumption that financial advice involves the ability to forecast, to predict the future is wrong. Would you ever trust your health to a doctor who said you owe him nothing for his insight and guidance because he gets paid from the pharmaceutical companies for the prescriptions he just prescribed for you? The bad news for these advisers is that no one can predict the future. It is amazing how many advisers outthere cannot deal with this simple common-sense reminder. The good news for investors is that you do not need to worry about forecasting the future of the market to be successful. If you do not wish to speculate, why would you look at an adviser who claims to “know” what the market is going to do next? At the same time, it must be said that there is a deep seated tendency to fall back into the trap of thinking “this time it’s different,” that this time the future can be predicted, this time I can outsmart the market, this time perhaps with the help of an expert – I can pick the mutual fund powerhouse that will trounce the stock market. There are no real geniuses who can do this. What most advisors are offering is a high cost system designed to beat the market, and it rarely does. What most consumers really need is an advisor who will help them capture the returns of the markets, and do so in a low-cost, tax-efficient manner. Tim Decker, President, ISI Financial Group, Lancaster, PA, is a fee-only financial advisor providing comprehensive financial advice and retirement planning. He is the author of the soon to be released book “The Sleep At Night Investor”. He can be reached at 800-342-5474. His radio show “Financial Freedom” can be heard every Saturday at 2:00 pm on WHP 580 AM providing financial guidance and answering questions from callers. Media review copies of “The Sleep Well At Night Investor” are available by e-mailing beth_chapman@inkair.com with Sleep in the subject line. Provide a mailing address. Your copy will be mailed as soon as it is available from the publisher. Buying Affection is Common Gift Giving Pitfall for Divorced Parents When parents don't communicate around the holidays, gift giving for the kids can take some pretty ugly turns. Each parent feels they will give more gifts than the other parent, they go for big ticket "way cool" items, and it turns into an affection auction. It's expensive for the parents, spoils the kids, and throws the true spirit of the holiday out with the crumpled wrapping paper. One potential pitfall is a financial imbalance. Mom makes some homemade clothes and sweets for the kids. She's disappointed that she couldn't afford to some some items the kids would have loved, but hopes her efforts will be appreciated. Dad buys them new bikes and music systems for their rooms at hishouse. Mom is left feeling like her work and thoughtfulness is completely unnoticed when the kids ask if they can go back to Dad's house pretty early on Christmas day. One possible solution would be for Mom and Dad to make a list of what each will give individually, then Mom could offer to do the big gift shopping for items the kids want, contribute what is appropriate toward the big gift based on her financial situation, resulting in big ticket items under the tree from both parents. Another pitfall is lack of direction for the parent who never purchased the Christmas gifts. Mom has had lots of discussions with the kids about what they want and throughout the year she's purchased great gifts on sale. She is able to give gifts that are completely on target without breaking the bank. Her son gets a great handheld video game, some cool athletic looking shoes, and a new lacrosse stick. Her daughter gets a docking station for her iPod, a trendy jacket, and four tickets to an upcoming concert. Even the stocking stuffers are great! Dad was always willing to pay for generous holiday gifts, but Mom did the shopping during the marriage. The last week before the big day Dad is wandering the mall and finally gets some horrifically expensive gift certificates good at any store there. Certainly the kids will use them, but the lack of thought is apparent even to young children. If Mom and Dad had coordinated their efforts, Dad could have given the kids what they really wanted and both parents might have been be able to spend less. When parents can agree on what they'll each spend and, ideally, give at least one gift jointly, kids have a good holiday, competitive tension is lessened between the divorced parents, and the kids know that both parents love them. When parents cannot discuss any financial issues because of divorce hostilities, the children are the victims. Try these tips for communicating with your ex during the holidays. Bottom line, your children deserve parents who can communicate and Christmas is a good time to start. Linda Leitz, CFP and EA, is an author and financial planner working with divorced and divorcing couples in Colorado Springs, CO. She is the author of the soon to be published “We Need to Talk – Money & KidsAfter Divorce”. Her earlier book "The Ultimate Parenting Map to Money Smart Kids," published in 2006, was the first in a series of books planned by Leitz. She can be reached at Linda@brightleitz.com or 719-260-9800. Media review copies of "We Need to Talk – Money & Kids After Divorce" by Linda Leitz, CFP, will be available to the media shortly. Please send an e-mail to beth_chapman@inkair.com with the word Divorce in the subject line and provide a mailing address. Your copy will be mailed as soon as it is available from the publisher. Stark Realities Face Gay and Lesbian Couples Planning Long Term Care If one partner in a heterosexual couple needs Medicaid assistance as part of long term care, the couple would have to spend down their assets to qualify the ill spouse for care, but the jointly owned home can be protected from a lien by Medicaid if the healthy spouse is still living in it. If one partner in a gay or lesbian partnership needs Medicaid assistance for their long term care, this couple gets penalized by lack of Federal marriage recognition(at least for now), and the house is not protected for the healthy partner. The healthy partner (or same-sex spouse in Massachusetts) would need to buy out the ill spouse's shareofthe value of the house to unfreeze the Medicaid disqualification for nursing care. This option is extremely difficult for some couples when there is still a mortgage on the house. It may require refinancing for which the healthy spouse may not qualify. Also the purchase of a partner's share of a house may affect the partner's cost basis. While hetereosexual couples can do unlimited gifting between one another, house transfers are much easier as well. Gay couples, however, are limited to $12,000 a year to one another.There are serious downsides to estate and long term care planning for gay couples, but even more serious consequences unless planning is undertaken. Long term care insurance is one viable option for these couples to consider, and regular gifting to the younger or healthier partner over a long period to equalize assets can help. It is important to find a financial advisor who is competent to advise you. Look at http://www/prideplanners.com for a list fo advisors who choose to work with unmarried and same-sex couples. Stewart H. Armstrong II, Signator Insurance Agency, Wellesley Hills, Mass., has had the financial planning issues of the GLBT community foremost in his fee-based financial advisory practice since its inception integrating his client's goals with the objective of providing solutions in the areas of wealth accumulation, asset protection and retirement income. He has earned the Certified Financial Planner, (CFP(R) designation, is a Chartered Financial Consultant (CHFC,) a Chartered Life Underwriter (CLU," and has earned the CLTC for competency in Certified Long Term Care planning. He is a member of the Financial Planning Association, and the PridePlanners Association (specializing in financial issues for the GLBT community). He can be reached at sharmstrong@jhnetwork.com or 617-524-0005.
16 Strategies for Saving Estate Taxes #2 – Lifetime Gifts Joan and John Allen could and did give $12,000 each every year to their three children. But recently, the couple in their middle 60s, gave away $2 million in real estate to their children, using their lifetime exemption of $1 million each to remove the real estate from their joint estate without taxes. In so doing, they are on a path to save significant taxes on their estate at the time of their death. If their property grows at 6% for the next 12 years, it could be worth $4 million. If it continues to appreciate for 24 years, it could be worth $8 million. If it had remained in their estate, the 50% estate tax could have been $3 million. However, all of this growth will no longer be within their estate, but owned by their children. The Allen’s recent actions were at the suggestion of their financial advisor. He made the point that passing on inheritances to children before you die is a specific strategy to reduce the amount of estate of death taxes you will pay at the time of death. Tax planning is essential to preserve the greatest amount of wealth that you can for your family. Talk with your advisor about strategies that will work for you. Pearson Financial Services, Dennis, MA, is the author of "The Two Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, his clients' 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, seth.pearson@verizon.net. Qualified Default Investment Alternatives (QDIAs): What Executives Need to Know Before Selecting Between Managed Accounts or Life Cycle (Target Date) Funds WATKINSVILLE, GA -- The U.S. Department of Labor (DoL) estimates that key provisions of the Pension Protection Act of 2006 (PPA), including the Qualified Default Investment Alternative (QDIA), will result in increased retirement savings of up to $134 billion dollars over the next 25 years. The intent of the PPA is to assist 401(k) participants by protecting plan sponsors from liability for investment losses when participants don’t provide investment direction for their own accounts and are defaulted into an appropriate Qualified Default Investment Alternative. Approved choices include lifecycle funds (age-based), balanced funds (risk-based), and managed accounts (can be both age and risk-based). “The advent of managed accounts as a QDIA challenges plan sponsors to understand the extraordinary differences between managed accounts and lifecycle (or target date) funds, the two options most likely to be used of the three investment alternatives approved by the DoL”, says Tim McCabe, 401kToolbox/PMFM, Inc. leading provider of advice and managed account services to plan participants. Though increasing in popularity, life cycle funds are not quite the panacea the investment industry has made them out to be, perhaps even less so in the 401(k) environment. One problem is that not all are created equal, and they are getting less so every day as providers make a deliberate attempt to have their funds stand out from the rest. For example, if you took a sampling of 2020 funds, you would find some with very high equity exposure, perhaps 70% or more, while others have equity exposure in substantially lesser amounts. They may also seek differentiation by varying holdings, (i.e., international vs. domestic), or allocations of holdings. Such differences will inevitably result in disparate performances. Services like Morningstar and Lipper are now ranking lifecycle funds just as they rank large cap growth funds, Some will top the performance list and others will be at the bottom. From a practical standpoint, plan sponsors will have a unique problem in this regard: their choices may be scrutinized by employees whose money is being managed. What action step will a 401(k) plan sponsor take if the QDIA is a target date fund and those funds are in the bottom quartile of their peer group? Will they change 401(k) providers altogether, simply to get a better target date fund? In all likelihood, target date funds have another disadvantage. They are generally fully invested, which means they will experience downside volatility in bear markets, perhaps more so than many 401(k) investors can handle. Lost confidence may cause them to opt out of QDIA to an inappropriate choice, such as a money market. This is bad for the plan sponsor in terms of fiduciary liability and bad for the participants in terms of long-term results. An actively managed account, on the other hand, likely provides opportunities for the money managers to take cash positions to mitigate risks in a declining market, thus lowering volatility. A related issue is ‘real’ versus ‘relative’ returns. Older participants with larger account balances place increased emphasis on near-future retirement income and fear the impact of downside volatility on that income. An equity fund, even one diversified across all appropriate asset classes, may achieve outstanding ‘relative’ returns, but still not achieve absolute returns in severe bear markets. Aging pre-retirees cannot afford setbacks that younger participants can endure. They do not want to be forced to continue working or lower retirement goals. ‘Relative’ performance is unlikely to impress them. In contrast, a properly executed managed account using tactical asset allocation can offer market-like returns with lower volatility. There are other concerns unique to 401(k) investors. For instance, they may not understand that life cycle funds are diversified. When they see a single holding on their monthly statement, it goes against the gospel of diversification that has been preached to them for years. Of course, the fund may be properly diversified, but the participant simply won’t understand. By contrast, managed account statements will exhibit a full list of holdings, as well as show movements in those holdings as they are rebalanced or changed out, thus demonstrating professional managers are actively working on the participants’ behalf. Managed accounts offer additional benefits that are an advantage to participants as well. For example, services provided by 401k Toolbox/PMFM, Inc. offer participants the opportunity to talk, one-on-one, with salaried retirement specialists about their individual situation. The participant can include spousal retirement plans, as well as any other assets that could become available for retirement, during their discussions with the financial professionals. The idea is to help them develop a complete view of their stated retirement goals, where they are currently, and what changes are necessary to achieve them. One final managed account advantage is that if the participant makes the investment decision to change their risk tolerance by selecting a managed account outside the age-based models within QDIA, the plan sponsor is still protected from liability for that participant because the participant has made an active decision on their own behalf. The fiduciary liability for the investment decision transfers to the managed account provider, not back to the plan sponsor. 401kToolbox.com/PMFM, Inc, Watkinsville, Georgia has more than $1 billion in assets under management. The firm provides tactical asset allocation money management and managed account services for client and 401(k) plan participants PMFM has a lengthy history of good risk-adjusted performance, preserving the value of client accounts in uncertain markets, consistently posting positive returns in each of their investment strategy composites since inception. Tim McCabe 800-222-7636 or tim.mccabe@401ktoolbox.com. |