Many retirees have had their incomes devastated because of low interest rates. Historical returns for five to ten year bonds have been 4.5% to 5.5%. Today 10-year treasury bonds yield a paltry 2.6% and the average money market account is paying less than one percent. One of the primary drivers behind low interest rates is the Federal Reserve who has set and maintained the fed funds rate at near zero percent in an effort to stimulate an anemic economy. This past week, Federal Reserve Chairman, Ben Bernanke, indicated that the Federal Reserve will continue to support low interest rates for the foreseeable future. This leaves many retirees who depend on interest income in a financial tight spot with no relief in sight. Many retirees are finding it necessary to invade their principal just to pay their monthly bills.
In some cases, adult children are in a financial position to help…but what’s the best way to do this? First, let’s examine how a reverse mortgage can turn a non-income producing asset into a cash flow machine.
With a reverse mortgage, instead of making payments to a mortgage lender, the mortgage lender makes payments to the homeowner. And instead of paying down your mortgage over time, as you receive payments, your mortgage balance increases over time. At the point that you no longer live in the house, the home is sold and the loan paid off. Additional options include receiving a lump sum or having a loan that operates like a home equity line of credit. Some of the disadvantages of reverse mortgages are that you have closing costs that can be from three to seven percent of the loan amount; the interest rate attributed to the mortgage is typically two to three percent higher than a conventional mortgage; and you have to be at least age sixty-two to qualify. Lenders will also restrict loans to around 50% or less of market value.
One of the most often comments I get from retirees is that they don’t want to be a financial burden to their children. Translated, this means they would be very reluctant to take a financial handout even if you could easily afford it. However, they would likely consider a financial transaction that is mutually beneficial such as a ‘private’ reverse mortgage. With this strategy, the adult child becomes the mortgage lender but can do so without the closing costs; can use a lower interest rate; and could offer a loan greater than 50% of market value. You would need to formalize the transaction with a written promissory note and federal law requires that a minimum interest rate, called the Applicable Federal Rate, must be charged in order to avoid potential gift taxes. To avoid potential future conflict, be sure to make all siblings aware of the details of the arrangement before implementing.
Ultimately, when the parent is no longer living in the home, it can be sold and the loan, plus interest, repaid. The private reverse mortgage is an excellent way to partner with a parent to provide additional monthly cash flow during what may be an extended economic downturn.
Tuesday, September 28, 2010
Tuesday, September 21, 2010
Teaching Children about Work & Money
I was twelve years old when my father drove me to an unfamiliar neighborhood and let me out with a case of aerosol-size cans of fire extinguishers and said, “Son, when you finish selling this case, I have two more cases!” So I went door to door, ringing door bells, selling my wares. My first day I had limited success so I went home and pondered how I could become more effective and hit upon the idea of a ‘live’ demonstration. The next day I was armed with a small pan and lighter fluid. When the lady opened the door I squirted lighter fluid in the pan, lit it and asked, “If this was a stove-top fire, how would you put it out?” She ran and got some baking powder and attempted to dowse the fire. When it continued to burn, I handed her one of my fire extinguishers and she instantly put out the fire. My sales went through the roof!
Here’s what I learned:
I learned not to give up. Within every obstacle is an opportunity. In this case I used poor sales as an opportunity to try a different approach.
I learned how to interact with adults whom I had never met. After doing this over and over I found I quickly became more at ease in conversations.
I overcame the sense of rejection. Every presentation did not result in a sale. I’d take a moment to think if I could have done anything differently, learn the lesson and move on with the intent to constantly improve…try new approaches.
I learned that ‘work’ can be fun! Certainly making my own money was a new experience for me and it felt good! It gave me a sense of confidence. Maybe, just maybe, I could make my own way in the world!
Children learn the concept of work best at an early age. It’s not taught in school but through experience. As soon as you feel your children are old enough, encourage them to get a job. It could be babysitting, mowing lawns, a paper route.
Don’t pay children to do things that are part of family responsibilities such as taking out the trash, mowing the lawn, cleaning up their room or making good grades.
Do give them an allowance but include some ‘money rules’ to go with it, otherwise the only lesson they’ll learn is how to spend money….and my experience is that this lesson they learn without any help! Money rules might include:
The first 10% goes to helping others through a charity or gifts to their religious organization.
Twenty percent should go towards long-term investments. Yep, even at an early age, children can begin to learn about investing. Help them choose stocks they are familiar with such as McDonald’s, Wal-Mart, or Disney.
Another ten percent should go towards long-term savings…call it ‘the unexpected’ fund.
They are free to spend the rest as they choose.
They should be responsible for balancing their checkbook.
These money rules apply to both their allowance and job earnings.
Think of the mistakes you made as a young (or older!) adult and figure out how you can help your children learn the needed lessons before they are on their own. It will be one of your greatest gifts.
Here’s what I learned:
I learned not to give up. Within every obstacle is an opportunity. In this case I used poor sales as an opportunity to try a different approach.
I learned how to interact with adults whom I had never met. After doing this over and over I found I quickly became more at ease in conversations.
I overcame the sense of rejection. Every presentation did not result in a sale. I’d take a moment to think if I could have done anything differently, learn the lesson and move on with the intent to constantly improve…try new approaches.
I learned that ‘work’ can be fun! Certainly making my own money was a new experience for me and it felt good! It gave me a sense of confidence. Maybe, just maybe, I could make my own way in the world!
Children learn the concept of work best at an early age. It’s not taught in school but through experience. As soon as you feel your children are old enough, encourage them to get a job. It could be babysitting, mowing lawns, a paper route.
Don’t pay children to do things that are part of family responsibilities such as taking out the trash, mowing the lawn, cleaning up their room or making good grades.
Do give them an allowance but include some ‘money rules’ to go with it, otherwise the only lesson they’ll learn is how to spend money….and my experience is that this lesson they learn without any help! Money rules might include:
The first 10% goes to helping others through a charity or gifts to their religious organization.
Twenty percent should go towards long-term investments. Yep, even at an early age, children can begin to learn about investing. Help them choose stocks they are familiar with such as McDonald’s, Wal-Mart, or Disney.
Another ten percent should go towards long-term savings…call it ‘the unexpected’ fund.
They are free to spend the rest as they choose.
They should be responsible for balancing their checkbook.
These money rules apply to both their allowance and job earnings.
Think of the mistakes you made as a young (or older!) adult and figure out how you can help your children learn the needed lessons before they are on their own. It will be one of your greatest gifts.
Thursday, September 16, 2010
Strategies for Avoiding Probate at Death
My associates and I were recently working through a complex multimillion dollar estate planning case where the client owned real estate in multiple states. One of the central topics of discussion was how the probate process would work under the current will which we were in the process of revising. Probate is the court supervised process of transferring one’s property at death to his or her rightful heirs. The costs of probating an estate varies according to state law and based on case complexity but can easily be three to seven percent or more of the probate estate. Not all assets go through probate and, with proper planning, probate can be avoided altogether. That’s exactly what we are doing with this client. Since the family has real estate in more than one state, their current will would have required probate in each state that they owned real estate adding to the costs and complexity of settling their estate. In addition to fees, the probate process results in making public some of what was private information. That’s because the filing documents are part of the public record which may include listing of assets and beneficiaries. Finally, the probate process typically takes a minimum of six months and can take several years.
Here are three ways that you can avoid probate:
Create a Revocable Living Trust. With a revocable living trust, you establish a trust and move all of your probate assets into the trust. You can act as your own trustee but designate a successor trustee should you become incompetent or die. This sounds more complicated than it is, for once it’s set up it’s easy to maintain.
Own property as Joint Tenancy with Right of Survivorship. A good example would be to own your home with your spouse under this form of title. At death, your interest in your home automatically passes to your spouse by title rather than going through probate. Some states use a slightly different version known as Tenancy by the Entirety and community property states such as California use Community Property with Right of Survivorship.
Name beneficiaries to your retirement accounts, bank accounts and life insurance. I’ve run into lots of cases where someone named their estate as the beneficiary of their life insurance. This not only subjects the assets to potential probate fees but also potential creditors. For bank accounts and brokerage accounts, you can use a ‘Payable on Death’ designation to direct who gets your account assets at death.
Take a moment to review your own estate situation. If you own property in more than one state or you put a high value on privacy of your financial affairs, consider the revocable living trust. If your estate is simple and will not be subject to estate taxes, the strategies above may simplify the transfer process and greatly reduce the time required to get your assets to your heirs at your death. Care must be taken in executing a plan for avoiding probate for there are many potential pitfalls and tax traps so your best strategy is to seek the advice of a professional experienced in estate planning.
Here are three ways that you can avoid probate:
Create a Revocable Living Trust. With a revocable living trust, you establish a trust and move all of your probate assets into the trust. You can act as your own trustee but designate a successor trustee should you become incompetent or die. This sounds more complicated than it is, for once it’s set up it’s easy to maintain.
Own property as Joint Tenancy with Right of Survivorship. A good example would be to own your home with your spouse under this form of title. At death, your interest in your home automatically passes to your spouse by title rather than going through probate. Some states use a slightly different version known as Tenancy by the Entirety and community property states such as California use Community Property with Right of Survivorship.
Name beneficiaries to your retirement accounts, bank accounts and life insurance. I’ve run into lots of cases where someone named their estate as the beneficiary of their life insurance. This not only subjects the assets to potential probate fees but also potential creditors. For bank accounts and brokerage accounts, you can use a ‘Payable on Death’ designation to direct who gets your account assets at death.
Take a moment to review your own estate situation. If you own property in more than one state or you put a high value on privacy of your financial affairs, consider the revocable living trust. If your estate is simple and will not be subject to estate taxes, the strategies above may simplify the transfer process and greatly reduce the time required to get your assets to your heirs at your death. Care must be taken in executing a plan for avoiding probate for there are many potential pitfalls and tax traps so your best strategy is to seek the advice of a professional experienced in estate planning.
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