Wealth Management Blog

Posts published in March 2013

Crash Course on Paying for College

By JJ Burns

March 29, 2013

There’s good news in the mail: Johnnie or Susie just got accepted into a top college. Naturally, you’re proud of your child. But now comes the hard part—figuring out how to pay for four years of education at an elite school.

Tuition costs at private institutions, in particular, can seem staggering. Still, there are ways to send your son or daughter to a great college without bankrupting your financial future. Start with these five steps:

1. Compare and contrast financial aid offers.

There’s no standard format for the wording of award offers, so carefully review the information in each one your child receives. Typically, the offers will list financial aid from several sources, including school scholarships, work-study programs, and federal loans, and also will note your “expected family contribution,” calculated from the information you provide on the Free Application for Federal Student Aid (FAFSA). But some schools provide more information than others, so try to compare apples to apples.

2. Do the math.

Once you determine how much aid each school will provide, figure out your how much you will have to provide. Incorporate the amounts you expect your child will be able to cover—perhaps for such things as books, meals, and entertainment—into your calculations. That will give you a better handle on what you’re really facing.

3. Expand the hunt for financial aid.

Don’t give up just because your child isn’t a star athlete or a computer genius. You can find scholarships to fit a wide range of niches and groups on websites such as Fastweb.com, SchoolSoup.com, and SallieMae.com. In addition, students may qualify for state aid. Also, many corporations offer scholarships to children of employees. And remember to reach out to civic, religious, and ethnic groups within your community.

4. Consider a payment plan.

Frequently, colleges provide tuition payment plans that charge little or no interest. You may have to pay just a small up-front fee. Contact the school for the necessary arrangements.

5. Explore loan options.

If your family must borrow money, start with federal loans, which typically have the lowest interest rates. Currently, a subsidized federal Stafford Loan offers a fixed interest rate of 3.4%, while the federal PLUS loan features a 7.9% rate and Perkins loans have a fixed interest rate of 5%. Apply for these when you fill out the FAFSA. As a last resort, you might turn to private loans, but be aware that the interest rates on those tend to be higher.

This is just a quick lesson on navigating the financial aid waters. The schools your son or daughter is considering also may be able to provide ideas for reducing the financial burden on your family.

Get a Quick Fix on Estate Tax Rules

By JJ Burns

March 13, 2013

Estate planning is especially complex in 2012. Due to a series of tax law changes—most recently under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Relief Act”)—wealthy families can benefit from generous estate tax exemptions, a lower estate tax rate, reunification of the estate and gift tax systems, portability of estate tax exemptions, a return to “step-up in basis” rules, and other changes. But it may be all for naught.

Why is that? The latest set of estate and gift tax provisions are scheduled to “sunset” after 2012. Barring any new legislation, the estate and gift tax law generally will revert to the way it was prior to the passage of a 2001 law that phased in today’s favorable rules.

Of course, Congress still could act late this year, or even impose retroactive provisions next year, but there are no guarantees, and without further action, the family of someone who dies in 2013 will face much stiffer estate planning challenges than if the death had occurred the previous year.

How well do you understand the current state of affairs? Here’s a brief quiz to test your knowledge.

1. The maximum estate tax exemption for someone who dies in 2012 is:

  1. $1 million.
  2. $3.5 million.
  3. $5 million.
  4. $5.12 million.

2. The maximum estate tax rate in 2012 is:

  1. 25%.
  2. 35%.
  3. 45%.
  4. 55%.

3. The portability provision for estates allows for the:

  1. Transfer of an unused exemption between spouses.
  2. Transfer of an unused exemption to a child.
  3. Carryover of the exemption to the following year.
  4. Extension of the exemption to gift tax.

4. The generation-skipping tax generally applies to any:

  1. Transfer from a grandparent to a grandchild.
  2. Transfer from an estate to a trust.
  3. Transfer from a parent to a child.
  4. Transfer to a younger individual.

5. The lifetime gift exemption in 2012 is:

  1. The same as the estate tax exemption.
  2. Half of the estate tax exemption.
  3. Equal to the gift tax exclusion. 
  4. Repealed.

6. Barring new legislation, which of the following will occur in 2013?

  1. The estate tax will be repealed.
  2. The top estate tax rate will be 55%.
  3. The estate tax exemption will be $500,000.
  4. The generation-skipping tax will expire.

7. Barring new legislation, which of the following will NOT occur in 2013?

  1. The portability provision will be repealed.
  2. The generation-skipping tax exemption will be reduced.
  3. The lifetime gift tax exemption will be reduced.
  4. The carryover basis rules will be reinstated.

Answers: 1-d; 2-b; 3-a; 4-a; 5-a; 6-b; 7-d

Nine Reasons to Consolidate Debt

By JJ Burns

March 12, 2013

Now that another year is under way, you might make a “New Year’s Resolution” to put your financial house in order—and a great place to start is to resolve to pay down the debt on your personal balance sheet. If you owe money to multiple lenders, you may find it advantageous to consolidate those obligations with a single creditor.

What are the benefits of debt consolidation? Here are several to consider.

1. No muss, no fuss.

You can make just one monthly payment instead of having to sort through an avalanche of statements and write checks or make electronic payments to many credit card companies or other lenders. Simplicity and convenience are often cited as the main reasons for consolidating.

2. Better recordkeeping.

It’s easier to track payments to one creditor than to collect information from several sources. You’ll get a better handle on how your debt is affecting your cash flow.

3. Less stress.

Trying to figure out what you have to pay, and how to fit it into the family budget, can turn into a nightmare. And consolidation will save you from being harassed by collection agencies.

4. Lower interest rate.

Debt consolidation makes the most sense when it saves you money. Try to arrange terms so that your new interest rate is lower than the average rate for all of your old loans.

5. Longer repayment schedule.

If the new loan lets you stretch out payments longer than the terms of lots of small debts, it may be easier to balance your family’s budget.

6. Improved credit history.

Having bad credit can hinder your ability to borrow or to qualify for preferred terms on new loans. Consolidating debts and attacking the outstanding balance will generally help your credit score.

7. Get a plan.

If you work through a debt consolidation company, it will help you address your situation in an organized fashion, paying off old debts while getting a reasonable interest rate and repayment schedule for the consolidated loan. Or you could develop such a plan on your own.

8. Avoid late fees.

Typically, fees for late payments will be reduced or waived if you can show that you have a reasonable plan for consolidating and paying down your debt.

9. Set yourself free.

Finally, debt consolidation provides an opportunity to get out from down under the obligations of multiple loans. Then, if your financial situation improves, you can pick up the pace of repayment to lift your debt burden as soon as you can.

Debt consolidation isn’t a cure-all; it won’t solve all your financial problems. But it can start you on a better path.

When Do You Need an Appraisal?

By JJ Burns

March 12, 2013

Are you planning to donate real estate to charity? The tax law allows you to claim deductions, within generous limits, for giving property to qualified charitable organizations. But you have to meet strict requirements, including the necessity to obtain an independent appraisal for property valued at more than $5,000.

In fact, in a new case, a taxpayer who donated real estate worth approximately $18 million failed to provide the required appraisal, and after an audit, the IRS challenged his charitable deductions. The Tax Court’s verdict? His deduction was zero!

The basic rules for deducting gifts of property say you can’t use those donations to write off more than 30% of your adjusted gross income (AGI). Overall, your charitable deductions can’t exceed 50% of your AGI for the year. But if you exceed those levels, you can deduct the rest in future tax years.

If you donate property that has gained value, the deductible amount is equal to the fair market value (FMV) of the property at the time of the donation, as long as you’ve owned it for more than one year. For shorter-term gifts of property, the deduction is limited to your “basis” (usually, what you paid for it).

However, the IRS requires you to jump through a few hoops before you can pocket any tax deductions. When you file your tax return, you must include a detailed description and other information for property valued at more than $500. Also, if you claim the FMV is more than $5,000, you must obtain a written appraisal of its worth.

In the case of the above disallowed deduction, Mr. Mohamed was a prominent entrepreneur, real estate broker, and certified real estate appraiser. He donated several parcels of property to a charitable remainder trust during a two-year period. When he completed his tax returns for those two years, he attached Form 8283 (Noncash Charitable Contributions). Based on his own appraisals, the total FMV of the properties exceeded $14 million (although his initial deduction was “only” $3.8 million due to the AGI limits).

But Mohamed didn’t read the form’s instructions explaining that self-appraisals aren’t permitted. He also omitted important information such as the basis of the properties. The IRS challenged the deductions. When Mohamed appealed to the Tax Court, the IRS disallowed the entire deduction, despite subsequent independent appraisals establishing the total FMV at more than $18 million. In the end, the Tax Court agreed with the IRS, although it acknowledged the result was harsh.

The moral of this story is that if you donate appreciated property, you need to make sure you observe the strict letter of the law.

Where Will You Live After You Retire?

By JJ Burns

March 11, 2013

Planning your retirement involves far more than determining how much income you’ll need. One of the most basic and important decisions is where you want to live during your retirement years.

Choosing a location is something you can start working on early, as much as five to 10 years before you leave work. Don’t wait until retirement is just around the corner, because the process of comparing and contrasting different regions can be time-consuming and eye-opening.

The first step is to decide whether you want to remain where you are or move to a new place. It’s a very personal starting point, and often it will take into account proximity to family members and attachment to your community.

For those who decide to move on, here are some steps to make sure you end up in a happy place:

  • Discuss your desires. Do you dream about lying on a beach with the latest bestseller, or reeling in giant marlin from deep water? Do you envision attending symphonies and plays, or riding horses and hiking up mountains? Will you play golf or visit museums and the library? Do you want lots of sunshine or four seasons? Small town or big city? Lots of restaurants or lots of bait shops? Start by writing down a clear picture of your life in retirement.
  • Do your homework. Start matching real places with your dream retirement activities and environment. Look into weather, demographics, health care costs and health care availability for hospitals and medical specialties, crime statistics, and other factors using popular “Best Places To Retire” guides. Generate a list of three or four places that look like good matches.
  • Dip your toe in. Schedule a trip to each area, and make it a long vacation if possible, up to several weeks. Try to visit each area at different times (e.g., when weather isn’t ideal) and experience as many things as you can while there. Are the people friendly? Do any unexpected difficulties pop up? Does it match your vision?
  • Consider longer visits. If your short-term visits leave you uncertain, consider renting your current home out while you spend even more time in your potential locations. Take several months to get a real feel for the area and make your decision. After all, you hope to live there for a long time to come!

Once you decide on a location, it’s time to look at some financial factors, starting with the sale of your current home. Ask several realtors for an estimate, and compare what you’re likely to clear from the sale with what you’ll need in your new area. We can help you do these calculations, and we’ll add any expected surplus into your income calculations, and take into account tax and other implications.

Relocating can be one of the most stressful aspects of retirement. Work with a financial advisor who understands all the state and estate tax implications and how moving affects your financial outlook and quality of life.