To Trust Or Not To Trust…That Is The Question!

Living Trusts have become very popular and are being heavily promoted to seniors. Should you Trust or not Trust? That is the question. Read on to learn some simple guidelines that will help you know whether a Living Trust may be right for you and how to go about getting one if needed. A Living Trust is considered a separate legal entity much like a corporation. As a result, any assets ‘owned’ by the Trust at your death avoid Probate and can pass to your heirs simply and easily. It also provides for the management of your assets if you become incapacitated. Living Trusts can be complex documents that allow you to precisely detail your wishes or they can be a straightforward means of handling your estate. Even though the Trust is considered a separate legal entity, you retain complete control over everything you own. In fact, a Living Trust can allow you to control assets from the grave. A Living Trust will not protect your assets from lawsuits or creditors. It won’t ‘hide’ your assets from Medicaid should you need to go into a nursing home. It won’t automatically eliminate all estate taxes, though it can help eliminate some and reduce others. And a Living Trust only controls those assets that are ‘owned’ by it, so unless you re-title your home in the name of the Trust, for instance, the Trust will not protect it from having to go through Probate. Living Trusts are being heavily promoted through seminars. If you attend one, you may come away feeling that everyone needs a Trust. That’s not true. Although many people will benefit from one, they are not for everyone. Take ‘Lily’, an 82-year old widow from LeHigh Acres, Florida who recently called me. She was being pressured to get a Trust after attending one of these seminars. “If you don’t get one, you will have to pay thousands of dollars in taxes when you die,” the salesperson told her. That is completely untrue. In fact Lily didn’t need a Trust at all. Lily’s assets consisted of a few small bank accounts, an IRA at a brokerage firm and a modestly priced condominium. She had already named beneficiaries on her bank accounts and IRA, so these assets would avoid Probate when they passed to her heirs. The only asset that would be subject to Probate was her condo. Lily has a good relationship with her kids, so she can title the condo in their names. Sometimes there can be a gift-tax issue when transferring ownership of an asset to a child. I almost never recommend adding a child’s name to your home, but in this case it makes sense and she shouldn’t incur any tax liability. Another option for Lily was to set up a Living Trust on her own. There are a number of off-the-shelf computer programs that provide all sorts of legal documents, such as wills, powers of attorney, contracts, and Living Trusts. Trusts created using this software may not have all the special features of those costing $2,000, but most people don’t need them anyway. Anne and her husband in South Carolina set up a Living Trust this way. They used an inexpensive software program to put together their Trust. It’s critical that you have an attorney review it when you’re finished. Their local attorney reviewed it, made sure everything was as it should be and only charged them $100. If you are able to do this, then there isn’t any reason not to have a Living Trust. Even if it is to handle the transfer of your real estate at death, the time you take now will make things much easier for the loved ones you leave behind. There are, however, several situations where it pays to go ahead and have a professional draw up a Trust for you. These include your estate being worth more than $1.5 million, having children that are handicapped or disabled, or having children from a previous marriage. Professional help should be sought if you want to have incentives to financially motivate your heirs or if you want them to receive their inheritance over time instead of all at once. Still unsure if a Trust is right for you? Send me an email and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Commission vs. Fee–Based Advisors: Which Cost More?

There is a debate in the financial services industry over commission versus fee-based compensation. As an investor, it’s important that you understand the differences. Otherwise, it can end up costing you tens of thousands of dollars and great frustration. If you’ve read any of my weekly articles, you know that I am opposed to investors working with a commission-based advisor. I often receive angry emails from brokers and agents berating me for ‘misleading’ investors. They say that over time an investor will end up paying less in a commission-based product versus paying an ongoing management fee of 1% per year. On the surface, this appears to be true. If you invest $100,000 into a mutual fund with a 5.75% front-end commission, you will have $5,750 deducted from your account on the first day. If instead, you paid 1% of the value of the account each year for seven years then you would end up paying $7,000 in fees—not counting the fees from the account increasing in value. As the value of the account goes up, so does the amount paid in management fees. On the other hand, the up-front commission was only based on the initial investment. Why on earth, then, do I say that it is more expensive to pay a commission? First, this simple example above does not take into account the true costs associated with investing over that seven-year period. It’s true that if you owned the same investment for seven years and didn’t make any changes along the way, that you would benefit from paying a commission versus fees. The problem is that there will only be a handful of every 100 people who will hang on to the investment that long. Studies have shown that the average length of mutual fund ownership is less than 2 years! It’s not unusual for an investor to go back to the broker that received the initial commission (or to a different one) to complain about the performance of the investment. Many times the broker then recommends the investor make a change that involves another commission. Or maybe you initially purchased a variable or an equity-indexed annuity. If you need to take out your money because your situation changes or you’re unhappy with the annuity’s performance, you will end up paying a steep surrender penalty. The amount of that penalty should be considered part of its cost. Secondly, the service you receive suffers when you pay a commission versus an ongoing fee. Commission-based advisors justify earning their commission by saying that the client is paying for 7-10 years worth of service up-front. But the advisor gets the commission regardless of how the investment performs, how little they service the account or how unhappy you are. The commission-based advisor improves their standard of living regardless of whether they improve yours. If you pay a dentist for seven years worth of service up-front, what incentive will the dentist have to bring you in every six months? None. In fact, by doing so, the dentist is wasting time that could be spent selling someone else a 7-year package! Paying a management fee gives the investor CONTROL over the relationship. You can change investments or move your account, at any time, without additional costs. As a fee-based advisor, the only way I can improve my standard of living is to first improve yours. In fact, when you consider all the time I initially spend with a client, it takes retaining that account several years in order for me to profit from it. As a result, I continue to be motivated to meet your needs and to keep you satisfied. Wouldn’t you rather have your advisor’s compensation tied to their performance? The worst investment you can make is having an advisor who doesn’t do a good job. You won’t know if you have the right advisor until after you’ve worked with him/her for about a year. If you’ve purchased commission-based products it will be costly to change. It’s not so with a fee-based advisor. Don’t be fooled by the argument that it is cheaper to pay a commission than to work with a fee-based advisor. It’s just not true. It’s your money and you deserve better. Have a financial question? I’ll personally answer it. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Equity-Linked Certificated of Deposit: The Safer Low-Cost EIA Alternative

Equity-Linked Certificates of Deposit are a safer, low-cost alternative for those who must have an Equity-Indexed Annuity type of investment. These little-known investments allow you to participate in the growth of the market index while your principal is guaranteed by the Government. Read on to find out more. Equity-Indexed Annuities are probably the most heavily promoted investment for seniors in today’s marketplace. The sales pitch is appealing and the payoff to the agent is very big—up to 13%. The enormous commissions have led to sales abuses which leave seniors holding the bag. Readers of this column have wised up to the flaws of Equity-Indexed Annuities. But what are the alternatives? The best alternative to Equity-Indexed Annuities is to use a diversified mix of investments and strategies that can provide an income stream between 6% and 10% while limiting any risk of significant loss. That’s what I do for my clients—without long-term time commitments or surrender penalties if they want access to their money. Another alternative is called an Equity-Linked Certificate of Deposit. They provide virtually all the benefits that Equity-Indexed Annuities are designed to provide, without all the negative strings attached. Equity-Linked Certificates of Deposit are offered by banks. They pay a return that is based on a stock market index, usually the S&P 500. Just like all Certificates of Deposit, they are federally insured by the FDIC up to $100,000 per individual. The minimum purchase for an Equity-Linked Certificate of Deposit is usually $25,000, but some can be found with $1000 minimums. The return is based on the average performance of the S&P 500 over a set period of time. Just like Equity-Indexed Annuities, how the return is calculated depends on the issuer. The returns are all based on averaging the gains or losses of the index at set points over the life of your contract. Some Equity-Linked Certificates of Deposit guarantee a 3% return. Those doing so will limit the index return. Others provide 100% of the calculated index return. The only way you can lose your principal with an Equity-Linked Certificate of Deposit is if you pull your money out before the end of the term. Most will have some form of a penalty, but since there wasn’t a big commission paid to an agent to sell it, the redemption penalties should be small. (Some don’t allow early redemption so investigate before you invest.) All allow early redemption without penalty if the account holder dies. One of the major benefits Equity-Linked Certificates of Deposit have over Equity-Indexed Annuities is a short term commitment, FDIC insurance of principal, and much lower fees. They allows you much more control and flexibility. For instance, let’s say you intend to invest $75,000 in Equity-Linked Certificates of Deposit. Instead of putting all the money in a single CD, divide that money between three--purchasing one each year for three years. Then as one comes due you can roll it into another 3-year term. This will reduce the negative effects in how the index returns are calculated while giving you access to $25,000 every year. There are several disadvantages to Equity-Linked CDs. They don’t normally pay interest until maturity, so these investments are not a good choice of those looking for steady income. And like Equity-Indexed Annuities, you don’t really get 100% of the market gains because of the averaging used in calculating the rate of return. You may be wondering why you haven’t heard of Equity-Linked Certificates of Deposit before. In fact, you should wonder why the advisor recommending you buy an Equity-Indexed Annuity hasn’t recommended them! The reason is they don’t pay a large commission so there isn’t a financial incentive for the advisor to do so. Check with your local bank to see if they offer Equity-Linked CDs. Not all do, but they are becoming more widespread. Any broker or advisor that can sell bonds should also have access to Equity-Linked CDs. I still believe there are better ways to invest your money than Equity-Linked CDs. But I’d much rather see someone invest in them than an Equity-Indexed Annuity. Don’t let advisors who stand to gain so much from your money pressure you into investing in an Equity-Indexed Annuity when an Equity-Linked CD is a much better alternative. Have a financial question? I’ll personally answer it. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Let Financial Freedom Ring

As our nation recently celebrated its freedom, we are reminded of the ‘unalienable rights’ our Founding Fathers appreciated: life, liberty, and the pursuit of happiness. Sounds like the ideal retirement, doesn’t it? But unless investors are careful, they’ll never achieve their own financial freedom. Being financially free requires: 1) Living beneath your means. You can’t spend more or equal to what you bring in and get ahead. 2) Making a budget and sticking to it. Be realistic and leave room for expenses to increase over time. Before you buy, count all the costs such as long-term maintenance and higher insurance premiums. 3) Basing your fulfillment on something other than your possessions. He who dies with the most toys doesn’t win, and no, you can’t take it with you. Most would define financial freedom as having enough money to live comfortably for the rest of their lives. But how much is enough? Let’s take a look at two couples and get a better picture of what true financial freedom is and how you can achieve it. With our first couple, the husband just retired from a successful career with $1,000,000 in his 401(k). They haven’t put any other money into savings. Now that they’re retired with all this money at their disposal, their spending habits take over. They buy a new home, new car and generously help out their children. They don’t live on a budget and it is hard for them to see the impact their current decisions will have on their future. This couple has to invest fairly aggressively and earn at least 6% to 7% just to keep up with their current standard of living. A sustainable retirement lifestyle should be based on a withdrawal rate of no more than 5%. Consistently earning enough to support a 7% withdrawal rate is difficult at best. Our second couple, also newly retired, has always lived under a budget. Their household income was the same as that of the first couple, but because they’ve lived ‘beneath their means’ through the years, they have a larger nest egg of just over $1,600,000 to fund their retirement. They’ve made some major, but wiser, purchases. Rather than building a new home on an expensive lot, they’ve chosen to do a more modest remodel on their existing home. They don’t mind driving older vehicles, and they help out their kids in more modest ways. Because of the lifestyle they’ve chosen, both now and in the past, they only have to earn 3% on their money to maintain their standard of living. There is no need to take risks with their nest egg, because they don’t have to. So which couple has achieved financial freedom? The friends and neighbors of these couples will say that it is Couple #1, because of their expensive lifestyle. The answer becomes more obvious, though, if we fast-forward a decade. Couple #1 has to start tapping their principal to make ends meet. Their lavish lifestyle combined with rising costs for life’s necessities means they’re now facing the grim possibility of running out of money and becoming dependent on their children. Couple #2 has faced rising costs, too, but the impact has been minimal. In fact, they’ve hardly changed their lifestyle at all. Since they are able to earn more than they actually spend, their nest egg has continued to grow. Not only do they have the peace of mind that they won’t outlive their savings, but they know they’ll be able to leave a nice inheritance for their children and grandchildren. It’s obvious Couple #2 is financially free. Financial freedom isn’t about spending more, but worrying less. How much money you make doesn’t determine whether or not you will achieve financial freedom. It’s more about the relationship between your lifestyle and your income. Couple #1 may try to solve their problem by taking higher risks to earn more on their investments. But they only have three choices in order to reach financial freedom. They have to save more, spend less and/or work longer. These are painful choices. There isn’t a magic formula to becoming financially free. It is based on consistently making the proper choices. The security of having financial freedom is priceless and with a little effort, you can do it. Have a financial question? I’ll personally answer it. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.