Re-educated and Wanting to Cancel - Too Late?

Q. Dear Jeff: My wife and I just invested in an Equity Index Annuity. We signed the papers on October l3, 2005 and the money is being transferred today and some this last week. We are very concerned after reading your article, which was recommended by a friend and would like to know how long we have to cancel out of it. We live in Wisconsin and would like to know what the time limit is to get out of this contract without a penalty.

Awaiting your reply, THANK YOU.

A. Thank you for contacting me.

You should have at least 10 days to cancel the contract. The fact that the money is just now being transferred means you should still have time.

Contact the agent. Contact #### and notify them all that you are exercising your right to cancel. If this is IRA money, have them either transfer it back to where it came from or into an IRA account at the place of your choosing.

It will also be good to have some form of paper trail. Write a letter cancelling and mail it to the agent.

Let me know how it goes or if I can be of further help.

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Appreciation For Revealing The Truths

Q. I was in the process of checking out Equity-Indexed Annuities and the advisors presentation and the actual documentation was not even close. He said the program guaranteed a 7% interest gain, but he did not mention all the cost, conditions and strings attached to them. From his pitch I would have bought it, and it sounds like many people do. I say the way it was presented would make it fraud, but he did give me the documentation. He said he would do the print out with a percentage gain of 12%, because that was very possible!!!! Luckily he also gave me a 0% gain print, which revealed the truth. When I checked Equity-Indexed Annuities, and USAllianz out on the web it brought me to your site, and you confirmed my thinking. You are right this needs to be controlled, or eliminated. Thank you very much.

I would like to know if you have any articles or information on short term trading, or day trading. What are your thoughts on the subject? I have always been a "buy and hold person, but that seems to be too risky now. I am near totally liquid now, and I would like to change my strategy. Any information would be appreciated. I am 75 years young.

A. Thank you so much for your story and your kind words. People like you are the reason that I write what I do. I regularly get hate mail from advisors telling me I don't know what I'm talking about or that I don't understand how the product works or that I'm jealous of them making so much money. I do get it and I want to make sure unsuspecting investors don't get taken by it.

You are so right that the presentations make these products look great. I commend you for getting an illustration showing a 0% gain! I will now recommend others do the same.

We are of the same mindset about the inherent dangers posed by buy and hold investing these days. I don't have any articles on day-trading and I'm not sure I would recommend it.

What I have done is developed a proprietary money management system that I think of as more of a common sense approach to investing. People want to make money when the market goes up but they want to protect that money if the market goes down. That's what my system is designed to do. There are 21 different parameters assigned to each security that determine when it should be bought or sold. The parameters are specific to each security and arrived at through historical back-testing.

The basic philosophy is that the key to better returns starts with minimizing and preventing losses (as much as possible) . I want to own an investment as long as it performs, but if it starts to decline beyond pre-set limits then all or a portion of it is liquidated to lock in gains or protect principal. When the security starts trending back up the money is moved back in. The fluctuations on the security itself determine whether it should be bought or sold.

Let me know if you have any questions or if I can be of help.

And thanks again for your kind words!

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Frustration Over Lack of Growth

Q. My husband and I are 84 years old. We have money invested in bonds and mutual funds that is not moving or paying off. Our broker wants us to transfer the money into the Freedom ETF Account. I am not familiar with this type of proposal. We need a little income to pay for our long term insurance policy. I am a little frustrated because our money has not grown for seven years. He tells us that our chances of growth is better with this plan.

What do you think?

A. I think you need to find a better advisor. If your money hasn't grown in seven years then he obviously doesn't know what he is doing. In fact, I doubt he knows how to manage money in the first place. Instead, his job is to sell investments.

The 'Freedom ETF' account sounds like a program the firm came up with to make money. ETFs are like stocks. You can buy them one at a time on the open market. What's the benefit of the Freedom ETF account.

Lastly, at 84 years old, what are you wanting to accomplish with your money? Most people your age are more concerned with preservation then they are with growth. If that's the case you are in the wrong investments entirely.

If you want to tell me more about your situation, the amount of money you have and what you are trying to achieve I can offer some suggestions.

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Corruption Has Many Faces - Sounding Off

Q. I am a lowly insurance agent and read your recent article on EIAs. RIAs are every bit as ignorant and unethical as life insurance people. I recently spoke with a man in OK (age 74) who wanted the best way to increase his estate using a $150,000 IRA. A $100,000 ife insurance premium would give him an immediate estate of $250,000, tax free. His RIA talked him into a Variable Annuity. Go figure. My wife just came out of 6 years with Variable annuities with her 403b and has lost basis, even with monthly contributions. I used to be securities licensed, but will not go near them because of the corruption in the marketing and sales and now in the underlying companies represented. The securities people are just jealous of a good life product and want to get a cut of it. I hope their hue and cry is seen for what it is--a greedy grab.

A. Just because someone is an RIA doesn't mean that they are fee-based and hence there exists all the conflicts of interest found in traditional brokers. I share your disdain for brokers and the entire commission-based financial services industry. That doesn't mean that I think EIAs are a better alternative.

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Gifting Property - Avoiding Capital Gains

Q. Is there a way that my mother can give her 4 sons each a investment property that she owns without paying capital gains or any sizable taxes? She is 75 years old and it is too much for her to handle even with a property manager. We know that if she passes away in the future we avoid capital gains. Is there a way that she can gift it or put it in a trust?

A. The issue is that if she gifts the property to her sons then the sons will inherit the cost-basis and then will have to pay capital gains taxes on it when sold. If she retains ownership till death, then the property receives a stepped-up basis so when sold there wouldn't be any capital gains. She is still considered the owner even if she moves it into a Living Trust.

If she has an estate valued over $1.5 million then she will be subject to estate taxes. By the way, that is based on the market value of all her assets and even includes life insurance she owned. If that is the case, then it will be cheaper to gift the property prior to death because the capital gains rate is lower then the estate tax rate. Also, gifting the property would reduce the size of her estate and might keep any estate taxes from being owed.

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Definitions: Executor vs Trustee

Q. What is the difference between an executor of a will and a trustee?

A. The term executor is used for the person responsible for handling the probate of an estate. Probate involves the court overseeing the distribution of the estate according to the person's Will.

A trustee is the person responsible for managing a trust. A trust is a separate legal entity that can be formed prior to death in order to avoid probate. Some Wills include provisions for a trust to be established, but that is only after the assets pass through probate.

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Considering Recommended Funds

Q. I am considering rolling over my 401K from my prior employer in an IRA. I am 40 and the 401K has $170,000. I met with an investment consultant (who is a CEEP) and she recommended #### variable annuity or 3 mutual funds. I am going to stay away from the variable annuity after reading your articles. The funds she recommended are Fidelity Mid Cap II, Fidelity Diversified International, and John Hancock Classic Value.

My 401K currently consists of Columbia Acorn Z (67%) and Morgan Stanley Emerging Market B (33%). I have not commited to this financial consultant and am looking to maximize my returns over the next 25 years.

What do you think about these funds?

A. The first thing you need to think about is what type of advisor do you want to work with long-term? From the investments that she is recommending, it is obvious that she is a commission-based advisor. Even if she is fee-based for the mutual funds, your will still be paying the underlying fund expensed plus her fee or commission.

More importantly, you want and need the flexibility to change your investments based on your situation and changing market/economic environment. Most advisors put you in an investment and move on to the next person. Will she actually be managing your money after the sale? If so, what processes and procedures does she have in place that insure her systematic attention?

For instance, my clients expect me to look after their money. They want it to grow when the market is good but they want me to protect it when the market is bad. This won't be done if I just throw them in an investment and forget about it. This can't be done if I review their account quarterly. That's why I've developed systems that monitor every investment in every account on an almost continuous basis.

If situations arise such that profits should be harvested, action taken to protect the client from loss of principal or take advantage of an opportunity, I am alerted and make the decision. As a result, when my clients see the market dropping like it has so far in October, they don't have to worry because they know that I am closely monitoring their investments and am taking action to protect their gains.

I believe the advisor you use will affect your return and your satisfaction much more then the specific investment.

Currently, I am researching ways to open up my money management services to a greater number of people at costs that are 50% less than those typically associated with an advisor. This may happen in the next several months. This is a long-term decision you are making. For now, you might consider staying where you are at until you explore other options.

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Annual Elimination of Tax Debt

Q. My husband and I own a small business and I work as a manager, full time, at a software company. Our small business, which my husband tends, does not gross much money, but every year we owe the IRS thousands of dollars because we do not have any tax shelters. We do have some business expenses, but not enough to break even.

What is your advice on how we can eliminate costly tax debt yearly? We are currently renting a house and are not property owners. We would like to own investment property, but we’re afraid we won’t qualify for a home loan because of credit history. Is there any hope for us?

A. It really comes down to cash-flow. Some things that you can do to reduce your taxes are to make sure that you are contributing as much as you can to a 401(k) if offered at work. The money comes out of your check before taxes and thus reduces your taxable income. This would thus reduce the taxes due on the self-employed income. Usually, contributing to a 401(k) doesn't impact your take-home because of the tax savings.

Secondly, you can set up a SEP for the business. This would function sort of like the 401(k) in that it would allow up to 20% to be put into a retirement account each year pre-tax. It is completely flexible so that you only contribute if the money is available.

Owning a home would provide the interest deduction but you may be limited because of your credit history and/or cash flow. I wouldn't even think about an investment property until after you have your own home.

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Real Estate - Protecting Parents' Assets

Q. My elderly parents own a home valued around $100,000. How best can I help them protect this asset prior to the possibility of both going into a nursing home or passing away? Should they quit claim the house to me or put me on the deed? Would one option be less costly in taxes? Thank you.

A. If they quit claim the house to you it will be considered a gift and you will inherit their cost basis. Since it is over $11,000 per year per person gift limit, they would have to file a form (706 or 709) with their taxes which basically says, "Consider the excess amount of our gift as part of our $1 million lifetime gift exemption."

You would then be responsible for paying capital gains taxes on it when sold based on their cost basis plus any improvements.

If the transfer occurs within 3 years of applying for Medicaid, then Medicaid would withhold payments for the period of time the value of the asset transferred would have paid for.

If the apply for Medicaid after 3 years then that wouldn't be the case.

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Greed Knows No Bounds

Q. I thought you would be interested in this story. Up until January of this year I had been a client of a financial advisor in the Chicago area. My wife and I had opened VUL's with him two years earlier and I had introduced him to my mother to help her with some finances.

In January of this year we had our annual meeting with him to go over the investments we had. I recently changed jobs and had a 401k at my old company and he suggested I roll the 401k money into an EIA. Leading up to our meeting, I was getting skeptical of his investment strategy so when he made the EIA recommendation I wanted to find out more information on my own.

Well, I found your site, plus many others, that confirmed my suspicions about his investment advice. At the same time that this is going on he is supposedly helping my mother with her investments. My mother was completing the sale of my grandmothers house, because my grandmother was moving to an assisted living facility and the money was to help pay for her medical expenses. The advisor had big plans for the $550,000 made from the sale of the house. That is until I stepped in. The advisor proposed the money be divided between an EIA, high commission mutual funds, and a limited partnership.

Literally days before my mother was to hand the check over to him I called her and we set up another meeting with the advisor. I showed my mother the evidence that I had found and after listening to the advisors sales pitch he either tried to change the subject or could not answer when confronted with the questions raised by what I had researched on your web site. At the end of the meeting his face was red and his eyes showed fear as he envisioned his commission going down the tubes.

In a desperate attempt he tried to appeal directly to my mother and the so called trust they had built. But it was of no use and he knew it, he had been exposed for the charlatan that he was. I think this was the first time he had been called out directly to his face. I also think he had that commission already spent having known he recently moved to a larger house in a north shore suburb of Chicago.

After he left, my mother and I were relieved and she said, "He seemed like such a nice person". And I told her, "That's how they prey on people".

To make a long story short, my wife and I cashed out our VUL's, we didn't put in a lot of money so with the surrender charges we ended up loosing about $2000. Which is fine, we learned our lesson and the money we got back is now in an ETF.

My mother recently moved to be closer to the grand kids and has a nice start on retirement with over $1 million from the sale of her house plus the money that the advisor did not get his hands on.

I still get mail from the advisor even after insulting him to his face.

Greed knows no bounds.

A. Thanks for the story and for the compliment. It means a lot to me that the articles were a help and prevented you and your mother from making a decision you would have regretted!

Let me know if you ever have any questions or if I can be of help...

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Reverse HUD Mortgages and 2nd Mortgages

Q. A senior relative is considering a reverse mortgage - They have a $25K equity line- Will HUD request information about that credit line and/or insist it be paid off in the new reverse HUD Mortgage and doesn't HUD have a provision that you cannot take a second mortgage?

A. The reverse mortgage will need to be the only lienholder, so yes, they will require that any existing debt on the property be paid off. Typically, money from the reverse mortgage is used to do so at closing.

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The Deeds of Siblings - Selling Property

Q. We live in Ohio, and my in-laws put the names of their children on the deed of their residential property. Both died last year, and now my husband and his siblings are readying the house for sale. Will the proceeds be taxed in any way other than capital gains? Also is there any way that one sibling can stop the sale of the property when the four others are in favor of it?

A. If your parents names are not on the deed, then it can be sold whenever desired by all of the owners. When sold, all of the owners whose names are on the deed will have to sign the deed so, yes, the all have to agree to it. That means that one sibling can tie up the sale for everyone.

For tax purposes this is viewed as an investment property and the gains will be subject to capital gains taxes. The cost basis for each child will be their portion of the origianal amount paid for the house when the parents purchased it plus any money spent on capital improvements. That means that there can be a significant gain and a fair amount of taxes.

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Death After Trust and Home Equity Loan

Q. Long Story, My boyfriend (RON) passed away on May 16, 2005 One week before he passed away he took out practically all the home equity. He Refinanced before the first of the year and ONE week before he passed he took the home equity loan out. The Estate is in a Trust and I am Assigned as 1st trustee. A financial advisor that no longer works for **** set him up with these contracts at which time I was there to hear and witness, not to mention audio record the whole transaction. There was X amount of $s written in a check to **** and notation made on the check stub of a split, (x-amount to Me) and (x-amount to his Children). So this transaction date was 5/11/05. Statements say the money was received at **** on the 11th. A contract date with "### Investors- Trust-Service Class 1-Lifestyle Portfolios)" was not recorded as a journal entry until the 18.

So when they received a death certificate stating the 16th, ### sends it back to **** after 3 months of interest accumulation. August received statement from **** showing only the initial investment. Not to mention **** says the money is sitting there with no beneficiary and will not be released except to a court appointed Executor along with a letter of testamentary, affidavit domicile, and something about LOA Executor? Anyway 3 things.

Well according to the Trust, Last Will and Testament, as well as THE POUR OVER WILL, I am listed as One of the Successor beneficiaries, 1st Successor Trustee, Executor, Durable Power of Attorney, and DPA for health care . I faxed them all this information along with a signed and notarized affidavit, plus a few other pages from the trust showing my name and powers but they refuse to release the money. No one is contesting this that I know of. Is there something else I can do without involving a lawyer or Judge and occurring added fees? By the way I have been keeping up the payments for the Home Equity Loan with a portion of the money he left in our joint bank (now my) account. But not to forget the funds at **** are part of that loan which continues to go up every month as well as the principle. It doesn't seem right **** is holding money that was taken out from a trust asset and now says the money was not part of the trust.

Any suggestions or help would be a blessing. Thank you sincerely.

A. There is a lot of information here and it needs to be sorted through.

How is the home titled? Was it in Ron's name only, in both of your name's or in the name of the Trust?

How was the account at **** titled?

The bottom line is this. If the account at **** was in Ron's name only, then **** is doing exactly what they are supposed to do. Just because someone has a Living Trust doesn't mean that the trust document will govern what happens to an asset. It only governs those assets in the name of the trust. If the **** account is in Ron's name instead of the name of the trust, then it isn't governed by the trust document.

If the account is in Ron's name, then it has to go through Probate. Unless you understand the process and can navigate it yourself, you will need an attorney. Assuming his pour-over will says to move everything into the trust, then once probate is completed the account at **** will be moved into the trust.

Then, as the successor trustee, you will have control over the money and will be responsible for managing and distributing it according to the terms of the trust.

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Dwindling Retirement Funds and Agent Recommendations

Q. I retired about 4 years ago. I foolishly invested all $240,000.00 retirement money in a varible annuity receiving a monthly income of $1,541.00. My funds are now down to about $144,000.00. I was offered a deferred annuity master dex ten to help me have an income for life. Another agent suggested I talk with my current agent first. Is there any hope for me? I do need an income now. I will be 59 1/2 jan 2006. Help! Help! Help!

A. First, the last thing you want to do is move from the VA to the Master Dex. That would be jumping out of the frying pan and into the fire. Don't even talk to the advisor that recommended that because he/she does not have your best interest at heart.

Secondly, what to do with the VA? We want to find a way to make that work for you and it should by just making some adjustments.

Can you give me some more info?

How much income do you need off of it per month right now?

You say that these are retirement funds and that you won't turn 59 1/2 until 2006. If you are currently taking money out without an IRS penalty then you probably have set up what is called a 72T. A 72T (or it's equivalent) basically says that you will take out the same payment for a period of 5 years or until you turn 59 1/2--WHICHEVER IS LONGER.

If you are doing that then it will limit your ability to stem the red ink.

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Follow The Bouncing Townhouse...

Q. Dear Jeff, I bought a townhouse in Florida for $60,900 in 1985. After graduating from college I lived in the townhouse for about 14 years. About 7 years ago I quit claimed it to my mom so she would have a place to live and I wouldn't have to worry about it since I had moved to VA. At that time I owed about 48,000. My mom refinaced it and now the mortgage is $64,000.

Two years ago my mom wanted to move in with me when she retired and quit claimed me back the Townhouse in payment for living at my residence. About 4 mos. passed and she want to go back to FL and she moved back in the Townhouse.

Just recently she called and said she can no longer afford to live in FL and wants to sell the townhouse. We both agreed to put it on the market. The selling price will be around $185,000. I told my mother that I would give her 70% of the monety we get and I would take 30%. Will I have to pay a capital gains tax? If I do how do I figure out the cost basis? Will it be the fair market value from 2 years ago or the amount she owed when it was quit claimed?

A. Wow, what a mess!

I don't think you realized when you were transferring the ownership back and
forth that it was the same as making a gift.

There are two issues here. First, the gift was in excess of the amount you
can give annually without being affected by gift taxes. So, potentially, the
IRS and possibly the states, can come back to you for taxes and penalties on
all of those transfers. I'm not sure how many years they would go back....

Second is the tax issue. Whenever a gift is made, the person receiving the
gift inherits the cost basis of the person giving the gift. That makes this
part easy because your cost basis is the amount you originally paid for it
($60,900) plus any money spent on improvements.

But wait. There is a lifetime exclusion of capital gains tax on your personal residence up to $250,000 per lifetime. The owner must have used the
property as their primary residence in two out of the last five years.

If that's the case, and it sounds like it would be for your mother, then she
won't owe any capital gains taxes on it. The problem is that all of the transfers could impact that two out of five years.....

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Funds From Reverse Mortgages

Q. Concerning reverse mortgages - Heard a financial person on radio saying one could get a reverse mortgage and invest proceeds in a CD and it would earn more than your home was worth in a few years. Is that true? Did I understand correctly that you cannot use funds from reverse mortgages until all your savings are depleted?

A. You can get a reverse mortgage before your savings are exhausted. In the article, I was making the point that tapping your home equity should not be taken lightly and that in most cases you should use other sources of principal before doing so.

The idea presented by the financial person on radio is a perfect example of what a reverse mortgage should not be used for. First, the interest rate you will pay on a mortgage is higher than current rates on Certificates of Deposit. So you will end up paying more in interest than you currently are.

Secondly, you will 'earn' the appreciation in your home's value regardless of whether you have a reverse mortgage or not.

I absolutely disagree with that recommendation.

For most people, their home's equity is their best savings vehicle and their greatest generator of wealth. Don't squander that.

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Protecting Your Family From Unscrupulous Dealings

Q. I didn't know where else to go so I thought I'd give this a shot. My ex-boss at a mortgage/real estate company pretty much took advantage of my Grandfather(age 65) and forged a bunch of documents w/o his notice. He also was the broker for this office and she wouldn't tell him the things that went on and would sneak things behind his back. She has committed so many crimes and I have at least a 2 page list of them along with witnesses and evidence against her.


The thing is... She forged and notarized a limited power of attorney for him and I think this situation is going to turn sour real fast if we don't act soon. I don't care about all the crimes she committed against me and my mother but I just want to save my grandfathers life, literally. This situation has him feeling really down and stressed and I don't know how much more he can take.

I'm trying to help him out with all I can because all I want is the well being of my family. She is guilty of many different kinds of fraud and tax evasion. She also illegally runs her office and is trying to steal my grandfathers identity. She already started opening credit cards and stuff under his name and is ruining his credit. Please, for the love of God, help me in any way possible. It would be greatly appreciated. Thank you.

A. I'm so glad you found my site and took the time to ask me. This is an extremely serious situation and you are justifiably concerned.

The first thing you need to do is call the police. If she has set up a power of attorney and other documents, she is guilty of fraud and forgery. Will your grandfather attest to the fact that he never signed nor intended her to have power of attorney? If so, see if he can press charges.

The police will follow up. If they don't, contact the FBI because of the identity theft situation.

If all else fails, go to an attorney. But don't wait. You need to act as soon as you can because if you know this is going on and do nothing that may be viewed as consent.

Contact the credit reporting agencies immediately. Let them know that he may be the victim of identity theft and they will flag his files. Contact each of his credit card companies and places where he has loans and let them know as well. If possible, close his existing credit card accounts so that they cannot be used. Notify the banks where he has accounts. If he receives a pension, contact the administrator and make them aware of the situation.

Please keep me informed....

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I Don't Want My Inheritance!

Q. How can we best block receipt of my mother's home through her will? She is living & has listed my sister & I as beneficiaries, not listing my brother who has been in big trouble with IRS. So she wants us 2 to take possession, sell, then split 3 ways; but we want nothing to do with that & all the repairs, 2nd mortgage etc. Can we file some disclaimer to avoid all the expenses? Thanks!

A. There's nothing you can do to keep her from naming you in her Will.

When she dies and the Will is probated you can disclaim the inheritance and it will pass to someone else.

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Protecting Your Inheritance While Receiving Social Security Benefits

Q. I'm the beneficial of a retiremant and insurance policy. I receive Social Security. I may loose my Social Security benifits if I receive the funds.

I also owe a student loan.

How can I protect my inheirtance.

I'm scared and don't have a clue what to do.

A. The main issue is whether the person of whom you are the beneficiary has already died. If not, then you should create a beneficiary trust (or have a special needs trust). The money then goes into that trust and can be used to pay for certain items for you without causing you to lose SSI.

If the person has already passed away then it becomes much more difficult. I think your options are pretty limited. The money may be claimed by the government to pay back what they have paid you all these years, or at the least, could cause them to deny benefits moving forward.

This is a terrible situation and one in which there should have been some advanced planning. Unfortunately, many people fail to take the simple actions that would prevent an inheritance from being lost.

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