Do You Need A Trust Or Foundation?

Trusts and private foundations aren’t just for the rich and famous like Warren Buffet or Bill Gates. Nowadays, even people of modest means are realizing the great benefits trust and foundations can provide. Read on to see if you can, too. There are many different kinds of trusts and foundations, but they all share a common element—control. Using them, you can control what happens to your assets while you are alive, in the event of incapacity and for generations to come. For instance, a trust is highly recommended if you and your spouse each have children from a previous marriage and you want to avoid any conflict when one of you passes away or becomes incapacitated. A trust can be just the thing if you are concerned about a child losing their inheritance in a divorce. And in today’s litigious society, trusts can be used to shield assets from lawsuits. A trust can be as simple or as complicated as you need it to be. Foundations have many similarities to a trust. The main difference, though, is that foundations are designed specifically for charitable, religious, educational, scentific or literary purposes. Like a trust, a foundation allows you to control how the assets are invested, who they are distributed to and when. Plus, there are tax benefits for transferring assets into a foundation that aren’t available with most trusts. If you expect to leave several hundred thousands of dollars in assets to charity, a foundation may be right for you. That’s especially true if you want the assets invested and each year’s earnings distributed to a special cause. There’s more involved in setting up a foundation as compared to a trust. They also require more work. Accurate records must be kept and informational tax returns must be filed. For those with much smaller contributions, it may be easier to donate the money or assets to an existing organization as opposed to forming your own. But it may be easier to donate a significant amount than you think. You might have a life insurance policy that you’ve had for years that you no longer need. Instead of canceling it, you can name your foundation as the beneficiary. If fact, life insurance is a great way to not only provide the initial funding for a foundation, but also to help it increase in size over time. I mentioned tax incentives. Appreciated assets like real estate or stocks can be transferred into a foundation (and certain charitable trusts). That way capital gains taxes don’t have to be paid and you still get a tax deduction for the contribution. The result is that your charity receives more money than if you sold the asset, paid the taxes and donated the remainder. There are different versions of charitable trusts. Some allow you to donate an appreciated asset, get a tax deduction, and receive an income stream for life. When you die the remainder can be used by your favorite charity. Another version is similar but the charity receives the income stream during your life and your heirs receive the remainder at your death. This can be beneficial if you have investment property that has greatly appreciated, you need income and you don’t want to pay all the taxes. In can cost thousands of dollars to set up a trust that allows you to avoid probate and protect your child’s inheritance from a lawsuit. Foundations can be even more expensive. But they don’t have to be. If you are comfortable doing research on your own and are willing to take the time, you can set up a trust and/or foundation on your own very inexpensively. Legally, you can serve as your own attorney and draft your own estate documents. There are many sources that provide templates. If your situation is straightforward, all you have to do is fill in the blanks. For those with more involved situations an experienced attorney is recommended. Even if you do it yourself, it’s not a bad idea to have an attorney review it. Lastly, a trust does nothing for you unless you transfer assets into it. Don’t forget that step or all your work will have been for naught. Have a financial question? 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.

Beware of Generalities

Talking heads and pundits everywhere are quick to make predictions based on broad generalities. Many investors respond by making changes to their portfolio. Doing so isn’t always in your best interest. Let me explain why. Generalities, by their nature, deal with broad segments. For instance, financial experts have been talking so much about the popping of the Real Estate Bubble that it may become a self-fulfilling prophecy. Based on questions from readers, investors are now concerned about all things real estate. That’s where the problem lies. It may be true that there is a Real Estate Bubble of sorts. But that doesn’t necessarily mean that all real estate investments are destined to drop in value. There are many ways to invest in real estate besides buying an actual property. There are publicly traded real estate investment trusts (REITs), direct participation programs and stocks of homebuilding companies and materials providers such as Home Depot. Before you make changes to your real estate investments, you must first dig deeper to better understand what is happening and what the specific effects will be. Based on your research, it may be best to shift funds from one type of real estate investment to another. When the media talks about the Real Estate Bubble, they are really talking about the collapse of prices on single-family homes. It’s true that the demand for homes has surged the last 5 years due to abnormally low interest rates. Just about anyone who was paying rent could own a home for the same monthly payment. Those with existing homes (and mortgages at a higher rate of interest) were able to sell and purchase larger homes while maintaining a similar monthly payment. The result of this surge in demand was that home prices went up. As people heard about the remarkable gains real estate investors were earning, they decided to jump into the game. The numbers of vacation homes and second homes being purchased soared, further inflating prices. People who had never invested in real estate were suddenly trying to flip properties. Higher interest rates are letting the air out of that bubble. It is taking longer and longer for a home to sell. Prices are coming down. Sure, there will be some areas where people paid too much for a home and will have to wait years before they can sell at a profit, but I don’t believe there will be a crash like investors experienced in the Tech Stock Boom. It’s just that our homes won’t appreciate as fast. Here’s the point. Not all real estate will decline. During this rush to purchase homes, rental properties went down in value. No one wanted to rent, everyone wanted to buy. Landlords had to offer extravagant incentives. They had to lower rents and include freebies—much like home sellers are doing now. So while it was a great time to invest in single-family homes, it was a terrible time to own rental property. Likewise, as the single-family market reached its peak it was time to shift investment dollars into rental properties. Demand for rentals is increasing. Rents are rising. Profits are returning. For instance, I have invested my clients in one company in this niche. It focuses on acquiring, owning and operating apartment communities mainly in the southeastern United States. Even after a recent pullback it is still up over 13% year-to-date. And its dividend yield is currently 4.4%. If you moved money out of all types of real estate based on the Real Estate Bubble generalities hyped by the media, you missed opportunities. I believe real estate should be a normal part of any portfolio, just like domestic and international stocks and bonds. Real estate doesn’t move in tandem with stocks, so it helps level out the ups and downs of the market. Investing takes work. There aren’t any short cuts. Taking action based on broad generalities is a loser’s game. By drilling down through the hype to understand the specifics, you can make adjustments to your portfolio that will reduce your risk while allowing you to continue to grow your wealth or achieve a higher level of income. If you aren’t interested in doing that work, you might consider someone like me to do it for you. I’ll personally respond to your questions, free of charge. Go to http://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.

Real Estate In An IRA

Did you know you can use your IRA to purchase real estate? You can, but it’s important that you follow some basic rules or you risk the IRS disqualifying your entire IRA! Read on to learn more. You will probably need to change your IRA custodian. Most banks and brokerage firms don’t allow non-traditional investments in their IRAs, including Fidelity, Schwab, Vanguard and T. Rowe Price. Other custodians specialize in serving as the custodian for IRAs holding non-traditional investments. (You can find many by typing in “Real Estate IRA Custodian” in your favorite internet search engine.) The fees charged are higher and may amount to hundreds of dollars a year to thousands of dollars a year based on the value of the account. In these accounts, your IRA can own apartments, single-family homes and duplexes. Your IRA can own raw, undeveloped land or commercial property but it cannot directly benefit you or your relatives. You can’t rent from your IRA. The process is involved, but straight-forward. You open an IRA account with the new custodian and transfer funds from an existing IRA. You can use the new custodian for your entire IRA or just a part. I would recommend using a traditional custodian for that portion of your IRA that uses investments like stocks, bonds, and mutual funds. You then identify the property you want to buy and the custodian purchases that property on behalf of your IRA. The custodian does not provide any management of the property—that’s left up to you. Say your IRA buys a duplex to serve as a rental. Even though your IRA owns it, you would still be the one responsible for finding tenants, arranging leases, getting insurance, making repairs and all the other things associated with being a landlord. Conversely, you can hire a property management company to do this on behalf of your IRA. It is extremely important that you only use IRA funds for all expenses associated with the ownership and management of the property, including taxes, repairs and insurance. The rents received flow into the IRA account and that money can then be used to cover these costs. If you mix personal funds and IRA funds together you risk substantial penalties that may include your entire IRA being disqualified by the IRS. That means you would immediately have to pay ordinary income tax on all the money in your IRA, plus other penalties and interest. Don’t invest all of your account’s funds into real estate, but leave a cushion to cover normal operating costs. The amount you leave as a cushion will depend on the type of property and the expenses associated with it. It’s also important that you don’t borrow money within the IRA to purchase property. Income from a debt-financed property within an IRA is subject to unrelated business taxable income (UBTI). Your IRA will then have to file a tax return and pay income taxes on those ‘profits’. Taking Required Minimum Distributions from an IRA invested in real estate can be a problem unless you plan ahead. If you are 70 ½ (or as you approach that age), build up an extra cash cushion in the account to cover your RMD each year. If all of your IRA is invested in raw land and you don’t have enough liquid investments to cover your RMD, then you will have to withdraw a piece of that property. You do this by deeding a portion to you as an individual. This creates potential problems because you have to have appraisals done to insure that the land withdrawn was properly valued. It also involves lawyers, deeds and recording fees. For those experienced in real estate, it makes perfect sense to own some in their IRA. Those without experience should think long and hard about it before they do. I suggest you consult a CPA knowledgeable in this area prior to making your first purchase. It’s also not worth it for small IRAs. Diversification is still important in real estate so you will want to own more than one piece of property. Your IRA should also have a portion invested in traditional, more liquid investments such as stocks, bonds and/or CDs. Have a financial question? 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.

Arbitration Won’t Fix It

Some of my best article ideas come from my readers, and this week is no exception. This is a story of misplaced trust, dishonesty, inaction and great financial loss. The lessons learned through their experience will hopefully save you from a similar fate. Read on to find out more. “Bill” and his wife, “Jane”, (not their real names), were a well-educated couple looking to boost their returns. After attending one broker’s seminar, Bill was impressed by “his expertise in company analysis and stop-loss protection.” They decided to put Jane’s retirement money into this broker’s hands. But after signing the paperwork to open the account, the broker never contacted Jane to find out how she wanted her money managed. Both sides made assumptions about what the other wanted and/or would do. Jane and Bill were busy, and so was Jane’s IRA. We don’t know how long it took or how the account did early on, but eventually, over 90% of Jane’s retirement money went down the tubes. The broker promised stop-loss protection but never actually put that strategy in place. The broker determined Jane’s risk tolerance without any input from her. When that section of the application was left blank, the broker filled it in it himself so that it, according to Bill would “justify his stock picking and mutual fund selection.” Bill and Jane had to go through arbitration in an attempt to recover their losses, as are almost all brokerage firm clients. After a process that typically takes several years, the panel agreed that the broker had violated 26 NASD regulations. These included lying, the use of erroneous information, total mismanagement of clients’ accounts and the use of unsuitable investments. When it was all over, guess who the panel found at fault for Jane’s losses? Jane, of course! They reasoned that since she was a well-educated woman, with a Master’s degree no less, that she should have known better than to let it happen. Her husband Bill was even chastised for finding the broker in the first place, and, “for putting her in a position to lose her money. We were supposed to know better, not the broker, or his broker-dealer. I am not making this up. My wife got a check for less than 1% of the account value before the losses occurred.” Bill’s experience with arbitration is fairly typical. Roughly 50% of arbitration cases are won by the investor, but the award is often a fraction of the damages. Moreover, many times the complaint doesn’t even show on the broker’s record. This story has many lessons. Perhaps the most important one is that you bear the primary responsibility for managing your investments. The financial system isn’t out to protect the individual investor. Even if you suffer great financial loss, don’t expect the system to bail you out. Bill’s story also illustrates the need for investors to have transparent communication with their advisor. If you don’t like the investments being used or if you aren’t comfortable with the portfolio allocation then let the advisor know. Don’t just assume that your account is doing fine. Watch your monthly statements. Track your portfolio’s value. If the value starts to decline significantly and you aren’t assured the advisor is taking action to protect it, then find out why. If you don’t like the advisor’s response, then take your account elsewhere. Also keep in mind that you won’t know if any advisor is right for you until after you’ve worked with him/her for about a year. If you find yourself laying awake at night worried about your money, though, it’s a sure sign that something is wrong. The bottom line: it’s better to prevent significant losses from occurring in the first place instead of trying to recover them through arbitration later. Determine the risk you are willing to assume. If your account value drops to that level then demand that action be taken. You are the boss. The buck stops with you. You can delegate the day-to-day management and investment selection to a trusted advisor, but it is your responsibility to manage that relationship. Think of yourself as a business owner. If you didn’t like the job an employee was doing you’d fire him/her. Take the same approach with your advisor. Remember…it’s YOUR money. I’ll personally respond to your questions, free of charge. Go to http://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.