ARM Youselves For More Foreclosures

I wrote an article yesterday about adjustable rate mortgages comparing them to a fixed rate mortgage and the number of foreclosures. CNN posted a new article today detailing the effects of what is going to happen when the ARMs reset their rates.

From the article:

The result: increased foreclosures and forced sales, flooding the market with homes and depressing prices even more.

“There will be a huge glut of houses that will be coming on to the market,” said Schiff.

The people who have ARMs are surely affected, but what about the rest of us? With a slow housing market already, a flood of new houses will again depress prices. Will we be able to get out of this hole?

The 3 must haves of estate planning

Financial-Estate-Planner-Raleigh-NC-300x300Everyone needs an estate plan. I don’t care how old you are, how young you are, how rich or how poor you are. You need to protect yourself and your family. Do you want your family to be on the news like Terry Schiavo? Without some form of protection, decisions made after you’re gone or incapacitated can tear families apart.

Each of the following documents protect you in some form or another. Each one can be as equally as important. You do not have to have $10 million to find value in a couple pieces of paper. Ask yourself this, “what happens when I die or become incapacitated?” Where do your children go? Who decides whether you should remain on life support or not? Who gets the house or that prized base ball collection? Do you want your private life made public by the state?

Lets examine the 3 must haves:

Last Will and Testament
A last will and testament is a document that directs where you want your assets to go and who gets to oversee the disposition of assets. A will can be as simple as a “I leave everything to so and so” to as complex as setting up various trusts.

Wills help you avoid making your private life public. If you die without a will, you are considered intestate. This means that the things you own or control at the time of death are examined and distributed by the probate court. Which also means that everything you own is made public for the world to see. There are those out there who will prey on people who just inherited a lot of money. They just look up the latest probate cases. Lets me also mention that probate court can be expensive and time consuming.< Do you want your heirs fighting over who gets what? I’ve seen it destroy families.

Living Will
A living will is a will that you use when you are living. Simple enough, right? The living will issues orders to doctors or caregivers in the event that you become incapacitated. For example, you get in a car accident and go into a coma. Now, what if you’re brain dead? Doctors have an obligation to keep you alive, do you want to live and suffer or die quickly?

The living will details specifically what doctors should do in a situation like this. Instead of letting your family quarrel over whether or not you should live, you made the decision already. It is a touchy subject, especially asking yourself if you want to live or die, but it is necessary.

Health Care Power of Attorney
The HCPOA for short appoints someone to make decisions for you in the event that you become incapacitated. This person can decide the level of health care as well as, depending on the provisions, take care of your obligations such as bills. The person you appoint can make the decision whether you should live or die based on what you have in your living will or have said in the past. If Terry Schiavo’s husband had a HCPOA, he could have stopped all that legal fiasco, he would have had the power to remove her feeding tube.

There you have 3 simple documents that will protect you and your family. There are a lot of issues to consider when developing your estate plan, there are a lot of hard questions that must be answered. In the end, do you want to control your fate, or do you want the state or doctors decide it for you?

Have Too Much Money? ConGRATs

financeHere’s a little article for those of you with too much money. What’s my definition of too much money? Well, lets say you’re in retirement and have investment assets that will put you way over the top of the estate tax.

Lets say you want to minimize your estate tax but also want to maximize the amount of money you leave to your heirs. No matter what you do (short of putting your money in a couple of steel lined briefcases) you’re going to earn interest on your money, why not make the most of it and give it to your kids now?

Luckily for you, the IRS gives you just such a way to pass a fortune to your kids tax free! Its called a GRAT – Grantor Retained Annuity Trust. Well what does that mean and what does it do?

Here’s how it works, I’ll try to keep it simple.

You put money into this irrevocable trust (meaning you can’t take it back until its done) and select a form of annuity payments over a certain period of years (usually 1 or 2 years). The IRS has a set expected annual rate of return, what this means is that they expect your money to earn at least lets say 5% per year. That seems reasonable and easy to achieve. It is and that’s why GRATs are an excellent means of transferring wealth!

Take your money, put it in, and earn whatever you want based on your investments – 10, 11, 12%. So what happens at the end when the trust is done? Well a couple of things:

First, everything you put into the trust plus the 5% the IRS expects you to earn is transferred back to you, its back in your estate. Sorry, you can’t get rid of that so easy slick. However, the 5, 6, or even 7% extra that you earned above and beyond the 5% the IRS stipulated goes to your beneficiaries tax free! Let’s do the math.

The future value of $2,000,000 invested for 2 years with a rate of 12% will be $2,508,800. The future value of $2,000,000 invested for 2 years with a rate of 5% (the IRS assumed rate) will equal $2,205,000. Take the difference and you get $303,800. What does it mean? $303,800 just went to your heirs tax free. $303,800 of interest that you would have otherwise included in your estate is now out of it.

A couple of points to make about GRATs.

  1. If you die before the GRAT ends, it ends up back in your estate.
  2. If you earn less than the IRS rate, GRATs aren’t useful.
  3. You can keep doing one GRAT after another.