California Estate Planning Practice Blog

A Real Estate Proposition.

A client just called me with a contemporary real estate dilemma – now that she’s sold her place, when should she get back into the real estate market? She sold for good reasons: the neighborhood was changing for the worse, so her equity/investment was in jeopardy, and her new neighbors were not people she cared to share a county with. Given the slide in home prices, she rented an apartment to sit on the sidelines for a while.

But this is not just a tale about the real estate market – it’s also about the cost of property taxes. That’s because now that my client is 55 she can take her old property tax basis with her to her new place – but the clock is ticking on this deal.

It’s called Proposition 60, and it says that if she sells her primary residence and within two years buy another of the same or lesser value, she may take her property tax base with her. Proposition 60 applies when you do this within your own county, and Proposition 90 is when you move to another county that allows reciprocity (those counties are Alameda, Los Angeles, Orange, San Diego, San Mateo, Santa Clara, and Ventura).

[By the way, if a couple divorces, the first person to take advantage of this deal gets it. The other one loses out].

So should the client wait until real estate prices really fall, but lose out on Prop 60? Probably not. She’s going to look for a new place. Sure, she could rent and live off the equity from the sale of her home, but then she may never be able to afford to buy again. I’ve had other clients lose their Prop 60 opportunity for one reason or another, and now they can’t stand the thought of buying again – the mortgage is doable, but it’s tough to justify the cost of higher property taxes.

The moral of the story: Be sure you know the true cost of buying and selling real estate, especially when it comes to your primary residence.

Delia Fernandez, MBA, PFP

It’s Fire Season: Are You Adequately Insured?

If there’s one weakness I find in most people’s finances, it’s that they don’t have sufficient homeowner’s and auto insurance coverage. Yet it’s the insurance we’re most likely to use, and so inexpensive for what it offers.

I think one reason people are so underinsured is that we are introduced to this kind of coverage when we start driving, a time when we’re young and don’t own anything. So we want the cheapest insurance we can find, and marketers oblige us by touting their product by price. So by the time we have accumulated assets, such as a home, and have something to lose, we’re still thinking like that broke young driver. 

Ideally, you’d have an insurance agent you trust, and you’d sit down with them once a year or so to review your coverage. But most people don’t. I encourage you to find one – ask friends for referrals – and then book that appointment. Take along a net worth statement and a list of special items you own, and be sure to ask the following: 

• If your home was completely destroyed, would the insurance be sufficient to rebuild it and replace all your possessions? I’ve had builders tell me that Southern California homes cost $200 - $250/square foot to rebuild. Apply that amount to the square footage of your own home and then check your coverage. With home prices appreciating over the past few years, most of my new clients are underinsured. The Wall Street Journal covered this in their August 26th issue, and suggested a replacement-cost calculator at www.accucoverage.com which for a $7.95 fee can help you assess the amount of coverage you need. 

• If you were sued for everything you’re worth, do you have sufficient personal liability coverage? This is where the net worth statement really comes in handy. It tells us how much you have to lose, and is a great starting point to discuss liability coverage. It may be difficult for a judgment creditor to tap your retirement funds in an employer’s plan (see my blog entry on Asset Protection and Retirement Plans), but all your other assets could be up for grabs. Once you max out the coverage offered under the individual auto and homeowner’s policies, your insurer can give you additional coverage through a personal umbrella policy, sold in million dollar increments. Don’t panic – it’s really inexpensive, about $200 per $1 million of coverage – and is one of the basic tools in a financial planner’s kit to protect middle class and wealthy clients. What’s more, it typically offers a wider range of coverage than the personal liability offered under your homeowner’s plan. 

• What about uninsured driver coverage? This is the coverage that protects you should you be involved in an accident with someone who does not have insurance. In the past few months I’ve seen a lot of clients with very low amounts of this coverage – say, $30,000 – when we know that auto accidents can cause much higher amounts of damages. Interestingly enough, these same clients have attachments to their policies from their agents, showing that they had to sign a form to acknowledge that they refused higher levels of coverage. Clearly, the industry is concerned about these lower coverage levels. And why would you want to be covered for less if hit by an uninsured motorist? 

Remember, now that you have something to lose, it’s wise to consider whether those things are adequately insured. Only buy the amount of insurance you need…but most people need more insurance than they have.

Delia Fernandez, MBA, PFP

Asset Protection and Retirement Plans

When you see the phrase “asset protection,” you may immediately think of wealthy people establishing offshore trusts. But most of us already have access to something that allows us to protect an unlimited amount of money: our company’s retirement plan. 

This includes 401ks, 403bs, deferred compensation or 457 plans, profit-sharing and money-purchase plans, defined benefit or pension plans and SEPs and Simple IRAs. Thanks to the 2005 changes to the Bankruptcy Act, all funds inside these accounts now have unlimited protection against creditors. 

And under the same law, regular IRAs (including traditional and Roth IRAs) are now protected up to a balance of $1 million, unless we deposit money into them from a qualified plan (more on that later). SEP and Simple IRAs are not included in this amount. 

But before you relax, consider when this protection would kick in. You would have to be sued, and the person suing you would have to win the case and obtain a judgment against you by the courts that says they have the right to pursue your assets. You would decide to file bankruptcy to protect yourself, and thus protect your assets. 

Yes, we’re saying you’d file bankruptcy to obtain this protection. Not an attractive prospect. 

Clearly, the first line of defense against unwanted lawsuits (aside from living a careful life) is having sufficient personal or professional liability insurance. But if you think you might have to rely on these new asset protection laws, keep the following in mind: 

• Manage rollovers carefully. When you leave a job and roll your funds from your employer plan into an IRA, be sure there’s a paper trail. For example, keep the final statement from your employer plan, the first statement from your new IRA rollover, and a copy of the transfer paperwork. I’d also recommend that you keep these funds in a separate IRA from other IRA funds, just to be safe. Remember, if the courts can’t distinguish these funds from your regular IRA, you won’t have unlimited protection.

• Small businesses should be sure their plans are well designed. If you’re not using a master or prototype plan document for your 401k or other plan (e.g., a turnkey plan from a mutual fund or brokerage firm), get a qualified professional’s help in designing your plan.

• Consider rolling IRAs into employer plans. This is a more aggressive strategy that hasn’t been tested yet in the courts, but could be helpful.

Delia Fernandez, MBA, PFP

Identity Theft: A Terrible Plot Twist.

It was one of those calls I hate to receive from clients: A client’s husband had been a victim of identity theft. What’s more, the perpetrator was one of the client’s own children. She learned of the fraud thanks to a phone call from a collection agency, seeking payment.

As sad and frustrating as it is when a kid goes wrong, the worst of it was that the victim had died three years ago.

Identity theft against the dead? Yes. It’s more common than you may think. I’ve had clients experience this before, sometimes within a month of someone dying. And although it seems like the definition of a victimless crime, it can create endless problems for the remaining family.

With cases like this, I turn to the ID Theft Center. It was founded by Linda Foley, Executive Director, and her husband Jay, after Linda had been a victim of identify theft herself.

They’ve put together a great website, with lots of tips and guides for victims. Here’s the link to their guide for the theft of Social Security Numbers and fraud against the deceased; I used it to help this client. What’s more, the ID Theft Center has people available to speak to groups about identity fraud.

The guide explains that families can write each of the three credit bureaus to place an alert on the victim’s credit report explaining that they are deceased (you need to include a copy of the death certificate in your letter). They can also add a message requesting that the creditor call them before issuing credit to someone using that person’s information. But the ultimate solution (no pun intended) is to freeze the credit report completely. California is now one of 12 or more states that allow this.

If you’ve been a victim of identity fraud (and have a copy of the police report you filed) you can freeze your file for free. Otherwise, there’s a $10 fee. The bureaus will freeze your report and give you a password that you’ll have to use to unfreeze it when you want to apply for credit.

I worked for TRW’s credit reporting agency for 12 years, and occasionally we’d receive requests from consumers to freeze their credit report. We used to laugh, thinking what  an impossible inconvenience it would be for the consumer. But in today’s virulent fraud environment, I now think it’s a great idea.

So if you already have the credit you need – home equity line of credit, credit cards, etc. – consider freezing your credit file. That just leaves your existing credit vulnerable to theft. Here’s how to make this happen: California Department of Consumer Affairs’ instructions.

Delia Fernandez, MBA, PFP

Open Enrollment Season: Disability Insurance.

Fall is often open enrollment season for many companies’ employee benefits programs. Sometimes people simply renew their existing benefits without really reviewing their options, which means they often miss out on some very critical opportunities.

 Of all the benefits that companies offer, two of the most important – and most overlooked – are short-term and long-term disability (LTD) coverage.

 These two benefits help pay the bills when someone can’t work due to illness or accident. Short-term disability, as the name implies, covers you for a short period of time – perhaps one to three months – and often pays 100% of a person’s paycheck. Often the employer pays for this coverage.

 LTD is designed to kick in once you’ve exhausted the short-term coverage, and may last for several years, even up to age 65 (when Medicare begins). The benefit typically covers 50% - 65% of pay. Some employers automatically cover part, or all, of LTD coverage, but some don’t.

 When the employer doesn’t pay for LTD, I see a lot of people who don’t sign up for the benefit, perhaps trying to save some money, or believing that they’re invincible to accidents or illness.

 Yet this coverage is not only essential for most of us, but is also one of the best deals in town. Group LTD costs about 1/10^th the cost of what you would have to pay if you bought your own policy, and unlike buying it on your own, it usually doesn’t require a medical exam.

And if you pay the premiums in after-tax dollars – not as part of a pre-tax cafeteria plan – the benefit, should you become disabled, is tax-free to you. (If the company pays the premium for you, the benefit is fully taxable).

So as you approach this season’s open enrollment period, ask yourself this question: How long can I live without a paycheck? Then be sure to carefully review what your employer offers, and be sure to make the right choice.

Delia Fernandez, MBA, PFP

'Tis The Season For Open Enrollment.

At a Labor Day BBQ I attended, one friend said her company had taken the unusual step of boosting employee benefits, rather than cutting them back the way most companies have. In addition to offering low deductibles on their medical insurance offerings, they will pay for life insurance for all employees up to two-and-a-half times their earnings.

 

I was happy for her – free is good. But I also reminded her of the advice I give all my clients, which is that if you really need life insurance, I’d prefer that you be in control of it, rather than relying on your employer.

 

The reasoning is very simple – your employer can change, often against your will – and you don’t want to find yourself without the critical insurance you need. And unfortunately you usually can’t take your life insurance with you the way you can your medical insurance through COBRA. Some companies will allow you to swap your group term coverage for a more expensive cash-balance type of policy, but most won’t. 

Worse yet, your health can change in a way that could make you uninsurable. This is less likely with life insurance than with disability, but it can happen. (Life insurers have found ways to insurance most people’s lives, at a price). 

So take a few minutes now to ask yourself the big question – what do I want to have in place for my loved ones if I die? Many people want to have sufficient funds to have a surviving spouse stay home and finish raising the children, to pay for college and pay off the mortgage. 

Add that all up and then subtract what you already own and will leave for them. Be sure to remember the benefits they will receive from such sources as Social Security (you do file those Benefits Estimate Statements you receive annually, right?). It will pay a benefit to your surviving minor children until they turn 18, and will also provide a benefit to the surviving parent until the youngest child turns 16, but there are restrictions on how much that parent can earn. 

If you need additional funds, I urge you to consult an independent insurance broker to discuss buying your own life insurance (and check with your attorney to determine whether a trust should own the policy). I recommend a broker over a do-it-yourself internet search because a broker can work with your medical history to find you insurers who will be sure to say yes to your application. I am also a big fan of term insurance, because it typically allows you to buy the most benefit for the least amount of money. 

Of course, a financial planner can help with the estimate of how much you’ll need, and can also help you find the right resource to purchase the policy.

Delia Fernandez, MBA, PFP

Buying Property Together.

I met a very astute businesswoman not too long ago. She impressed me with her understanding of financial matters more than most other financial planners I know. Her name is Delia Fernandez, MBA, PFP. She is a Registered Investment Advisor and Financial Planner. She has her own practice called Fernandez Financial Advisory, The Fee-Only® Advantage. You can reach her at this email address or by calling 562-594-4454. I have invited Delia to guest post on my blog about financial matters. [Disclosure:  There is no relationship or financial ties between her practice and mine.] You will see her guest posts from time to time under the aptly named category "Financial Advisories By Delia." Enjoy her wisdom.

Delia recently wrote to the Wall Street Journal about this subject of this  post and it was published last week.

More and more people are buying property together. Such arrangements can help make a real estate purchase more affordable, but it can also cause problems if someone’s life changes and the remaining owner or owners get stuck with the mortgage.

Unfortunately, most people who enter into such arrangements do so with surprising casualness, and without discussing finances in detail or having any written, legal agreement. And when you think that this is no doubt the largest investment of their lives, it's very surprising and frightening.

So here are the steps I recommend my clients take before making such a purchase:

1. Sit down with your prospective real estate partners and discuss the basics: what's the proportion of ownership? How does that translate into the down payment and the mortgage and other expenses? How much should each person also contribute to an account to maintain the property? By the way, this is the time for candid financial disclosures -- what each partner earns, what their credit score is, what their other debt is. (I can't believe how many couples buy a house together and don't share this information).

2. What if something goes wrong and one or more partners can't pay his or her share? If they become disabled, will they have disability insurance to help cover the cost? Can the other partners pitch in and then will the other partner owe them the difference?

3. And what if someone wants to sell or dies? Do the other partners get the first right to buy out the other partner? And if so, how will they afford it?

4. Whatever you all decide, get it in writing. I recommend they go to an attorney and draw up a buy/sell agreement.

Step 4 is the one that most younger people resist as overkill, but that my older clients often realize is simply prudent (they've often been through divorces and other breakups). I try to get them to see it as an agreement to go into business together. And like any big decision of that type, before you get into it, you should figure out what it's going to take to get out.

Delia Fernandez, MBA, PFP