Another little-known fact to most is that an inherited IRA can be preyed upon by an inheriting child’s creditors, predators and divorcing spouse. There is a way however to prevent that from ever happening. The solution is to have a barrier between the retirement account and the beneficiary. This barrier is called a Standalone Retirement Trust.
The Standalone Retirement Trust strategy is right for those who want to give their children or other beneficiaries the gift of a stretch-out out of their IRA or other retirement accounts while protecting the accounts from a child’s creditor, predators or divorcing spouse. You may not even realize that the stretch-out of your IRA could provide your children ten (10) times or more the current balance in your IRA when inherited if the account were properly stretched-out over your children’s lifetime(s).
Remember that the tax laws and IRS rules may change over time, potentially limiting the effectiveness of the Stretch IRA strategy. However, at the time of this writing, in California, the top state and federal income tax rates combined amount to a tax rate of over 50%. Therefore, if your beneficiary has direct access through your beneficiary designation form to cash out your IRAs or other retirement accounts when they inherit them, that could place your beneficiary in the highest income tax bracket for that year (depending upon the size of your account(s)). This in turn could result in more than half of your retirement accounts being lost to the IRS in income taxes when you pass.
Keeping these factors in mind, it’s important to stretch-out your IRA distributions for your beneficiaries as long as possible (the stretch). It is wise to consider protecting a child or other beneficiary through the use of a special type of trust called a Standalone Retirement Trust (sometimes also referred to as a “Retirement Plan Trust” or “IRA Trust”). The trust helps to ensure the stretch-out of your IRAs or other qualified retirement accounts for your children and also to protect them from divorcing spouses, bankruptcy, lawsuits, and other predatory creditors taking the accounts from them.
Typically, when doing this type of advanced estate planning, a married couple will establish two Standalone Retirement Trust, one for each spouse. If both spouses were to die simultaneously, each spouse’s retirement accounts would funnel RMDs annually to their Standalone Retirement Trust for the benefit of their children or other beneficiaries calculated based on the ages of each beneficiary at that time.
The Trustee of the Standalone Retirement Trust must elect to stretch the IRA or other retirement account for each beneficiary and begin taking RMDs for each trust beneficiary by December 31st in the year following your death. Alternatively, if your spouse were the primary beneficiary of the IRA and they are still alive upon your death, it would not be until your spouse’s death that the Trustee of your Standalone Retirement Trust would stretch the IRA for the benefit of your children or other trust beneficiaries. This is because most married couples elect to list their spouse as the primary beneficiary of the account and their Retirement Protector Trust as the contingent beneficiary.
It’s also important to note that when your spouse completes a spousal rollover after your passing, they should update the IRA beneficiary designation form to list their respective Standalone Retirement Trust as the new primary beneficiary (and make sure they have an enhanced durable Power of Attorney as part of their estate plan to ensure that a Power of Attorney agent is able to do this on their behalf if they lacked capacity).
Upon the death of the surviving spouse, the trust beneficiaries generally take distributions from the IRA based on the life expectancy of the oldest beneficiary if only the trust itself is listed on the beneficiary form, but there is a far better alternative to this result. If the Trustee of the Standalone Retirement Trust splits the IRA or other retirement account into separate accounts for each beneficiary, each beneficiary’s share can be individually stretched based on their own life expectancy. The benefit in that is that a younger beneficiary will be required to take a smaller distribution from the IRA annually than an older beneficiary, thus allowing that beneficiary’s share of the IRA to remain in a tax deferred environment longer – accumulating more money over time. This beneficiary specific stretch through the Standalone Retirement Trust is usually achieved by using a custom drafted addendum attached to the retirement plan custodian’s beneficiary designation form.
In the case where your primary beneficiary is not a spouse, you would name your Standalone Retirement Trust as the primary beneficiary (with an addendum if the trust has more than one beneficiary). While you are alive, you as the IRA owner, need to begin taking RMD payments at age 70 1/2 using the IRS Uniform Distribution Table to calculate the distribution that must come out of the account and be taxed as income to you (note, this is not the case for ROTH IRAs).
Upon your death, your Standalone Retirement Trust beneficiaries are required to take required minimum distributions by December 31st in the year after your death. If the Trustee of your Standalone Retirement Trust stretches your IRA, 401K or other qualified retirement account, your trust beneficiaries would receive an annual distribution from your accounts. Again, it is important to note that each beneficiary’s share can be stretched based on their own life expectancy if the form calls out the separate shares of the trust on an addendum to the beneficiary designation form.
Proposition 10 has failed at the ballot box, leaving the state’s limits on rent control intact. Proposition 10 would have repealed a California law that limits how cities enact rent control. Its defeat is a blow to tenant activists in Los Angeles, and a win for landlords.
With the resurgence of cities as centers of economic energy and vitality, a majority of millennials are opting to live in urban areas over the suburbs or rural communities. Sixty-two percent indicate they prefer to live in the type of mixed-use communities found in urban centers, where they can be close to shops, restaurants and offices. They are currently living in these urban areas at a higher rate than any other generation, and 40 percent say they would like to live in an urban area in the future. As a result, for the first time since the 1920s growth in U.S. cities outpaces growth outside of them. So, it’s important for tenants to understand their rights.
The city of Los Angeles is one of just 15 California cities with rent control regulations on the books, and the local rules do more than keep down monthly payments for tenants. They also provide protections from eviction and financial resources in the event a renter is forced to move out of their apartment. Let’s be clear, the City of LA does not have rent control. There are no limits on how much an apartment here can cost unlike rent-controlled units in other cities. Instead, LA has the Rent Stabilization Ordinance (RSO).
If you do not live in Santa Monica, West Hollywood, Beverly Hills, or the city of Los Angeles, whether your apartment is rent-controlled depends mainly on what type of housing it is and when it was built. Single-family homes are almost never subject to rent control (though they are in rare cases in Santa Monica and West Hollywood); duplexes, triplexes, and apartment buildings, on the other hand, are fair game. Date of construction also matters. In Los Angeles, only buildings built and occupied before October 1, 1978 have rent control restrictions. The date varies city-to-city. In Santa Monica, it’s April 10, 1979; in West Hollywood, it’s July 1, 1979; in Beverly Hills it’s February 1, 1995. In the city of Los Angeles, it’s easy to check on the date of construction for your building—and whether it’s covered by the RSO. Just enter your address into ZIMAS (http://zimas.lacity.org/), the city’s property database. An outline of the property will appear on the map and a sidebar will pop up on the lefthand side of the screen. In the “assessor” tab, you’ll find the building’s date of construction and in the “housing” tab you can find out whether it’s under rent control.
The Los Angeles Rent Stabilization Ordinance (RSO), addresses allowable rent increases for rent controlled units, which can range from 3% to 8% and for July 1, 2017 through June 30, 2018 landlords can raise the rent once every 12 months by the annual allowable increase of 3%. What tenants fail to acknowledge is the landlord’s right to raise the rent by an additional one percent (1%) for each of the two utilities supplied (gas and/or electricity). What is even more surprising with the RSO is at the same time the landlord raises the rent, if the written lease so provides, the landlord may also raise the security deposit (and last month’s rent if applicable) once every 12 months by the annual allowable percentage increase (previously 3%). And a landlord who is planning to improve his rental, may apply for special rent increases based on an application for Primary Renovation, Capital Improvements, Rehabilitation, or a “Just and Reasonable” rent adjustment which must be submitted to and approved by the Rental Board.
As a Los Angeles tenant, there are (3) additional items to be aware of:
1) If a landlord serves a written thirty (30) Day Notice of Rent Increase and provides the tenant a copy of the Registration Certificate, they may collect $12.25 from each tenant in June (50% of the annual $24.51 registration fee paid to the Rent Stabilization Division) and also collect the annual $43.32 Systematic Code Enforcement Program (SCEP) fee if paid in full by the landlord by increasing the rent $3.61 per month.
2) The special circumstances which allow the landlord to raise the rent substantially. The Landlord can raise the rent by 10% percent (within the first 60 days) for each additional tenant / occupant of a rental unit exceeding the number of initial occupants allowed in the original rental agreement. The Landlord can raise the rent nineteen percent (19%), plus 2% if the landlord provides the gas and electricity, If a landlord has not increased the rent since May 31, 1976.
3) Though the RSO provides that the rent may be raised to any amount upon re-rental if vacancy is based on certain reasons, there are certain vacancies that the Los Angeles RSO requires the rent to a new tenant to remain the same as that for the prior tenant. Examples include: (1) an eviction to recover the unit for the use of the landlord, his immediate family. or a resident manager; (2) an eviction based on the prior tenant’s illegal acts; (2) an eviction based on the tenant’s refusal to sign a new lease with the same terms as are in the RSO; and (3) an eviction based on the tenant’s refusal to allow the landlord reasonable access to the unit.
Tenants living in rent-controlled units can be evicted, but benefit from stronger legal protections than those living in non-rent-controlled buildings. This is referred to as a “just-cause eviction.” The city outlines fourteen legal reasons for a landlord to evict someone from a rent-stabilized unit. Eight of these are the result of actions (or inactions) by the tenant. The other six are not attributable to any faults of the tenant, but they are allowed nonetheless. Failure to pay rent, violating the terms of the lease, being a nuisance, using the apartment for illegal activity and not being the person who signed the lease (or someone approved to live in the unit) are five obvious reasons for an at-fault eviction. California law states a landlord can move to evict a tenant with only three-day advance written notice for these faults. In turn, tenants have up to three days to correct them to avoid eviction.
The only other common cause for eviction is through California’s Ellis Act, which allows landlords to mass-evict tenants when taking a property off the rental market. That could mean tearing the building down, for instance, or redeveloping it as for-sale condos. In these cases, landlords are required to pay relocation fees to help tenants find and move into a new place. Fees range from $8,050 to $20,050. The amount depends on how long tenants have lived in the building, how old they are, and how much money they earn.
Passed in 1985, the Ellis Act is another piece of legislation despised by tenant advocates, who argue that it encourages property owners to replace affordable apartments with new construction or pricey for-sale units. According to a report from the Coalition for Economic Survival, more than 23,000 apartments in Los Angeles have been cleared of renters between 2001 and 2017. In Beverly Hills, eviction protections are weaker, but landlords still have to cover a tenant’s moving expenses when asking them to move out through no fault of their own. After an Ellis Act eviction, a building must remain out of the market for five years. Yet the L.A. Tenants Union has found units available on AirBnB immediately after an eviction, as well as instances of new tenants moving in while evicted tenants move out, and emptied buildings being immediately sold to developers to build new apartments in their place. Whatever the reasons for a no-fault eviction, the landlord is required to compensate a tenant for relocation. According to HCID, payment “depends on whether the tenant is an Eligible or Qualified tenant, the length of tenancy, and the tenant’s income.” A Qualified tenant is 62 or older, disabled, or has minor dependents living with them. All other tenants are considered Eligible. Current relocation rates run $7,550–$19,500 per leaseholder.
In order to make rent-controlled units available to new tenants, landlords often resort to “cash for keys” offers, in which they effectively pay tenants to leave. Under LA’s rent control laws, this is legal as long as landlords first inform tenants of their rights and notify the city of the agreement. Tenants have 30 days to cancel the agreement in case their landlord isn’t following through with the terms of the buyout. There’s also no reason that tenants have to agree to the offer. Those who wish to continue living in their current apartment can simply turn the money down.
If a tenant does not live in rent-stabilized housing, a landlord may evict them for any reason. However, the law requires that tenants receive advance written notice depending on the length of occupancy. A landlord terminating a month-to-month tenancy must offer sixty-day notice to someone who has lived in a unit for more than a year, or thirty-day notice for less than a year. Usually, that notice does not have to state the landlord’s reason for eviction. This is one of the key arguments for expansion of RSO: anyone in a unit built after 1978 is susceptible to a sudden eviction with nary an explanation. Trying to secure new housing on a sixty-day notice in the middle of a worsening affordability crisis only adds to the anxieties and vulnerabilities of tenants across the city.
I often get this question when screening questions from prospects or during financial planning workshops. Like so many personal finance questions, these are unanswerable without more information provided by the questioner.
Should I retire?
Should I get married this year?
Should I exercise my stock options?
These contingent questions are useless when no additional information is provided. So, “should I refinance?” is a loaded question for me because a mortgage refinancing strategy can have a variety of purposes, and that the success of your refinance depends on a range of factors that vary with your purpose.
Let’s look at five good reasons to refinance your mortgage:
1. Lower your Interest Cost
Most borrowers contemplating the refinance of a fixed-rate mortgage want to know whether the financial gain from a lower interest rate more than offsets the refinance costs. This is less important as a motivation than it was a year ago because of the rise in rates that has since occurred. It remains relevant, however, to borrowers with older higher-rate mortgages who for one reason or another failed to refinance when rates were at their lowest.
It’s important to run the numbers to measure the benefits of a rate-reduction refinance relative to the refinance costs. Whether you have one mortgage that will be refinanced into another mortgage, have both a first and a second mortgage that will be refinanced into one new mortgage or have one mortgage carrying private mortgage insurance and will be refinancing into a combination first and second mortgage without mortgage insurance.
2. Liquidity – I need to Raise Cash
Another reason borrowers refinance is to raise cash. While cash-out refinances are priced higher than rate-reduction refinances, this is not in itself a deterrent to the borrower who needs cash. What matters to that borrower is whether the cost of the cash-out refinance is larger or smaller than the cost of raising the same amount of cash with a second mortgage.
3. Risk Management – Reduce the Risk of Higher Rates on an ARM
Borrowers who now have an adjustable rate mortgage (ARM) and are concerned about rising interest rates have their own reason for considering a refinance. They want to know whether the likely loss from retaining their ARM exceeds the cost of eliminating the risk by refinancing into a fixed-rate mortgage.
4. Cash-in Refinance
Some borrowers have mortgage interest rates above the current market but they can’t refinance into a lower rate because their house value has depreciated. They want to know whether paying down the balance on their existing fixed-rate mortgage in order to lower the cost of refinancing into another fixed-rate mortgage would yield a satisfactory rate of return.
5. Eliminate High-Cost Short-Term Debt
Borrowers who are burdened with short-term debt may want to know whether it pays to consolidate such debt in a cash-out refinance. Here the borrower is comparing the cost of consolidating the short-term debt in a new and larger first mortgage, or in a second mortgage.
Don’t make assumptions or rely on a generalized rule of thumb. Instead run the numbers and see if the refinance will actually improve your balance sheet or cash flow.
It’s a good thing we have mighty brains, because humans are pretty useless in the face of danger. Sometimes doing what you think is the right thing can lead so adverse consequences. For example, survivalist experts and African safari guides often advise travelers never to turn their back and never to run when confronted by a lion. Yet, when faced with one of Africa’s apex land predators, who has the courage to take the advised steps of making direct eye contact–without breaking it–while backing very slowly away. If the lion charges you then you throw your arms out to make yourself look bigger and make as much noise as possible because lions will often do one or two mock charges (running towards you but suddenly stopping a few paces away) before a full-on attack. Most often, this will make them reconsider and run off.
With the recent market sell-off, where we are seeing a lot of down days and not a ton of rallies, I can sense the angst and uneasiness when talking to prospects and clients. There are two things we can be relatively sure about. That the market will keep crashing and that there will be another recession. Bear markets often overlap with recessions but not always. Just like a lion charging toward you and survival is based on your ability to be level-headed plus the courage to confront the danger.
This always boils down to why you are investing. Do no buy a security without having a sell strategy. Do not invest with a money manager unless you can understand and articulate your bear market strategy. For those select few, once you win the game, stop playing. Don’t gamble more than you can afford to lose. Having it and losing it seems to be heavy on the minds of many near-retirees who see record equity prices and who have lived long enough to know that bull markets don’t last forever. They can end very badly. Severe bear markets near a retirement date can delay retirement plans and even permanently lower a standard of living in retirement. The solution is to gradually shift the game away from growth of capital and toward preservation of capital, though not entirely.
For those younger households, who still have careers that let them buy more equities at bargain prices after a correct because they are dollar-cost averaging into their 401k, getting an employer match, and ‘hopefully’ reinvesting the tax savings their portfolios will recover even faster than the market. When dividends are included, the U.S. market recovered from the Great Depression relatively quickly.
Nonetheless, let these recent market moves be a wake-up call and ask yourself the following questions:
• Do I have the emotional capacity to maintain my current strategy? Will I let negative cognitive and behavior bias cause me to make irrational investing decisions?
• For those approaching retirement, do I have at least 5 years of required portfolio income in short-term investment grade fixed income, so I don’t have to sell my equities in a bear market?
• Have I let my asset allocation run too aggressive during the last two years of abnormally low market volatility?
• How did my current portfolio perform during the Great Depression?
• Should I rebalance my performance?
• Are my fixed income (bonds) strategies talking on too much risk?
• What do I have that can be redeployed when assets classes move to distressed levels?
Just like it’s a good idea to have an annual check-up for your health, it’s smart to have a Medicare check-up to make sure the coverage will work when folks need it, and not break the bank. The best time of year for everyone in Medicare to have that check-up is in the fall during the Medicare Annual Enrollment Period, which is fast approaching. So if you or your parents are receiving Medicare its important you have this conversation with them. Healthcare cost are one of the largest retirement expenses and 90-95% of beneficiaries overspend on Medicare. Those are startling statistics!
The most common reason beneficiaries overspend; they purchase Medicare Part C (Advantage) and Part D (prescription drug) plans that do not meet their individual health care needs. People tend to buy based on premium and overlook the benefits they use. Couples often purchase the same plan when they would be better off with different plans. Individuals may not realize what the full cost to them is until the new plan year has started and then it is too late to make a change.
The Annual Enrollment Period cycle starts Saturday, Oct. 15 and ends Wednesday, Dec. 7. Coverage goes into effect Jan. 1. This is the time of year when everyone on Medicare can reevaluate features of their contracts to see if they’re getting the best coverage at the best price for their Medicare Part C and D plans. All plans announce new pricing and benefits every fall. Cost increases are more likely to be hidden in other out-of-pocket costs, such as increasing deductibles, medications in higher more expensive drug tiers and greater use of co-insurance as opposed to co-payments.
It’s particularly important for your clients to perform their annual Medicare check-up if any of the following have happened this past year:
• Prescription medications have changed
• Diagnosis of major health conditions
• Medicare premiums and out-of-pocket costs have crept up over time
• Customer service has been poor
• Carrier has discontinued the Medicare Part C or D plan
• Legal residence has changed
If any of these events have happened, then a Medicare check-up is in order. September is a perfect time for clients and caregivers to pull some information together to make the task easier when new plan information becomes available Saturday, Oct. 15.
Here is a helpful checklist to help people get organized.
• Put together a detailed list of medications. Use the exact spelling and dosage of the medication on the prescription container. Pictures can be surprisingly helpful.
• Collect an accurate list of health care providers’ names, addresses and phone numbers. Make sure to include all healthcare providers such as physical therapists, medical equipment suppliers, laboratories, etc.
• Read the new plan benefit summary the insurance company sends each beneficiary at the end of September. Look at more than just the premium. See if copayments, co-insurance, deductibles and other plan features will increase next year; call the company or go online to find if all of the medications will be covered this next year and at what costs. Plans are allowed to discontinue coverage of specific drugs as well as increasing the cost; do the same for doctors and other health care providers. Ask the health care providers if they expect to continue to participate in the plan.
• Don’t assume that a better plan is not available.
• Don’t wait until the last minute to shop: Enrollment systems tend to bog down; People who enroll near the end of the Annual Enrollment Period usually start the new year without their new insurance card in hand, making it hard for them to get the care they need.
Right about now you might be thinking that the Medicare check-up can be challenging and certainly time-consuming.
While both are true, just like holiday shopping it is easier if you get organized and start early. The good news is that there are several sources of free assistance available to consumers and their caregivers to assist as they sort and sift through options. That said, to assist.d, free support services become overwhelmed quickly. The earlier folks contact them, the more likely they will be available.
Eldercare.gov is a public service of the U.S. Administration on Aging that connects people to services for older adults and their families. This free information and referral assistance, including the State Health Insurance Assistance Programs (SHIP), is available all over the U.S. Visit the elder-care locator online or call 800-677-1116 Monday-Friday, 9 a.m.-8 p.m.
I also recommend cultivating a relationship with a well-established Medicare broker. That professional can be very helpful to your clients and assist them with shopping for Medicare coverages.
If your clients are on Medicare or help someone who is, I encourage them to shop for Medicare Advantage (Medicare C) and Medicare D (for drugs) plans this fall to make sure they are getting the best value for their money. Your clients do not want to be part of the 90% to 95% of folks who overspend on Medicare and waste their hard-earned savings. Once the Annual Enrollment Period window of opportunity closes on Dec. 7, most Medicare enrollees will have to wait until 2018 for new coverage.
Often, small legal firms opt for a SIMPLE IRA, only because there are no administrative costs associated with operating this plan. In some cases this can be a big mistake, especially if you have the ability to contribute significantly more to a 401(k) plan. While it is true that SIMPLE has no administrative cost, the biggest cost of using SIMPLE vs. a 401(k) is the income tax on the money that could be contributed to a 401(k) instead. For those in the highest tax brackets, this cost can be as high as 50 percent.
What are the advantages and disadvantages of SIMPLE IRA vs. the 401(k) plan, and how can you make an informed decision on selecting the best type of plan for your practice?
Breaking down the differences
SIMPLE IRA is easy to set up and terminate, and it can be opened at a discount brokerage such as Vanguard so you can have access to high-quality, low-cost investments. No third-party administrator (TPA) is required—operating a SIMPLE IRA is relatively straightforward and can be done by the law firm owner without much assistance. The 401(k) with profit sharing requires the services of a TPA, so there is an added administrative cost and higher complexity compared with SIMPLE. However, a 401(k) with profit sharing allows for a significantly larger contribution.
SIMPLE IRA vs. 401(k) rules of thumb
There is a good rule of thumb that can help you determine which plan might work better for you. A SIMPLE IRA might be a better plan for your law firm if (together with your spouse) you can contribute less than $40,000 a year and/or the cost of 401(k) employer contributions is high (with less than 70 percent of plan contributions going to the owner and spouse). On the other hand, a 401(k) with profit sharing might be a better plan if (together with your spouse) you can contribute close to the plan maximum (approximately $55,000 if both you and your spouse are under 50) and your 401(k) employer contribution is reasonable (with more than 70 percent of plan contributions going to the owner and spouse).
The decision can be straightforward if you fall into either extreme, but what if you are somewhere in the middle? What if you can contribute the maximum, but your employer contribution expenses are relatively high? For those in the highest tax brackets, higher plan expenses might still justify selecting the 401(k) over SIMPLE.
What you’d need to do first is to get a plan design illustration from the TPA that takes into account your firm’s demographics to see what your potential plan contributions and expenses would be. Once you have an illustration, your retirement plan adviser should do a 401(k) vs. SIMPLE side-by-side analysis that takes into account your specific situation so that you can select the right plan for your firm.
SIMPLE vs. 401(k) example
The biggest downside of SIMPLE is that it has a lower contribution limit than the 401(k) plan. When you are just starting your own law firm and have a significant amount of student and firm debt, SIMPLE might be a perfect plan for you. However, when your debt is mostly paid out and your firm profits grow, so does your highest marginal tax bracket.
For many attorneys, some of their income might fall into the highest federal and state tax brackets, 39.6 percent for federal and as high as 13 percent for state (if you are in CA). Thus the cost of keeping your money after-tax might be as high as 50 percent, so the key to successful tax planning will be to shelter as much of your highest tax-bracket income as possible, which can be accomplished with an appropriately designed 401(k) plan.
Some attorneys might even want to go an extra step and set up a Cash Balance plan together with the 401(k), to shelter even more of their income from taxes. Whether your spouse is working elsewhere or not, you can (and should) hire your spouse, provided that the numbers make sense—this can potentially give you tax and income benefits.
While the 401(k) employer contribution for a small large firm can be lower, it can also be higher for a larger practice with more employees and partners. However, if the law firm has several partners, employer contribution expenses will be shared among the partners, so per-owner expense for a large law firm can be lower than for a smaller one. Many smaller law firms with only two to four employees can have significantly lower employer contributions and when employees are significantly older than the owners, the profit sharing plan might not be a viable option.
If employees do not participate in a SIMPLE IRA, the owner does not have to match their contribution, and if they do, the owner will have to pay them a 3 percent match. Similarly, there is a 401(k) plan design that uses only matching—rather than profit sharing—that works the same way: employees get a match only if they participate, and get nothing if they don’t.
Even though the cost of having a 401(k) plan for this practice is higher than the cost of a SIMPLE, a 401(k) plan can provide the owner the means to save significantly more money for retirement while lowering his or her tax liability.
SIMPLE IRA can be a great startup plan, but eventually your law firm will need a 401(k) plan, as those in the highest tax brackets can benefit significantly from making higher 401(k) contributions, which translate into larger retirement savings. There are a number of other reasons why a 401(k) plan might work better for some practices.
A 401(k) plan design can be customized, which can afford advantages over the SIMPLE’s standard design. For example, you can exclude some highly compensated employees from a 401(k), but you can’t do that with SIMPLE. If you hire a highly paid associate, he or she will have to participate in a SIMPLE, but he or she can be excluded from participating in a 401(k) plan. A SIMPLE IRA has a single hard-coded design, while your 401(k) plan can be custom-designed to minimize your employer contribution while maximizing your own.
The 401(k) will also give you the ability to make backdoor Roth contributions, Roth salary deferrals, or in-plan Roth conversions, and accept incoming rollovers—none of which are allowed with the SIMPLE IRA plan. If you are 50 or older, a 401(k) also allows a $6,000 catch-up contribution, while a SIMPLE’s catch-up is only $3,000. If you are not an expert at investment management, a 401(k) can be a great platform through which you can get personalized investment management advice and services from an ERISA (Employee Retirement Income Security Act) 3(38) fiduciary adviser.
Both SIMPLE IRA and 401(k) have a number of advantages and disadvantages, and without a complete analysis it can be difficult to decide which one would be better for a specific law firm (unless you happen to fit neatly into the examples discussed above). To make the right decision, you will need to do an accurate cost vs. benefit analysis, which includes a 401(k) plan design study and side-by-side comparison of the best 401(k) plan design with a SIMPLE IRA for your specific situation.
The 3 percent to 4 percent plunge in the major American indexes earlier this month is unsettling for investors who have grown accustomed to low U.S. market volatility in recent years. What’s more disturbing is that most of the traditional hedges against such a large equity sell-off, both within and across market segments, did not work well.
Yet neither of these developments should come as a great surprise given the following five factors that also point to what’s ahead:
1. After years of seemingly unquestioned central bank support — including the so-called “Fed Put” — stock and bond markets are transitioning away from a world where liquidity injections underpin asset prices and moving toward a greater role for fundamentals. Almost by definition, this is a volatile process: Think of a plane changing engines while flying at a high altitude. Turbulence is to be expected.
2. Unusual divergence in economic performance and policies within the advanced world is complicating this liquidity-to-fundamentals market transition. U.S. growth is increasingly outpacing other countries’, powered by the combination of higher household income, increasing business investment and government spending. In addition, the Federal Reserve is well ahead in normalizing monetary policy, after ending quantitative easing, hiking interest rates eight times, publishing the timetable for reducing its balance sheet, and signaling further rate increases for both this year and next.
3. The resulting dispersion in asset prices has placed some extra strains on markets. And it’s not strictly a matter of divergence. There are also a wide range of views on whether other countries will eventually converge with the U.S. in achieving higher growth or whether the U.S. will be pulled down.
4. Trade tensions are adding to the uncertainties about the market transition. Specifically, it’s not yet clear how long it will take China to realize that the least bad alternative for its development is to pursue the same path that other countries (South Korea, Mexico and Canada) ultimately followed — that is, make concessions to the U.S. It also isn’t clear what concessions would satisfy the Trump administration.
5. Finally, technical conditions in markets are not helping by amplifying large moves in the short term rather than tempering them. Over the longer term, success in the ongoing transition in the liquidity-fundamentals paradigm will place markets on a more solid footing. So will repricing that allows traditional stock-bond diversification to provide better risk mitigation. The short term, however, is likely to be quite volatile.
Although there is no hard and fast rule on how often you should update your trust, conducting an annual review of the trust and asset schedule is recommended. Circumstances will inevitably change. There will always be changes in the law – especially the tax laws. There are also going to be changes in your family situation or the make-up of your assets over time.
The Federal Estate Tax Exemption has changed more than a half dozen times over the last fifteen years. Currently it is $11,180,000 per person. The marital clause in your trust or your parents’ trust may have been the most appropriate clause at the time it was drafted ten or fifteen years ago. However, today it may cause a lot of unnecessary capital gains taxes when the assets pass to your children (or to you when both of your parents pass in the case of your parents’ trust).
Further, the needs of your beneficiaries will more than likely change over time as well. For example, we often review trusts that have language that says when a child inherits, they can access 25% at age 21, 50% at age 25 and the balance at age 30. This was a popular way to drafting in the 1990s and into the 2000s. However, the state of the art in estate planning now -that more progressive attorneys use- is to protect children from divorcing spouses, creditors, predators and bankruptcy claims with cascading trust provisions. In the trusts where the balance is available in an outright distribution at age 30, there is no protection for a child should they go through a bad divorce, get sued, go through a bankruptcy or have some other serious creditor issue.
Asset alignment can also be a situation where the wheels can come off the proverbial estate planning bus. A change in the make up of the assets is something that happens almost universally to all our clients every couple of years. The issue that this brings in the estate planning context is that the assets are often not properly funded to the trust or aligned with the estate plan. This is why it makes sense to be meeting with your estate attorney on a regular basis in order to ensure all of your assets are properly funded or coordinated in your estate plan. The asset schedule at the back of your trust also requires a short formal amendment when those assets change.
Being proactive is worth its weight in gold and will ensure the plan works as planned down the road. Make sure to make course corrections as you go to protect yourself, your spouse and your children or other family members. No one wants court interference, extra taxes or a train wreck for their family to deal with in the future.
If you suspect you may need an update to your estate plan or funding of your assets to your trust, give me a call and I can put you in contact with low-cost legal solutions.
Ready to start your own rental empire? The first step is to buy a property with more than one unit. For the average American, one of their biggest expenses is their mortgage payment, or their rent. According to the Bureau of Labor Statistics, roughly half of the typical American’s expenses come from just two categories – housing and transportation (excluding taxes), with 33% of total spending on housing alone. This payment is holding them back from accumulating significant savings, and the financial freedom that more capital to invest could provide them. What most people don’t know, is that this payment is optional. It’s possible to own your own building for less than $10,000 down, and never have to make another payment again. It’s not easy, and you’re going to have to put in a lot of sweat equity, but it will save you hundreds of thousands of dollars over 30 years. This investment is called a house hack. If you’ve never heard of house hacking, pay attention.
The concept of house hacking is simple. You buy a duplex, triplex, or quadplex with an FHA loan (3.5% down), and your tenant’s rent covers all or most of your mortgage and other expenses. If it’s done right, you can drastically increase your available capital for investing every month. If it’s done wrong, you can purchase a money pit of a property that’s hard to manage and will cost you more than renting. If you’re not willing to take a bit of a risk, this investment probably isn’t for you. For whatever reason, the FHA, and even the VA, considers any property with four units or less as a single purchase. This means you can buy a duplex, triplex, or fourplex with an FHA loan or a VA loan. In order to qualify, you have to live at the property, using it as a primary residence. That’s where the multi-unit part of the plan comes into play: You live in one of the units and rent out the rest.
It’s one of the easiest and most efficient means one can use to move towards early financial freedom while working a full-time job. In this situation, the owner now has a stabilized property that allows him/her to live for free, still have capital to repair their building as needed and is now free to invest what they would have been spending on rent. In fact, in a year or two, the owner can refinance into a traditional mortgage, and house hack a new property. You might be able to continue to acquire a rental property capable of sustaining early financial freedom in less than 10 years, depending on the market and real estate cycle. And, it’s no harder to buy a house-hack than it is to buy a home, financially speaking. It’s important to note that older building with major capital expenditures coming soon might be have enough cashflow to breakeven so looking for a with newer plumbing, electrical, sewer, HVAC, and a new roof.
Can you buy a second FHA home?
Once you are stable with your first property, you might want to purchase another property to rent out or move into. In this scenario, it’s tempting to use the FHA program again. However, that option may be limited.
You can obtain a second home, but it’s done on a case-by-case basis. You usually need to show need, such as relocating for a job, or prove that your expanding family can’t fit into your old home anymore.
FHA loan requirements are also such that you might not be able to count the income you receive from your rental property in your application. Unless you have 25 percent equity in your home, your income from renting out an FHA home might not be taken into consideration.
For many people, though, living in that first FHA property provides them the resources they need to take the next step. If your tenant is covering your own housing costs, that can help you build a large fund to use as a down payment on another property down the road.
You can use a program like FHA loans to get started as a landlord. It takes a couple years to really get going, but it’s one way start the process immediately — even if you don’t have a lot of money.
Finding Your House Hack
Finding a good property to house hack isn’t easy, but it can be done if you’re persistent. Have strict parameters. For example, don’t look at a property unless the total rent is at least 1% of the purchase price of the building. Ideally, closer to two percent, but a 1% deal can still cash flow. In certain markets, like St. Louis, it’s possible to find deals closer to 2 or 3% price to rent, but that might not be in an area you want to live in or manage. If you’re starting out, interview several realtors, and find one that has experience working with investors, and ask them to help you find your first property.
Your realtor should set you up with MLS alerts, so every deal that meets your criteria will be sent to your email. If you like a property, it’s time to schedule a showing. When you view a new property, be sure to inspect the following:
• Age of the roof
• Major cracks
• Water in the basement
• Do doors and windows open easily?
• Condition of the windows
• Is any paint peeling
• How nice are the kitchen and bathrooms (these rent houses)
It’s unlikely that you’ll find a property at a good price where all of these are in good condition, so you need to budget the cost of repairs into your projections. After you view a building you can make an estimate of the major repairs that will be needed, and make a more accurate model of how much to save for repairs and maintenance every month. While it’s very tempting to offer on a nice property, you can’t get emotionally invested. This is a business, and needs to be treated as such. Only buy something that makes a lot of sense on paper, because it’s probably going to do a lot worse in reality. You want an investment with enough margin for things to go wrong and you still end up OK. Buying a property that barely cash flows on paper is a recipe for disaster. Once you’ve found your property, a good agent will help you make the right offer. Be sure to include a personal letter to the owner for every offer that you make. If two offers are equal, the offer with a convincing letter is probably going to win the house. You can reuse the same letter on every house you offer on, and just make minor tweaks based on the situation. Assuming the offer is accepted, you’re officially under contract!
Financing: Know FHA loan requirements
Before you commit to house hacking, it’s important to understand what happens when you use FHA loans to buy properties. You can make this strategy work with just about any type of loan. However, FHA home loans are especially good because of the low down payment option. With this type of loan, you can pay as little as 3.5 percent for a down payment. For many people, that’s much more affordable than trying to come up with 10 or 20 percent to put down.
On top of that, FHA loan requirements are more flexible when it comes to your credit. It’s possible to qualify for 3.5 percent down with a credit score as low as 580. Even though it helps to have good credit, you can still become a landlord with less than perfect credit. There are limits to how much you can borrow. The FHA sets loan maximums based on home prices in the area. It’s done on a county-by-county basis, so talk to a mortgage professional about the limit in your neighborhood. Depending on the FHA loan limits and the cost of properties, you might be limited to a duplex for your first house hacking experience.
Next, you need to commit to living in the home for at least year. You must also move into the home within 60 days of closing.
Finally, you need to make your FHA loan payments on time and in full each month. I recommend saving up a buffer fund. That way, if your rental unit is empty for a few months, your finances aren’t strained. I can’t stress enough the importance of being able to afford your mortgage, even if you plan to rent out the other unit(s). Financing for a house hack is a bit more difficult than a conventional loan. FHA properties have to pass a more rigorous inspection, and peeling paint isn’t allowed. While this can limit some potential deals, it’s possible to do the work before you close, or use an FHA 203k renovation loan. A good agent and lender will be able to help you navigate through the FHA financing process. Before you schedule any showings, it’s important to get pre-approved, or your offers won’t be taken seriously.
Why House Hacking is so Awesome
Buying an owner-occupied investment property and renting out the additional bedrooms and/or units is probably the single most effective hack that a median wage-earner can make to begin moving towards financial freedom rapidly. It takes the largest expense in your life and wipes it out entirely. Why would you bother to remain disciplined day in and day out with the fun stuff in your life, when you can automatically save yourself tens of thousands of dollars per year through the combinatorial benefits of house hacking?
House hacking leaves the purchaser with three excellent options if done correctly:
1. It allows the house hacker to live happily at low cost indefinitely.
2. It allows the house hacker to move away and retain the property as a cash flowing rental.
3. Like every homeowner in the country, the purchase retains the right to sell the property.
Few people have all three of those excellent options. Few people are able to move anywhere they want at a moment’s notice and convert their home into an excellent cash flowing rental property. This is the ultimate low-risk, high-reward way to buy your first or next property if you aspire to early financial freedom and want to accelerate your wealth accumulation.
A good foundation is crucial in starting any business and one of the pillars that keep a business stout and upright is a great business lawyer. As a business owner, you want to allot your focus and energy in running and growing the business while someone else is on top of understanding the legalities that surround the business. Just how crucial is it to have an attorney right at the very beginning of your business journey?
Almost every aspect of your business would call for an effective business attorney – from choosing the business type upon putting up the company, to writing contracts, resolving business claims and issues, and navigating mergers and acquisitions, to name a few. A common mistake businesses make is holding off hiring a business lawyer until they need one. Here are some of the aspects of a business in which a business lawyer plays an integral role.
Preparing contracts with clients and suppliers. Business lawyers know how to make contracts iron-clad in order for all parties to be well-protected. When signing a contract for any reason, your attorney will be in charge of spotting issues and negotiate revisions to contracts with loopholes that can potentially put you in unnecessary liabilities in the future.
Securing intellectual properties through trademark and copyright protection. While patents and copyrights are handled by intellectual property specialists, your business attorney can help you with these as they are part of legal networks. It would be an advantage if your business lawyer can also help you acquire patents and copyrights.
Transacting with landlords and real estate sellers. In terms of dealing with properties, and this includes leasing and warehousing, a business lawyer can thoroughly review contracts and agreements to make sure that you are getting into a fair and legitimate deal with a seller. Your lawyer must have a standard “tenant’s addendum” that contains provisions in your favor, which can be included in the printed lease document.
Knowing the tax consequences of your business transactions. You want to make sure that you do not encounter unnecessary tax liabilities while on business. While your accountant takes care of preparing and filing of taxes, having a business lawyer means you have somebody who knows how to register your business for both federal and state tax IDs, and understands the tax consequences of your business transactions.
Venues for Finding an Attorney
In your search for a great business lawyer, make use of various resources. This will garner more options and give you the ability to make a valid judgement. There are many channels that you can utilize and here are some of them:
Referrals. It is important to understand that every lawyer has their own strengths, and one way to gauge whether a lawyer is best fit for your particular problem is to seek the advice of people who have experienced the same. Find out who they hired at the time, and gather leads from there. However, relying solely on referrals might not give you reliable leads as the relationship between the business owner and lawyer will depend on how they respond to each other’s style and personality.
Local Bar Association. A bar association is a professional organization of lawyers serving different purposes. Most bar associations make referrals based on specific areas of law, which can help you find a lawyer with the right expertise and area concentration. However, there are services that make referrals without concern for the lawyer’s level of experience. Seek out referral services that work under programs certified by the American Bar Association.
Online Services. Sites such as Upcounsel can aid in finding and connecting with top-rated business attorneys who can provide a wide array of business law services for startups and large businesses alike.
Hiring a business lawyer is a major investment for any business, which is why optimal sourcing techniques are very crucial in this process. Not finding the right lawyer for your business will cost you money, and can potentially lead to long-term consequences for your company. Watch out for these red flags when making a decision:
– The lawyer is not well-versed in the language of your business. In order to properly represent you, your business lawyer must speak your language and understand the field in which you are operating.
– The lawyer is learning on the job. Your business should not be your lawyer’s on-the-job training. If you see that the lawyer is doing something completely new to him, he may not be the best candidate to
represent your business.
– The lawyer comes up with extra costs. Hiring a business lawyer should be a well-calculated move, and needless to say, it should be cost-effective. Surprise and extra costs must always be kept to a
Choosing an Attorney
After exhausting your resources to find the right business lawyer and coming up with a short list of candidates, it is time set up interviews. In your initial meeting, be ready and upfront in describing your business and your legal needs. Make sure to express that you are interested in building a long-term relationship. Take careful notes of what the lawyer says and does during the interview, and pay attention to these aspects:
Experience. Begin by asking how long they have been practicing law and their areas of expertise. Assess whether their expertise is aligned with the needs of your business.
Ability to communicate. It is crucial that you and your business lawyer have rapport, and you can gauge this as early as your initial interview. Your lawyer must be able to express himself clearly, without the use of too much jargon or legalese.
Availability. Ask the best way to reach him and how quickly he responds to phone calls or emails. Will he be available after business hours? This is crucial in your working relationship.
References. Ask the history of business and cases he had handled in the past, and see if they are similar with yours. You can also ask for a list of clients you can contact to ask about his competence, service, and fees.
Fees. Ask about his rate and the payment terms – flat, hourly, capped, etc. It is important to get this information as you can use it when you compare your candidates. However, do not decide based on the rate alone. The lowest rate may not be indicative of quality work