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Tag Archives: Plan for Retirement

Reverse Mortgage: Rip Off or Blessing?

Reverse mortgage on blackboard


A reverse mortgage is a useful tool for helping senior citizens remain in their homes and maintain their lifestyle.


A reverse mortgage is a ripoff, a scam. Don’t fall for it or you might lose your house!


So which is it, a blessing or a trap? As with most financial products, the answer is, “It depends.” For some clients, it is just the opportunity they need for financial stability, but for others, it can be a danger. No one solution is right for everyone, as we all know.


Most of us in the financial planning field are familiar with the basics of a reverse mortgage. It is a means by which older homeowners (62 or over) can make use of the equity in their home without having to make payments on a loan. The amount a person can access depends on the value of the home, the age of the homeowner and interest rates. The money can be taken as a lump sum, monthly payments, or a line of credit. Nothing needs to be paid back until the home ceases to be the primary residence, either due to death or to the homeowner moving, perhaps to a nursing home.


Along with the age restriction, there are a few other conditions. Besides a single family home, a 2-4 unit building also qualifies, as long as the owner occupies one of the units. The home generally must be owned free and clear, although if there is a low mortgage balance it can be paid off with proceeds from the reverse mortgage. A financial assessment should be done to assure that the homeowner will have the means to keep paying property taxes, insurance, and maintenance.


Most current reverse mortgages are FHA-insured Home Equity Conversion Mortgages (HECM). There is a maximum amount a person can borrow under this program, currently $625,500. The owner of a higher-valued home might consider a proprietary reverse mortgage through a private lender. These are not subject to the HECM loan limits.


Under certain circumstances, a reverse mortgage can be the perfect instrument to address a senior’s needs. A lump sum can be used to make necessary home repairs or adaptations for an elder. A monthly stream of income might be the difference between an active or restricted lifestyle. Perhaps a line of credit can be tapped for a special vacation or a new vehicle.


A reverse mortgage is not the solution for everyone, however. In some cases, the homeowner might be better off downsizing, or moving to an assisted living facility. Some people might take a lump sum, only to squander it and be left with no equity and no cash. Unexpected expenses may deplete resources needed to pay property taxes, insurance, etc. And there may be no value left for heirs. If the heirs don’t have the means to pay back the mortgage themselves, they will have to sell the home. Fortunately, there is usually a “non-recourse” clause in the agreement so that if the value of the home is less than what is owed, the heirs don’t have to make up the difference.


Reverse mortgages come with significant fees and closing costs, so it’s worthwhile to shop around. However, the client must beware of salespeople who try to pressure them into a hurried agreement or sell them other products to invest the proceeds. There are always shady operators out there, and the best course of action for a client is to consult with a financial planner and consider all options before making a decision.


Financial Planning With Long-Term Care Insurance and Revocable Trusts

Serene senior couple

People are living longer than ever before. That is why long-term care costs have become a very important part of financial planning. All of these costs should be taken into account before any gifts are made. A common way of addressing long-term care costs is through a LTC insurance policy. The purchase of a long-term policy, however, is not the end of the planning required for clients approaching retirement.

Steps need to be taken to see that the long-term care coverage will be available when it is needed. The problem is that over a third of LTC policies lapse before their owners ever use them. Women over 65 have a 38% probability of lapse, while the probability for men in the same age group is 32%. What’s even more surprising about these lapses is they’re not all caused by inability to afford the premium. A significant amount of lapses occur because of cognitive decline.

Policies that lapse are often policies that were needed by the affected individuals, so it’s important for advisors to ensure that there’s a plan in place to deal with cognitive decline. Not only should financial planning include a durable power of attorney authorizing the agent to handle financial matters if the client cannot do so, but the planner needs to make sure that the agent is also aware of when to step in and what actions to take. Among the actions for the agent to take may be paying the premium for the long-term care insurance.




Revocable Trusts




Another way to protect an aging person is by means of a revocable trust. While revocable trusts have traditionally been viewed as a way to avoid probate costs, they can also be used to provide protection from elder financial abuse, identity theft, and different risks of aging, including the risk of cognitive decline. A trustee may be given responsibility for continuing the long-term care insurance as well as making other payments for the aging client. .In addition, when a revocable trust is created to protect an aging person, the advisor should ensure that the attorney drafting the revocable trust includes a trust protector. A trust protector is appointed by the revocable trust to monitor the accounting of the trust and to see that there is no misbehavior by the trustee. The trust protector may be given the power to fire and replace the trustee of the revocable trust. By adding a trust protector, an advisor can help protect clients from a trustee behaving irresponsibly.

Roth Conversions : Do They Offer Protection from Higher Tax Rates?

Investments - Open Door to Diversified Investing Growth

Roth conversions are a common topic of conversation between financial advisors and clients who have IRAs. One of the goals of optimizing tax planning is to pay taxes whenever rates are lower. However, just as it isn’t always easy to predict when to buy low or sell high, choosing the ideal time to convert to a Roth IRA can be a challenge.


The reason is most clients can’t accurately predict their tax bracket during retirement. While people often end up in a lower tax bracket after retiring, that shift isn’t guaranteed. When doing a Roth conversion from a traditional IRA, taxes are paid before they’re legally required.. Since advisors are generally in the practice of deferring taxes, any action that means paying taxes early is not something they want to do.


Estimating the future tax rate of a client can be an uphill battle.  As a result, it’s generally worthwhile for advisors to focus their attention and client conversations on a few other reasons. Let’s take a look at some of these reasons.


Diversifying Tax Risk


Diversification isn’t a principle that only applies to investing. It also plays an important role in tax planning. An optimal strategy is to have a mix of funds that are tax-free, tax-deferred, and taxable, and within the taxable accounts to have some funds invested to generate ordinary income and others that will produce capital gains. The role a Roth conversion plays in tax-risk diversification is filling up the tax-free basket as a hedge against potentially costly future tax increases.


This also brings up an important point to communicate with clients, which is that this conversion isn’t an all-or-nothing choice. Instead, the best option may be to do a partial conversion or systematic partial Roth conversions over multiple years to keep income in a lower bracket while still converting something on an annual basis. This will make Roth funds more valuable in the event tax rates do increase.


Eliminating Required Minimum Distributions


Roth IRAs are not subject to lifetime required minimum distributions (RMDs). After the tax is paid during conversion, Roth funds normally become tax-free. This is true even for beneficiaries (although beneficiaries are subject to RMDs). Since many clients want full control over their retirement distributions, converting to eliminate required minimum distributions can be a compelling option for clients.


Insurance Against Higher Tax Rates


Another tax benefit of a Roth conversion is being able to insure against higher tax rates in the future. Although those rates are unknown, this conversion can provide clients with a great sense of certainty during retirement. Because there is an opportunity cost associated with this conversion, it’s important for advisors to help clients choose the optimal time to take this action.


Why Keeping a Will Updated is Just As Important As Having One

Notary officer helping mature client

According to recent studies, more than half of all Americans are likely to die without a will. In this event, applicable state laws will dictate what happens to the assets of the estate. The decedent will have no say in the disposition, nor will the surviving family.


In general, state laws will direct the assets to spouse and children, or parents and other family members if the decedent was not married and had no descendants. There is no provision for bequests to friends, benefactors or charities. But even those who have a valid will might not have the distribution go entirely according to their wishes.


When a Valid Will Isn’t Enough


There are several reasons for this disparity. First of all, many assets do not pass through probate and thus are not subject to will provisions. Most people are aware that any insurance proceeds will go to the named beneficiary, but there are also other items to consider. Retirement accounts, annuities, transfer on death (TOD) and joint accounts will pass outside the will, as will any property held in joint tenancy with rights of survivorship.


Another consideration is that a person’s circumstances may have changed. Change is an unavoidable part of life, as we all know. Some of the major changes one might experience include marriage, divorce, the death of a loved one or the birth/adoption of a child or grandchild. Whether planned or unexpected, every change requires some adjustments, but often people overlook the less obvious items. For this reason, clients should be reminded to review their wills on a regular basis and update them as necessary.


How Planners Can Help Clients Manage Their Wills and Related Documents


Just as important, though, is to review the beneficiary designations (both primary and contingent) on all retirement plans, insurance policies, annuities and such.  Many a court battle has developed when an individual neglected this important detail. For instance, if a person fails to change the beneficiary after a divorce, insurance proceeds could be paid to an ex-spouse rather than the children or current spouse. Some states have laws that invalidate ex-spouse beneficiary designations after a divorce, but these laws don’t necessarily apply in every case, and can be superseded by any applicable federal statutes.


For retirement accounts covered by ERISA, a spouse automatically has rights to the account unless he or she has signed a waiver. So if, after a divorce, you name your children as beneficiaries of your 401(k) and subsequently remarry, your new spouse will get the assets absent a valid waiver. Any other beneficiary designation will be disregarded.


Every change in circumstance should prompt a review. An unmarried person may have designated parents or a sibling as beneficiary of an insurance policy and then married but never updated the beneficiary. Perhaps the original beneficiary of a plan or policy has passed away, in which case the choice of contingent beneficiaries comes into play. Should they be moved up to primary, or is there reason to make a different choice? Maybe there’s a new child in the family who needs to be provided for, or donating to a charity becomes a better option.

Given the certainty of change, a planner should not only exhort clients to execute their wills, it’s important for the planner to also remind them to review and update all of their documents and designations regularly.