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Case Studies and Position Papers from Pearson Financial Services

Every client family has different issues. These case studies and position papers are examples of issues that Pearson Financial Services has handled for its clients. They are brief write ups about how a family’s financial challenges have been solved. Each stoy focuses on the strategy chosen by Pearson Financial Services to best protect a family’s assets and its legacy.

We would be pleased to discuss, in depth, any of the concepts written about in these case studies. All the names have been changed and the numbers are hypothetical, but each story reflects a real client with real issues and successful solutions to their family’s financial challenges.

Private Annuities and Charitable Remainder Trusts Offering Similar Tax Advantages Are Often Overlooked in Current Rush to 1031 Exchanges.
Read this Article...

Retiree Loses Nearly Half of Pension Through Bankruptcy of Former Employer: Accessing Assets Tied Up in Home Equity Becomes Essential.
Read this article...

Trust in an Advisor Matters When Estate Planning Details Confuse Those Left Behind. Sources of income may change after the death of a spouse.
Read this article...


How to Make Real Estate Work for a Young Family's Future
Read this article...

Gift to a Conservation Trust Can Reduce State and Federal Tax and Protect Family Property in the Future.
Read this article...

The Best Option for Leaving Assets to Your Family is Inside a Dynasty Trust. But how do you convince your children to leave the assets there?
Read this article...

Financial Opportunity is Just Like Our Aging Bodies…
If You Don’t Use It, You Lose It.
Read this article...

Managing Your Portfolio Should be the Simple Part of Your Wealth Complexities.
Read this article...

Before You Sell Real Estate, Look at Strategies to Manage Tax Liabilities: The story of a modest estate yielding an impressive legacy.
Read this article...

Understand the Basics of Your Dynasty Trust.
Read this article...

Real Estate Investments Are Still An Excellent Way to Diversify.
Read this article...

It is Always a Bad Idea to Loan Money to Your Children. Plan to Give it Away, and then, Only if You Can Afford To Give it Away.
Read this article...

The Best Option for Leaving Assets to Your Family is Inside a Dynasty Trust
But how do you convince your children to leave the assets there?

Rather than receiving assets outright with all of the tax issues inherent in such an ill thought out plan, the dynasty trust is designed to allow the heirs to withdraw assets while maintaining the maximum asset protection and tax benefits available. At a minimum, make certain you and your financial advisor can help your children understand how the dynasty trust provides them with the following:

  • Unequalled protection of the assets from liability
  • Access to tax-free and interest-free loans
  • Personalized financial advice and service
  • A customized portfolio
  • A highly diversified, global asset allocation
  • Lower costs because of institutional pricing
  • Risk reduction through automatic rebalancing
  • A team of specialist money managers
  • Continuous manager monitoring
  • Excellent reporting
  • Tax return preparation and active tax management


Each of these attributes helps secure your family's financial future. Providing and encouraging this education is probably the single most important thing you can do to assure that the dynasty trust you establish will live forever. Don't let your family wealth dwindle and disappear within just three generations, as is the trend. A dynasty trust is a gift not only of tax avoidance and asset protection, but with your help, also the wisdom to become caretakers of and contributors to a family legacy. A well-constructed dynasty trust has four elements:

  • A custodian to "hold" your assets only as long as their fees and services are acceptable. There are no fees, penalties or taxes to transfer the assets from one custodian to another.
  • A financial advisor to manage the assets inside the dynasty trust who is compensated only by fees, specifically not by commission for transactions.
  • An independent trustee whose responsibilities include administration, tax returns, who can protect your assets from liability including divorce, auto accident, bankruptcy or other predators. The independent trustee's role and fee are based on the premise that the independent trustee is part of the team together with the investment advisor.
  • A family monitor, who once a month, through direct, secure Internet access via the custodian, can check on the value of the portfolio under management. Any significant change in value to the trust assets should prompt a call to your financial advisor, who will suggest a course of action.

But the best planning and establishment of a dynasty trust presumes that you are able to inform your heirs about its benefits and to educate them sufficiently so that they do not end the trust, which is their right when they become its beneficiaries. As long as the assets remain in trust, you have the relationship with a competent financial advisor, an independent trustee is on the job, and a trustworthy custodian is protecting the assets.

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Financial Opportunity is Just Like Our Aging Bodies…
If You Don’t Use It, You Lose It.

Every client family has different issues. These case studies and position papers are examples of issues that Pearson Financial Services has handled for its clients. They are brief write ups about how a family’s financial challenges have been solved. Each stoy focuses on the strategy chosen by Pearson Financial Services to best protect a family’s assets and its legacy.

We would be pleased to discuss, in depth, any of the concepts written about in these case studies. All the names have been changed and the numbers are hypothetical, but each story reflects a real client with real issues and successful solutions to their family’s financial challenges.

Back to the top ^

Private Annuities and Charitable Remainder Trusts Offering Similar
Tax Advantages Are Often Overlooked in Current Rush to 1031 Exchanges.

Private annuities and charitable remainder trusts are being overlooked in the current headlong rush by business owners of commercial properties who are trying to sell via a 1031 exchange to avoid capital gains taxes on the sale proceeds. In fact, there are several viable options to save taxes on the sale of investment real estate; private annuities and charitable remainder trusts are at the top of the list for the right families.

Recent media has focused on the high demand for investment income-producing property in New York City, because many business owners cannot find an appropriate exchange in their home states. The tax-free exchange of investment property of one kind for another is known by its tax code as the 1031 exchange.

It’s all about tax avoidance or tax deferral. Recently, the Robinson Family wanted to sell a $4 million commercial rental property at retirement and were looking for ways to avoid the nearly $700,000 capital gains tax that would be levied at the time of the sale. They were feeling pressure because their property’s buyer is doing a 1031 exchange into their property. They thought that their only option to avoid the tax penalty was to do a similar, like kind 1031 exchange, but they had no property in mind to purchase.

Federal rules state that in a 1031 exchange, the sellers have 45 days after the closing of their property to identify potential properties into which they will exchange that they must close on that sale within 180 days from closing on the family investment property. The Robinsons’ buyer is 60 days from closing, giving them nearly eight months to get organized. They want to avoid acting hastily, nonetheless. In their research, they discovered that if they put the proceeds of the sale in a number of vehicles, they could do what they really want to do and avoid the capital gains tax slam.

For example, a private annuity offers similar tax deferral properties to a 1031 exchange. The private annuity has no timeframe for investing and will hold the assets for a year or ten years, and a real estate purchase is not required. A private annuity trust is one answer that allows Boomers to downsize successfully and create an income stream from real estate assets. A private annuity trust document is not complicated and only needs to be two pages long, but its impact is very impressive.

The Anderson family wanted to sell their $3 million home and avoid as much capital gains tax as possible. After their advisor presented all of their options, they chose to put half of the house sales proceeds, $1.5 million, into a private annuity trust, saving approximately $250,000 in state and federal capital gains. They used their $500,000 exemption and half of their improvements against the other half of the proceeds of $1.5 million, reducing the tax bite dramatically. They took their $1.5 million and bought a house in Florida.

The private annuity helped assuage this couple’s fear of running out of money. They understood their private annuity could serve them like an IRA. They understood that they would have to begin to draw income from the private annuity at age 70 1/2, just like an IRA. The even greater benefit of the private annuity is that income from it is treated in three different ways, a very small portion is tax free, a greater portion is taxed as long-term capital gains at 15%, and a portion will be taxed as ordinary income at their top tax bracket. They will stretch their taxes out over their lifetime as they draw upon the private annuity income.

There is a huge push to get advisors to pay attention to the stretch possibilities with IRAs. Private annuities work the same way.

Or, a charitable remainder trust (CRT) can be another tax saving option:
A property valued at $4 million, for instance, can be deeded to a CRT. This eliminates the payment of the capital gains tax at the time of the sale. The existence of the CRT also means that the trust owners can claim a $400,000 tax deduction that can be spread over an allowed six-year period. During each of those next six years, the trust owner can take $66,666 a year out of their taxable IRA and put it in a Roth IRA. Roth conversions require that the investor pay taxes on the amounts being converted. In this scenario, however, the trust owners will have a large tax deduction from the CRT and can use it “against” the deposits to their new Roth IRA, making the trust owner’s conversion of $400,000 to a Roth IRA tax free. The Roth IRA has no minimum distributions compared to a regular Roth IRA.
The proceeds from the sale of the commercial real estate, inside the CRT, will pay the trust owners income for rest of their lifetime, estimated to be age 90, or 25 years going forward. Because the trust owners saved the $700,000 in capital gains taxes at the time of the commercial real estate sale, and assuming an 8% rate of return on this portion of their investment portfolio, the trust owners could generate $56,000 more income for their life expectancy of 25 years, or a total of $1.4 million of additional income.

The Robinsons, having discussed their options with their advisor, now intend to do the following with their $4 million.
1. Buy raw land in Arizona for $1 million in a 1031 exchange.
2. Create a private annuity
3. Six months after they close and shelter $1 million from taxes, they want to build a $500,000 home on the investment property.
4. When they take the $500,000 to build the Arizona home from the private annuity, it is still tax deferred.
5. They will still have $2.5 million in the private annuity that they can invest in any way they wish. The assets are still tax deferred inside the annuity and they can create an IRA-like income stream for their retirement.

Commercial realtors are delighted with the land rush to investment properties, particularly in the hot spot of Manhattan, but the responsibilities of investment real estate are not what many retiring families want. They prefer alternatives that give them more options but with the same tax deferral advantages.

An additional option considered and discarded by the Robinsons was a 1031 exchange into a Tenants-in-Common (TIC) investment. They were advised about the high risk of these largely unregulated real estate options and chose not to invest in the TIC.

 

Retiree Loses Nearly Half of Pension Through Bankruptcy of
Former Employer: Accessing Assets Tied Up in Home Equity Becomes Essential.

Sam, a Delta pilot, someone who definitely had planned for retirement, has been dealt a serious financial blow. After a forced retirement at age 65, the now 70-year-old and his 68 year-old wife are dealing with the repercussions of Delta's bankruptcy that has, in effect, cut his pilot's pension nearly in half. He needs to replace $3500 a month to maintain the standard of living he and his wife have adopted and found enjoyable. Fortunately for Sam, he owns a primary residence in a resort on Cape Cod that is worth $1.5 million and is completely unencumbered. He doesn't want to sell the home for at least ten years, but probably will at that time. Sam's options will be partly determined by the lender appraised market value of his home. appraisals are usually conservative – in Sam’s case $1.2 million.
After discussing a number of options with his financial advisor, Sam is now talking with a bank about a line of credit and with a different firm about reverse mortgages. Many banks do not offer reverse mortgages, but refer clients to trustworthy firms that focus on this niche.*
Sam now receives $4000 from his pension (down $3500 a month) as well as his $1500 social security benefit. His income at $5500 a month qualifies him for a line of credit on 41% of his monthly income, requiring a mortgage payment of $2255 a month, minus taxes and insurance. The prevailing interest rate (currently prime is 8.25 percent) will determine what he can borrow in an interest only loan. At $2255 a month X 12 months, his annual mortgage payment will be $27,050 enabling him to borrow up to $328,000 over a 20-year loan period. $328,000 divided by $3500 gives Sam 93 months of an additional $3500 draw that he can make, but it comes with a hefty mortgage payment for the privilege, partially defeating the purpose of the line of credit. During the first ten years, he can use it as a credit card, taking money out, putting money in. During the second ten years, the bank will require that he structure a payment plan to pay off the outstanding loan. Or he will open a new line of credit to extend the draw period. Sam would repay any outstanding balance on the line of credit when he sells his home. A reverse mortgage for Sam is also an option.
The media has criticized reverse mortgages in the past primarily for their upfront costs. Because so much of consumer's net worth is tied up in their homes, it becomes important to discuss with your advisor and your mortgage broker the breakdown of the costs of a reverse mortgage. A significant portion of that cost is the mortgage insurance premium which HUD collects to guarantee the lender is made whole when the mortgage is paid off. In some reverse mortgage situations, the length of the payout time, combined with declining housing values, may create a debt that exceeds the value of the house at the time of sale, when the mortgage is paid off. The insurance, NOT the borrower’s estate, reimburses the lender when such mortgages "get upside down."
In Sam's case, the Home Equity Conversion Mortgage (HECM) may be his best option. He qualifies for $274,632, which when divided by his requested $3500 a month will yield 67 months of additional income he can get from the mortgage. If Sam is willing to cut that amount to $3000, he can receive the income for 81 months or 6 years and 9 months. In this scenario, Sam's home is still appreciating and his reverse mortgage has guaranteed that he can borrow the $274,632 and never have to pay it back as long as he or his surviving spouse are alive, or have not lived in the house for more than 12 months consecutively. Sam may get lucky, there is a bill in Congress to increase the lending limit on Home Equity Conversion Mortgages to $417,000. This may allow Sam to continue to receive the necessary $3500 a month until he is ready to sell the house at age 80, and use his equity to buy a home in Florida.
The cost associated with establishing this mortgage, $16,900, is figured into the loan. The deferred interest rate is calculated on the U.S. Treasury Bill rate plus 1 and 1/2 basis points per annum. There are many reverse mortgage products that allow consumers to access the equity in their homes without selling their homes. Always take your income concerns to your financial advisor for assistance in creating a strategy that supports the life you want to lead using the assets you have at your disposal. You may be surprised by what your home equity can help you achieve.

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Trust in an Advisor Matters When Estate Planning Details
Confuse Those Left Behind. Sources of income may change after the death of a spouse.

There is a reason why thoughtful families make an effort to choose an advisor who can help a family understand financial arrangements after the financially savvy partner has died. Seldom are both spouses equally informed about financial arrangements, in particular, the details of the family’s trust. Depending on the size of the estate, the trust holds all or a part of the family’s assets to shelter them from future estate taxes. Great confusion can occur when the source of assets that provide income must change after a death.
While there are seldom any major changes that will occur in the estate planning, there are often administrative details that are difficult for the remaining spouse to handle, both emotionally and perhaps cognitively, if the spouse is elderly and not well. Choosing an advisor and getting to know the advisor’s staff early on in the estate planning process becomes an important part of managing the changes to the estate plan after a spouse’s death.
Estate planning will often segregate assets into the decedents trust accounts to take advantage of their tax-exempt status, making it important for the surviving spouse to not spend assets that are tax exempt but spend the assets that are non exempt.
Take John and Sarah. Sarah was the money manager in their family. When she died, John was not aware that Sarah’s segregated assets were now tax exempt according to the terms of the trust. Their joint income had come from her assets and it was no longer available to him if he wanted to keep it tax exempt. Now John’s income needed to come from John’s non tax-exempt sources. But John was resistant to change and without a long term relationship with his advisor and the advisor’s staff, might not have been willing to draw the income from his assets that were not tax exempt. Had he stubbornly refused to adjust the estate plan as appropriate after Sarah’s death, he could have faced serious loss of income for a protracted period of time or created unnecessary death taxes for his children.
Under another scenario, if the remaining spouse needs cash, illiquid (real estate) assets could be sold to the decedents estate in exchange for liquid assets such as cash.
In John and Sarah’s situation, it was very important to have the advisor working hand-in-hand with the estate attorney to make sure assets are titled correctly and that necessary documents filing changes are completed quickly after the death of the first spouse to enable the surviving spouse to have continuity in his income a sense that his financial well being is strong.

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How to Make Real Estate Work for a Young Family's Future

Amy and Dan are in their mid-30s and for the last ten years have purchased two fixer upper houses in a resort area in the Northeast, hometown for both of them. Dan is a policeman and Amy stays at home with their daughters, ages 5 and 7. They are now living in their third home, worth $700,000. They came to a financial planner with questions about how best to manage the equity, about $600,000, that they have in their current residence.
Highly appreciated real estate provides flexibility for families, even young ones, when they understand their options: Here are a few options that Amy and Dan need to think about.
They could try to sell their big house, but in their home area, resort real estate is declining at the moment. With the proceeds (let's say $550,000) they could buy another fixer upper, (they are willing) but smaller house in the $350,000 range. (More houses in this range will become available as real estate prices decline in their resort area, but the sale price of their "big" house will decline as well. If they are going to sell the big house, they need to make that decision soon. )
With the remainder of $200,000, they could put a substantial amount down on a second fixer upper that they would rent. This would give Amy and Dan two properties in a declining market, one of which would provide rental income to pay the mortgage on that property. They could wait out the real estate cycle and if the market cooperates, they will have doubled their probability of both properties again appreciating in their area.
Or, they could sell their big house, put money down on another house spending a total of $350,000 to buy and fix it, and invest the remaining $200,000 in the market. They understand that the total stock market index has returned an average of over 10%for the past 20 years. An investment portfolio earning 7.2% will double every ten years, giving them a sizeable nest egg ($400,000) to spend on their daughters' education and they do have the time for the portfolio to grow.
Whatever Amy and Dan decide, the important takeaway from their story is that sweat equity works, real estate equity can work for them in several ways, and they are asking for professional help at a very young age, even though all they really have is one primary residence with a great deal of captured equity. Good for them for looking at all of their options.

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Gift to a Conservation Trust Can Reduce State and
Federal Tax and Protect Family Property in the Future

The 90-year old patriarch of a large family owns a significant chunk of a highly desirable and expensive island off of the New England coast. He has not done any estate planning to lessen the impact of the value of the land (that could be carved into 50 building lots) will have on his five children. It may be because he is sharp and not focusing on dying. It may be because he does not understand that a first step of simply changing the title of his 100 acres to a revocable trust can keep his estate out of a lot of trouble. Without the trust, his estate will go into probate and his children will be required to sell the land currently valued at $1.7 million, to developers to pay the estate taxes which will be half of that value.
No one in the family wants to see the land developed. Earlier, Dad had deeded a large number of acres to a conservation trust and the same trust has come back with another offer for more acreage. What the family did not know until they talked with a financial advisor with experience in managing highly appreciated real estate was that the family could negotiate with the Conservation Trust. The Trust had offered $1.4 million for the 100 acres. Here is what the advisor recommended:
1.Immediately set up a revocable trust and title all of the acreage to the trust to avoid probate.
2.Begin negotiations with the Conservation Trust. Instead of accepting an offer of $1.4 million for 100 acres, offer a conservation easement on 50 acres for $700,000.
3.Create five 5-acre lots for each of the five children to inherit. The family also retains 25 acres of open space.
4.Allow the conservation trust to buy the building rights only for 50 acres for half of what the Trust originally had offered -- $700,000. Putting a conservation easement on the property such as the sale of building rights will drop its value to about $1.4 million. All of the land stays in the family, but it has a lower value and 50 acres cannot be developed. This plan reduces death taxes and enhances the value of the property retained by the family.
5.The sale price to the Conservation Trust of $700.000 is subject to a capital gains tax, leaving almost $600,000 after tax for Dad’s health care at home for the rest of his life.

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Managing Your Portfolio Should be the Simple Part
of Your Wealth Complexities

Retirees and pre-retirees get to a point where they may want to relinquish some control of their portfolios. Such "giving away" of personal responsibility for managing a family's portfolio means that the investor must find a money manager they can trust with a solution that works.
Many advisors recommend a simple investing solution that will allow their clients to get on with their lives. It is the same solution that the nation's largest pension plans (IBM, GE, Boeing and United Technologies) all are using -- indexing for a large part of the equity assets under management.
The simplest method of managing money is to create a core portfolio using U.S. Treasuries for the fixed income portion of the portfolio and two exchange traded index funds for the equities portion. For instance, history suggests that 70% in the Total Stock Market Exchange Traded Index Fund with over 3000 stocks and 30% in the Barclays Bank Foreign Exchange Traded Index Fund (EFA) would be the preferred allocation for the equity part of the core solution.
This is the same solution recommended by David Swensen, the manager of the Yale Endowment, clearly outlined in his book "Fundamental Success: A Fundamental approach to Personal Investment."
In 1990, the Nobel Prize was awarded for the research that led to Modern Portfolio Theory. Professor Markowitz, Ph.D., University of Chicago, proved that a portfolio with less volatility will have a greater compounded rate of return. Professor Emeritus William F. Sharpe, of Stanford University, proved that a stock portfolio that included all the stocks in the market has the least volatility. These two academic discoveries led to a breakthrough in investment methodology in 1990, the Modern Portfolio Theory.
In 1975, John Bogle, Magna Cum Laude, Economics, Princeton University, created the first Index Fund, a basket of all the stocks in an investment category that represents the total U.S. Stock Market. Investing in the total U.S. Stock Market Index Fund and the Total Foreign Index Fund, Provides a portfolio with all the stocks, which in turn leads to less volatility and historically, a higher compounded rate of return over time (past performance is no guarantee of future returns).
Experts agree about using stock market index funds.
Harvard Endowment Management CEO, Jack Meyers, says "Most people should simply have index funds so they can keep their fees low and their taxes down. No doubt about."
"The chances of identifying the very few managers who will beat the market are close to nil," says Professor of Economics at Princeton University, author of "A Random Walk Down Wall Street, Burton G. Malkiel.
Too often, money managers want clients to think that managing money is a difficult, complex endeavor. It is not. The complexities of wealth management occur when the client's needs and desires require paying attention to wealth transfer, health care, real estate, death taxes, income taxes, and legal documents. Look for an advisor who offers a simple investing strategy and is prepared to help you maneuver the wealth management complexities of the rest of the story.

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Before You Sell Real Estate, Look at Strategies to Manage Tax Liabilities:
The story of a modest estate yielding an impressive legacy.

John and Joan Wheeler, both age 65, want to sell a rental house on Cape Cod currently valued at $1 million. In addition to the rental house, the Wheelers have a personal residence, also worth $1 million, a $500,000 IRA, and $500,000 in a taxable portfolio of mutual funds and bonds. All tallied, the Wheelers have a current estate of $3 million. The Wheelers are very tired of managing a summer rental property, and they need to increase their retirement income, and to provide peace of mind, they want to create a cache of funds to pay for long term care concerns.
Fortunately the Wheelers have read that there are strategies to defer capital gains taxes on the sale of the rental property. They sought a financial advisor skilled at complex family financial planning to find out if this was the case. The advisor focused on teaching the Wheelers what they did not know, so they could apply what they learned.
In this case study, the financial advisor was able to recommend a number of linked strategies used by advisors providing family office services that allowed the Wheelers to increase their retirement income. In addition, they can create a charitable foundation that hypothetically will pay out more than $6 million to non-profit endeavors of the family’s choice, and allow John and Joan’s son and daughter, Bill and Jean, and their grandchildren Max, Nancy and Jane, to receive $5,356.350 in tax free stretch IRA payments over their two-generation life expectancy.
Taxes on an outright sale of their rental property (state and federal) would equal $250,000. Here are the options the financial advisor suggested to prevent the loss of the family’s equity and to position assets for the future benefit of the next two generations of their family.
The Wheelers deeded their rental house to a Charitable Remainder Trust (CRT). Putting the house in this trust means that no capital gains tax will be paid at the time of the sale. The existence of the CRT also means that the Wheelers can claim a $100,000 tax deduction that they can now spread over an allowed six-year period. During each of those next six years, the Wheelers can take $16,666 a year out of their taxable IRA and put it in a Roth IRA. Roth conversions require that the investor pay taxes on the amounts being converted. In this scenario, however, the Wheelers have a large tax deduction from the CRT and can use it “against” the deposits to their new Roth IRA, making the Wheeler’s conversion of $100,000 to a Roth IRA tax free. The Roth IRA has no minimum distributions compared to a regular Roth IRA.
The proceeds from the sale of the rental house, inside the CRT, will pay John and Joan income for rest of their lifetime, estimated to be age 90, or 25 years going forward. Because the Wheelers saved the $250,000 in capital gains taxes at the time of the rental sale, and assuming an 8% rate of return on this portion of their investment portfolio, the Wheelers could generate $20,000 more income for their life expectancy of 25 years, or a total of $500,000 of additional taxable income.
The Roth IRA requires no minimum distribution. If the Wheelers did not do the Roth, the minimum required distribution from a $100,000 IRA would have been $287,000 over their lifetime. Now it is zero. They can leave the Roth ($100,000) alone, assuming growth at 8%, it could grow to $675,000 tax free. If they want to allocate this $100,000 of their $3 million estate to their grandchildren Max, Nancy and Jane (leaving everything else to Bill and Jean) the grandchildren will be required to take minimum distributions over their lifetime. But Max, Nancy and Jane’s life expectancies from the time of inheritance in their 40s is possibly 45 more years. If John and Joan live 25 years and their grandchildren get to use the Roth for 45 more years, it can provide the family with 65 years of tax-free growth and income from the Roth. The longer it is stretched out, the more advantageous the tax free part of the Roth becomes as a benefit to the Wheeler family, with the Roth (at 8% return) paying more than $5 million in required distributions to Max, Nancy and Jane, during their lifetime.
In addition, when the parents die, Bill and Jean will inherit the remaining $400,000 IRA not converted to the Roth, and the $1 million primary residence. Assuming that the house may grow at 5% a year, and in 25 years the house could be worth $3,390,000. Bill and Jean’s inheritance in this instance could be $4,290,000, and the grandchildren’s inheritance, the $675,000, tax free from the Roth.
The CRT, originally funded by the sale of the rental for $1 million, can throw off 8% a year for the Wheeler’s to live on, and still be valued at $1 million at their death, going into a charitable foundation. The children, Bill and Jean become trustees, receiving a fee for running the foundation of about 1% a year for 30 years, creating an additional $300,000 or $150,000 each over their life expectancy.
The foundation could earn 8% and pay out 5% for 30 years. Growing by 3% a year, during the children’s lifetime, the foundation will pay out to non profits of their choice, $1,827,750 while still growing to $2,437,000. When Bill and Jean die, the grandchildren become trustees of the $2,437,000 foundation. If their compensation for managing the foundation is 1% they would receive $731,100 in management fees over their 30 years. The grandchildren will be able to distribute an additional $4,386,000 to non-profits over 30 years while the foundation grows at 3% to $5,848,000.
The Roth that the grandchildren inherited of $675,000, assuming 8% growth over their lifetime, drawing the required minimum distributions, means the grandchildren can receive over $5 million tax free from the Roth and the opportunity to run a $2 million foundation, where their only burden is to distribute assets to non-profits about which they feel passionately.
All of this potential for the Wheelers comes from a relatively modest estate of $3 million. Because of their awareness of tax avoidance through deeding their rental property to the CRT, and because of their use of the CRT tax deduction to fund a Roth IRA, and the establishment of a charitable foundation, the Wheeler’s have created a truly meaningful legacy for their children and their grandchildren.

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Understand the Basics of Your Dynasty Trust

Setting up a dynasty, or generation-skipping, trust need not be an overwhelming endeavor, but there is a specific check list for you to work against when you are in the planning stages. It is important that you become acquainted with the salient points of your trust, including the following:
• A Delaware trust should be used, when needed, to minimize state taxes, maximize privacy, and protect the assets from creditors for future generations without transfer (estate/death) taxes – forever.
• Keep control in the hands of the inheritors and provide for two exit strategies whereby the heirs can draw down the entire trust principal if they feel it is to their benefit.
• Remove conflicts of interest and hidden agendas from service providers. Research cost structures of your advisors and any recommended investment products and find out what you get for that money.
• Arrange for the trust to hold investments in bonds, stocks, mutual funds, treasuries, and real estate. It should be the beneficiary of any life insurance held at the time of death.
• Arrange that the trust may be funded at any time to leverage the tax savings. A family limited partnership may be added to the trust to increase the amount of family assets protected in the trust.
• The trust becomes a family bank when used correctly and the trust is the source of comprehensive financial services; however, beneficiaries must never delegate away control. They must become and remain involved and informed.
• Delegate to a team of tested, trusted advisors working in conjunction with an independent corporate trustee to administer the trust. Beneficiaries must maintain the ability to hire and fire the advisors as needed in the future.
• Make certain your total costs do not exceed those of a typical mutual fund. The trust is designed to be a profit center, customized for flexibility and personal attention.
The far reaching benefits of setting up a dynasty trust will serve your family from generation to generation. The investment you make in time and money to create the trust, the costs of ongoing administration, and any fees paid to a trusted investment advisor to oversee the investment portion of your trust will give you a great return on your investment. The value of assets left inside a dynasty trust are far more than the same assets left outside the trust. Why leave your estate any other way?

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Real Estate Investments Are Still An Excellent Way to Diversify

The Yale Endowment, managed by David Swensen, was able to achieve returns of over 16% a year for the last 10 years without one negative year. One of the core reasons the endowment achieved this peer beating performance was its allocation to real estate. When stocks fell, real estate gains offset those losses. Diversification is everything. A REIT Index fund would provide exposure to real estate including office properties, warehouses, malls and apartments. The history of real estate suggests that it does well in inflationary times and pays a healthy cash flow as a result of leases. An allocation of up to 20% in real estate is not out of line considering the long-term historical returns. Rebalancing a portfolio to maintain that allocation would reduce risk and stop loss protection on a REIT Index Exchange Traded Fund would also reduce volatility.
The second home has also been a source of significant appreciation in the last 10 years in many areas of the country. Bubble or not, the long-term expectation for US real estate is good.
In retirement, many people are capturing real estate profits by selling the highly appreciated big house and replacing it with a smaller condo or home in a resort area. There are many ways to capture the gains with little or not tax. Consumers should be aware that they can buy real estate using some of their IRA or 401K money. They could use those accounts to buy land or individual rental income, residential real estate. They could convert IRA accounts to Roth IRA accounts and have tax free growth in real estate all of their lifetimes and stretch out tax free withdrawals over the lifetime of their children and grandchildren.
Consumers will demand and receive lower cost reverse mortgages allowing them tax free access to their home equity in retirement while maintaining the growth potential of the allocation to real estate. As boomers retire and live longer than any generation before them, competitive priced reverse mortgages will become a huge part of lifetime income planning.
Remember when Japan’s economy was booming and they were buying up huge amounts of real estate in Hawaii and California? Where do you think the new millionaires in China and India will invest the real estate part of their portfolio? In the safest, most secure place in the world they can find with the greatest potential for growth. All the demographics point to continued growth in the demand for real estate through 2050. Of course, past performance is absolutely no guarantee of future returns and risk may not be rewarded in the next, inevitable, short-term decline.
Consumers interested in real estate investments should avoid the tenants-in-common deals which are filled with huge costs and conflicts of interest. Investing in public real estate securities like REIT Indexes or individual properties that you control offer the greatest potential reward. As rates rise in tandem with inflation, historically two things happen – bonds fall and higher inflation means higher real estate prices and rental income. Consider less in bonds and more in real estate over the next few years, but diversification also means having plenty of liquidity to carry you through unpredictable, temporary declines. Avoid highly leveraged real estate at all costs unless you are willing to throw your money together with thousands of other very smart people who lost everything because of mortgage debt.

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It is Always a Bad Idea to Loan Money to Your Children.
Plan to Give it Away, and then, Only if You Can Afford To Give it Away.

If you can't gift, don't lend. Children are still children no matter what professional expertise they acquire as they mature. Eighty percent of all parents whose children are up to fifty-years old, still help them financially. Parents who need the money to be repaid should never lend it with the assumption that it will be returned. One couple loaned an adult son $250,000 for an investment. Then the mother developed Alzheimer's. The father needed his loan to be repaid, but the child could not borrow from the bank to repay the loan, the proceeds of which he had invested in a business. At the worst possible time of stress for the family, money became a contentious and stressful issue.
The first obligation when asked for a loan is to determine whether or not you can afford to give money away. If the answer is no, then the answer to your children must be no.
If the answer is yes, the parents have enough money to loan, their first instinct is to attach strings dealing with repayment so their adult children will not develop a sense of entitlement. Whether the loan is for a down payment for a new house, specialty camp or elementary school for the grandchildren, or help with the mortgage during a period of unemployment. don't assume these loans will ever be repaid. The kids think, not without cause, "Dad won't miss the payment this month, I'll catch up next." Sometimes adult children put the loan on hold indefinitely an action that can guarantee rancor of some kind and generally muddy up family relationships.
A better strategy is to gift money to your children on a regular basis. The key factor in gifting is to make your children understand that the gift is an early distribution of their inheritance. Under Federal law, each parent can gift up to $12,000 annually to as many individuals as they choose. If the adult children need $36.000 a year to defray the costs of private Montesorri School for their child both Mom or Dad can gift their child, his or her spouse, and child $12,000. The gifts are not income to the children and help reduce the estate of Mom and Dad.
Parents can gift to one child as needed, with a clear understanding that the other children in the family who did not need gifts will receive equalized distributions of the family's trust that take into account all previous gifts.
Very wealthy families establish a family bank, also known as a dynasty trust.. One couple funded a trust with a $2 million deposit to the trust (each parent can give $1 million each). Access to this trust by their children is considered a loan from their inheritance and lack of payment of the loan reduces their proceeds from the trust after their parents deaths. The adult children can access the money for pre-determined reasons from such a trust. The message is "You are spending your inheritance." The brother's and sisters can be helped in different ways. When it becomes lopsided, an attorney can equalize the distributions from the trust.
Don't loan money you can't spare, but if you can help your children, make it a clearly defined gift. Family relationships will benefit from your generosity.

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