John J. Grande, CFP?

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Q. Could you give an overview of what might be done legally to protect my assets from lawsuits? I feel vulnerable not only to losing what I have accumulated, but I am afraid to have a lien against assets not yet earned.

How can you avoid running afoul of the fraudulent transfer laws? 

Unexpected liability can come from just about anywhere: 

There are three basic asset protection techniques: insurance, statutory protection, and asset placement. None of these techniques is a complete solution by itself, but may make sense as one limited component of an asset protection plan. 

The simplest way to cope with risk is to shift the risk to an insurance company. This should be your first line of defense. Before you do anything else, review your existing coverage. Then consider purchasing or increasing coverage on your insurance policies as appropriate. You should be adequately insured against: 

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The simplest way to cope with risk is to shift the risk to an insurance company. This should be your first line of defense. Before you do anything else, review your existing coverage.

Create asset protection plan to protect wealth

People aged more than 62 years control a significant portion of the wealth in this country, but like your parents, much of their wealth is concentrated in the equity in their homes. If Social Security benefits are excluded, just less than half of all senior citizens would fall below the poverty line based on their income. Inflation continues to drive up the costs of food, energy, and, particularly, health care, so it is no wonder that your parents believe things are tighter than they were 10 years ago. Also, federal budget cuts have pushed the cost of many programs down to state and local governments, driving up sales taxes and property taxes. These taxes, particularly the sales tax, tend to be regressive and really clobber retired people living on Social Security and limited resources. 

The problem seems intractable. Seniors no longer work, and if they went back to work, they probably would not return to the work force in high-paying positions, so an increase in income through additional labor is unlikely. Without additional earnings from labor, additional savings will be all but impossible. 

Reverse mortgages literally are mortgage loans that work backwards. They also seem to violate most of the traditional principles of good lending practice, but more on that later. Under a reverse mortgage, instead of sending a check to the lender every month to pay interest and reduce debt, the borrower receives a check every month from the lender and sees his or her debt increase. Reverse mortgages vary from lender to lender, but most have several characteristics in common. 

First, they are only available to senior citizens (the definition of the age at which one is considered a senior may vary from 62 to 70 years) who own their own home with little or no debt. Next, the type of loan is usually either a term loan (with the term based on the life expectancy of the homeowner or a certain time period) or a line of credit. 

The amount of the monthly payment depends on the term of the loan, interest rates, the value of the home, and the percentage of current equity eligible to be loaned out. With a line of credit arrangement, there is no monthly check; the senior merely taps the line of credit for cash whenever necessary. Generally, the loan is not repaid until the house is sold or at death.   

The risks to the lender are obvious. With a loan based on life expectancy, the lender could loan more than is possible to recover on sale. There is no current cash inflow. 

The risk to the homeowner is also clear. The loan will eat away-and could wipe out-the value of the home. If the senior wanted to pass the home on to the next generation, that generation may be saddled with a sizable debt. 

Q My parents are living on a fixed income. Lately, their monthly expenses have begun to exceed their income. The only real asset they own is their home, which is paid off. It is not important to me to inherit their house, but I also don't want to have to subsidize their income if I don't need to. How could they use the equity in their home to augment their cash flow, without selling it?

Reverse mortgage might ease burden of fixed income

Q Could you explain whether it is generally better to take Social Security benefits at 62 or wait until 65 or even 70? 

			Today, a retired worker who is fully insured can elect to start receiving benefits at any time between age 62 and 65 (or even later). Benefits can start as early as age 62, but if you choose this option, benefits are permanently reduced by 20% or more, depending on the year you were born (Figure 1).			

Before addressing the inherent problems with this empirical question, let's look at some of the factors and considerations, starting with when you actually can take full benefits depending on your age. The accompanying chart shows that the earlier one was born, the younger he or she can begin to collect full benefits (Figure 2). 

Further, for those born after 1937, normal retirement age is being extended. Normal retirement age currently is 65, but due to the Social Security amendments, full benefit age will be increased gradually in two stages, eventually reaching 67 in 2027. Thus, the early bird will receive even more checks than the retiree who bides his or her time for full benefits. 

If the early bird also did not need the benefit income and chose to invest instead of spending the checks, then the investment income would partially offset the reduced yearly benefit as well as extend the catch-up period for the normal-retirement-age collector. Sounds like most people would opt to be early birds. 

Delaying retirement benefits beyond normal retirement age until age 70 also will increase the size of the benefit due to a credit provided by the Social Security Administration for such patience. Further, for those born after 1937 who choose to begin receiving benefits at age 62, the reduction-in-benefits penalty is further stiffened, from 20% to an eventual 30% in 2022. The hare will feel the tortoise closing even quicker. 

Q Could you explain whether it is generally better to take Social Security benefits at 62 or wait until 65 or even 70?

Social Security benefit timing can have big impact

 Donating your IRA assets to a worthy cause while you are living is a pretty simple undertaking. Just take a distribution and donate it to charity. After all, that's the only way to do it, right? For certain taxpayers, it's not that simple anymore. The recently enacted Pension Protection Act of 2006 (PPA) gives some taxpayers a more attractive alternative. 

The second ceiling is based on AGI. When AGI exceeds $150,500 for all filers-except married taxpayers filing separately-for 2006 and $75,250 for married taxpayers filing separately, then charitable deductions are reduced by 2% (for 2006 and 2007; it was previously 3%) of the amount by which AGI exceeds this threshold. Other rules come into play, too. The point is, the charitable deduction will not completely offset the income tax obligation on the IRA withdrawal. 

Some specific criteria must be met for the donation to qualify, however: the qualified charitable donation must be made after the donor taxpayer has attained age 70 1/2, the charity must be qualified, and the withdrawal must be paid directly to the qualified charity from the IRA. 

Other requirements can't be addressed adequately in this brief article, and this attractive new law is only in effect for 2006 and 2007. 

Many factors must be addressed when deciding whether to make a lifetime donation of IRA assets or non-IRA assets, including the availability or lack of state income tax breaks, the fact that the new law does not apply to donations from a simplified employee pension plan (SEP IRA or Simple IRA), and ability to itemize deductions. When considering whether to take advantage of this law, consult your financial planner. 

When considering whether to take advantage of this law, consult your financial planner.

John J. Grande, CFP?

Articles

Reverse mortgage might ease burden of fixed income

Social Security benefit timing can have big impact

New rules pertain to donating IRA assets to charity

Create asset protection plan to protect wealth

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