Final Words on Debt

If you have incurred inefficient debt, one method of eliminating It is to transfer the debt to your home equity. Many people are reluctant to use their home equity to consolidate other debt. This reluctance really stems from a mind-set that is behind the times. Certainly, 30 years ago, if people refinanced their home or took out a second mortgage, you can be sure the neighbors were talking behind their backs about their financial woes. But using your home’s equity is economically wise.

It provides low Interest rates, a tax deduction, and an extended amortization.

However, even this form of debt should not be used recklessly. Defaulting on a mortgage of any kind has greater consequences than defaulting on consumer loans. Mortgage loans are secured by your home, which means that if you can’t make payments, you will lose your home. Consumer credit lenders cannot take such drastic remedies.

Avoid all other kinds of debt, including the high-risk debt of stock margin purchases and stock and commodity options. Leave those investments to the professional gamblers. Otherwise, buy only what you can pay for with cash.

Final words on debt. When to use it: rarely. How to use it: to increase your net worth or long-term quality of life, not to buy more things…

Vacation Properties and Income – Part 2

Another way for retirees to generate income from a vacation home is to sell it. By using the federal capital gains exclusion in conjunction with the sale of your primary residence, you can potentially realize tax-free income. Here’s how it works. The basic capital gains exclusion rules state that you must have owned and used the home as your primary residence for at least two years out of the five-year period ending on the date of the sale. If you are married, the full $500,000 exclusion ($250,000 for single homeowners) is available as long as one or both of you satisfies the ownership test (two years) and you both satisfy the use test (primary residence).

Vacation Properties and Income – Part 1

If you have a vacation home, you’re already aware of the enjoyment it provides and the benefits it can offer at tax time. But you may not be aware of how vacation property can be used to generate income in retirement or how it can play into an estate plan. In fact, vacation properties offer retirees a number of different options in managing their finances and estate.
Vacation property may be used to generate income in several different ways. The first, and most obvious, is renting it. The IRS allows you to deduct mortgage interest on your primary residence and one additional property up to a limit of $1 million in combined mortgage debt for mortgages taken out after 1987. Current tax rules also allow you to rent out a second home for up to 14 days per year without having to report the rent as income. If you rent for more than 14 days, the home is considered investment property, and rent must be reported as income. Converting the property to an investment property, however, allows you to deduct rental expenses, such as insurance and utilities, if you have a net profit on the property (deductions are limited if you report a loss). You can still use an income-producing property for personal use while maintaining your tax advantages — but only for the greater of 14 days or 10 percent of the total days it is rented. Maintenance days do not count as personal-use days, but use by in-laws or other part-owners does, even if rent is charged.

Simple Truths

As a financial advising firm, one of the simple truths we have learned is that relationships are the single greatest influence on how people use their money and plan for the future. When people talk about their hopes and dreams, they talk about the people they love. Their future, the life they wish to live, is always full of the people most important to them. They don’t talk first about dollars and cents, Dow averages, or bond yields. They talk about a spouse, a parent, a child. When imagining their financial futures, even those without family often focus on others, such as employees, friends, faith communities, and charities.

Keeping Your Emotions in Check…

In times like these, with the economy in a tailspin, and the stock market in the tank, investing requires an extra dose of patience, perseverance and perspective.
It takes patience to ride out the bear market, perseverance to continue to invest even through a difficult economy, and perspective to see the long-term picture and realize that recessions and bear markets are just part of the natural economic cycle. Slumping economies and bear markets of the past have always turned around — and there is no reason to believe that this time will be any different.

Saving for College

Saving for College
Another school year is around the corner and your children or grandchildren are that much closer to college. If you haven’t already started to save for their college costs, this may be a good time to talk to your adviser about setting up a tax-sheltered college savings plan.
By planning ahead, you can use a 529 college savings plan to give your children a head start on their college costs. There are two types of 529 plans: college savings plans and prepaid tuition plans.
College savings plans are state sponsored investment accounts that allow participants to contribute regularly. A 529 plan account grows tax-deferred and withdrawals from the plan for qualified educational expenses are exempt from federal income tax. There are no income limits.

Tips When Planning Your Finances

Don’t Sell Yourself Short

Planning is the only way to make sense of the five things you can do with money. If you don’t plan, you will likely spend more, save less, invest less, and do nothing to reduce your taxes.

Don’t sell yourself short by planning your retirement based on some arbitrary percentage of your income. “Needs planning” is a good start for someone who has given no thought to retirement savings. It’s one way to convince people that they should save something, but it’s not good for people who want to do better than just get by. Don’t settle for mediocrity in your investment planning; try to excel. It’s fine to set a floor for what you will need, but then aim higher—and plan to get there! Become a “wants” planner, instead of a “needs” planner. Only when you determine what you want from life can you determine the role that money will play in helping you achieve your dreams.

Home Equity’s Advantages

A Debt like No Other

If you have incurred inefficient debt, one method of eliminating it is to transfer the debt to your home equity. Many people are reluctant to use their home equity to consolidate other debt. This reluctance really stems from a mind-set that is behind the times. Certainly, 30 years ago, if people refinanced their home or took out a second mortgage, you can be sure the neighbors were talking behind their backs about their financial woes. But using your home’s equity is economically wise. It provides low interest rates, a tax deduction, and an extended amortization.

However, even this form of debt should not be used recklessly. Defaulting on a mortgage of any kind has greater consequences than defaulting on consumer loans. Mortgage loans are secured by your home, which means that if you can’t make payments, you will lose your home. Consumer credit lenders cannot take such drastic remedies.

Avoid all other kinds of debt, including the high-risk debt of stock margin purchases and stock and commodity options. Leave those investments to the professional gamblers. Otherwise, buy only what you can pay for with cash.

College Tuition Planning and Wealth Management

Using 529 Plans to Invest for College and Manage Wealth

Paying for a child’s or grandchild’s college education is an expensive proposition, even for many high-net-worth Americans. Today’s elite institutions promise graduates a rewarding future, but at a cost that more often than not extends well into six figures. Enter the 529 plan, a tax-advantaged investment vehicle generally available to families regardless of their income level. For affluent parents and grandparents, a 529 plan offers a variety of potential benefits — including some that go beyond the scope of college planning. A 529 plan may in fact play an integral role in an estate plan.

Named for the section of the Internal Revenue Code that authorized them, 529 plans allow investment earnings to grow sheltered from federal income taxes, and withdrawals used to pay for qualified education expenses are tax free. But for parents or grandparents concerned about estate taxes, 529 plans may be even more valuable, supporting a long-term gifting strategy while still providing significant control over assets that have been removed from a taxable estate.

First and Foremost, a College Savings Tool…
Before you consider the potential role of a 529 plan in your estate plan, it’s important to understand a few basics.

There are two types of 529 plans — prepaid tuition plans, which let you lock in tomorrow’s tuition at today’s rates, and college savings plans, which let you choose from a menu of investments and offer more return potential, as well as risk. Both types of plans are generally sponsored by a state government (although tax law permits certain educational institutions to sponsor prepaid tuition plans) and administered by one or more investment companies.

With a 529 college savings plan, the underlying investment options are typically managed by mutual fund companies. Many plans offer age-based asset allocation portfolios that become more conservative as the beneficiary grows older. Others let account owners choose from individual investment options to create a customized portfolio.

Originally, 529 plans offered the benefit of tax-deferral — taxes on earnings weren’t due until withdrawal and then only at the beneficiary’s rate. But qualified withdrawals are now federally tax free.

Eligibility to contribute to a 529 plan is not limited by age or income. In addition, total plan contribution limits often exceed $200,000.

Withdrawals can be used to pay for undergraduate or graduate school expenses. Withdrawals for purposes not related to paying qualified education expenses are subject to ordinary income taxes and a 10% penalty tax.

Finally, remember that you are not limited to participating in your home state’s 529 plan — you can participate in national plans sponsored by other states as well. Be aware that your home state’s 529 plan may have state income tax consequences. Consult with a tax advisor before investing in a plan.

…But With Valuable Estate Planning Potential
The IRS clearly had college planning in mind when it drafted Section 529 of the Internal Revenue Code. However, it also left the door open to use 529 plans as estate planning tools. That’s because a contribution to a 529 plan is considered a completed gift from the donor to the beneficiary named on the account, even though the account owner, not the beneficiary, maintains control over the money while it’s in the account. Tax rules permit you to give $12,000 (indexed to inflation) to as many individuals as you choose each year, free from federal gift taxes. Couples can give $24,000 without incurring taxes. As a result, one method of reducing a taxable estate is to make scheduled gifts up to the tax-free limits each year. You might give $12,000 to each grandchild on an annual basis, for example.

That’s where 529 plans come in: The first $12,000 you contribute each year per beneficiary won’t come back to bite you, as long as you haven’t made any additional taxable gifts to the beneficiary in that year. You can also accelerate your gifting schedule by electing to make a lump-sum contribution of $60,000 to a 529 plan in the first year of a five-year period ($120,000 for a couple). Of course, you wouldn’t be able to make additional taxable gifts to that beneficiary during the five-year period. And if you use the five-year averaging election and die before the five years are up, a prorated portion of the contribution may be considered part of your taxable estate.

But the wealth transfer potential can be substantial: An individual who has five grandchildren could immediately remove up to $300,000 from his or her taxable estate by contributing the money to five separate 529 plan accounts. Five years later, he or she could do it again.

Smart Shopping: Making the Right Decision
If you decide that a 529 plan deserves further consideration, keep in mind that there are often important differences between the plans offered by each state. For example, lifetime contribution limits can vary widely from state to state. The limits are often based on average college costs within the sponsoring state. In calculating those averages, some states assume that not just undergraduate expenses are incurred, but graduate expenses as well.

Also, some plans offer relatively few investment options, while others may give you a wide range of investment choices managed by specially selected sub-advisors. Evaluate the performance of the investment options offered by specific plans. Compare the fees and expenses each plan charges too. And finally, keep in mind that some states offer in-state residents a tax deduction when they make a 529 plan contribution.

You Stay in Control
It’s worth emphasizing: Although the assets contributed to a 529 plan are no longer considered part of your taxable estate, you still exercise control over the money. You decide how it will be invested — within the confines of the plan’s available investment options — and when it will be withdrawn. You also have the right to change beneficiaries, in the event that the original beneficiary decides not to attend college, for example. And doing so generally won’t trigger tax consequences if you choose a beneficiary who is a member of the original beneficiary’s family. (As spelled out in Section 529, qualified family members include the beneficiary’s brothers or sisters, mother or father, sons or daughters, and nieces or nephews, among others.) If there isn’t another suitable beneficiary, you also have the option of closing the account and taking the money back, although earnings will be subject to income taxes, as well as a 10% penalty.

When choosing a 529 plan, you’ll need to look beyond estate planning considerations. There are dozens of plans available and their features and rules can vary greatly. To help narrow down the choices, consider working with a qualified financial professional. And be sure to consult with an estate planning attorney or tax professional before making any decisions that could affect your tax liability.

Points to Remember
1. State-sponsored Section 529 college savings plans have the potential to double as high-powered estate planning tools. Any assets you contribute to a 529 plan account are removed from your taxable estate and pass into the plan free of federal gift taxes, up to an annual limit of $12,000 ($24,000 per couple.)
2. The IRS will allow you to make five years’ worth of tax-free gifts in one year, but only once every five years. That means you can contribute up to $60,000 at once ($120,000 per couple), helping to finance a beneficiary’s education while simultaneously minimizing potential estate tax obligations.
3. Although the assets gifted to a 529 plan are removed from your estate, you retain control over investment, withdrawal, and beneficiary decisions.
4. 529 plan contributions and investment earnings can be withdrawn tax free as long as the money is used for qualified education expenses. If you make withdrawals for non-education purposes, you must pay ordinary income taxes and a 10% penalty.
5. Shop wisely before selecting a 529 plan. For example, compare fees, investment options, and lifetime contribution limits.

Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.

Copyright © 2008, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.

Remodeling Your Home

Making Your Home’s Equity Work For You

When do you know it’s time to make some major changes in your home? Most likely when you can’t bear to look at your old bathroom fixtures and cracked tiles or the outmoded kitchen cabinets and shabby vinyl floor. Or it could be that you need some additional space to accommodate your growing family. Regardless of your reasons, you’re certainly not alone when it comes to remodeling your home.

Demand Drives New Products and Services
Even when the stock market falters or mortgage rates rise, economists seem to agree that home building will continue to grow because rising home prices permit the homeowner’s equity to be reinvested. As a result, renovations have become more upscale and home remodeling businesses have expanded to meet the demand for more sophisticated projects.

The Open Kitchen
The most popular remodeling job is for the kitchen, which also leads in adding resale value to the home, according to Remodeling Magazine. One of the hottest trends is the “open design” kitchen, which is incorporated into the overall living area of the dining room, den and/or living room. Additionally, kitchens are being rebuilt larger to accommodate more people, food preparation, and storage. Space is being designed more efficiently with rollout shelves, lazy Susans, trash compactors, recessed lighting, and underground cook-top venting. Many designs include dual work areas with separate sinks and cutting areas or large granite “islands” doubling as preparation and dining surfaces. Skylights, dimmable lighting, stainless steel appliances, and wine coolers make the kitchen an attractive setting for entertaining guests while preparing a meal.

Manufacturers have developed many efficient appliances to meet the needs of the time-challenged consumer. For example, there are convection ovens that move heated air directly onto the food instead of into the oven cavity, reducing cooking time up to 25%. And at least one manufacturer offers an oven that uses intense light to reduce cooking time. Meanwhile, the so-called smart appliances on the market can interact with your computer, so you can activate or control the dishwasher, oven, heating/air conditioning, or Jacuzzi over the Internet.

The Lavish Bath
Bathroom improvements are also extremely popular with homeowners, who are eager to sacrifice their small spare bedrooms to make way for huge bathing areas that often include a hot tub, separate shower, dual sinks, heated towel racks, bidets, and lavish marble floors and countertops. Moreover, ceilings are often being raised to the roof to create an atrium look with skylights and small trees, and it is not uncommon to find dedicated telephones for the toilet and the Jacuzzi.
Remodeling Resources

􀁺 U.S. Department of Housing and Urban Development, Washington, DC (202) 708-1112, www.hud.gov
􀁺 NAHB (The National Association of Home Builders) Research Center (800) 638-8556, www.nahbrc.org
􀁺 National Kitchen and Bath Association (800) 843-6522, www.nkba.org
􀁺 National Association of the Remodeling Industry (800) 611-6274, www.nari.org
􀁺 Remodeling Online, www.remodeling.hw.net
􀁺 Canadian Home Builders’ Association, www.chba.ca
􀁺 Better Homes and Gardens, www.bhg.com
􀁺 Home Ideas, www.homeideas.com
􀁺 Home Doctor, www.homedoctor.net

The New Home Worker’s OfficeAn office at home is also in demand now, as workers choose to “commute” from home — saving time, dry-cleaning bills, and transportation hassle and expense to become more productive and efficient. Since electronic communication can deliver corporate office and customer site meetings at home, an attractive, workable home office is needed to accommodate this new work culture.

How to Finance Renovations

Home equity loan: Line of credit, at fixed or adjustable rates. Interest generally tax deductible on principal up to $100,000. Banks, credit unions, other lenders.

Second mortgage/refinanced mortgage: Based on percentage of home value minus amount owed on first mortgage. Fixed rate. Interest generally tax-deductible on principal up to $100,000. Banks, credit unions, finance companies.

FHA Title 1 Home Improvement Loan: up to 20 years. Home improvement lenders.

Cash value life insurance/profit sharing plans: Interest not tax deductible. Insurance companies, employers.

Buyer Beware
While these innovations are impressive, so are the costs. A standard kitchen redesign can run $20,000 to $40,000. Add in granite countertops and special appliances, and the price can climb well over $60,000. Although time-saving and fun, these new appliances can cause sticker shock, so comparison shop.

But before you even think about making a home improvement, you need to find a reputable contractor, and that may not be easy. Even if you know one, a reputable contractor may have a long list of projects. It may take months or even years to start the work, as the boom in home renovation demand often exceeds contractor availability.

And then there are some horror stories to give you pause. For example: A homeowner [in Canada] wanted his fire-damaged house renovated. The contractor asked to be paid in cash to avoid workman’s compensation and taxes. The homeowner agreed, hoping to save a few bucks. Later, he found the work unsatisfactory and, unable to work things out with the contractor, decided to sue. The court did assess damages, but held that because the homeowner had participated in an illegal agreement [to avoid taxes], his right to receive compensation from the contractor was voided.

Other common stories include contractors who never show up; contractors who start the job and then disappear for weeks (leaving portions of the house open and exposed to the elements); and contractors who fail to return at all and never finish the job. Of course, then there’s the contractor who does shabby work that’s not up to code. Since the work can’t pass inspection, sometimes the whole job needs to be redone.

In response to these scenarios, the American Financial Services Association (AFSA) has developed a voluntary standard designed to protect against home improvement scams. Under AFSA guidelines, members who provide financing agree not to make final payment until they receive a certificate signed by the homeowner and contractor acknowledging satisfactory completion of the work.

The best and most obvious way to avoid problems is to get the contract in writing. A worker injured on the job without workman’s compensation insurance could sue you personally. There may also be complications with your homeowner’s insurance if the contractor is not properly licensed. Without a contract, you have no recourse against shoddy work, work not done as specified, cost overruns, and potential legal proceedings.

A written contract will state the proper building materials to be used and that warranties from manufacturers be honored. Additionally, it will specify exactly how “change orders” from the homeowner will be handled by the contractor. If your contractor is interested in cheating or cutting corners, chances are it could happen on your project. Remember, laws are created to protect both you and the workers. Trying to save money illegally could end up costing you more.

Do Your Homework on Your Biggest Investment
This may be a great time for home renovations. Sophisticated new appliances and larger living areas can create beautiful, stress-relieving surroundings while also saving you time and money. Banks are eager to make home equity loans, and loan interest is tax deductible as well. So take the time to find a reputable contractor. Do the research, talk to your friends, check references, get several estimates, and most important, get the contract in writing. These simple steps could keep your new dream home from becoming a “money pit.”

Points to Remember
1. Remodeling demand is driving new product technology and costs.
2. Kitchen remodeling ranks first in popularity and resale value.
3. Retain a reputable contractor through references and estimates.
4. Do not proceed without a written contract.
5. Project financing is available through home equity loans, mortgage refinancing, and home improvement loans from banks, credit unions, and insurance and finance companies.

Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.

Copyright © 2008, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.