Finance

The Wrong Power of Attorney Could Lead to a Bad Outcome

There are two different types of advance directives, and they have very different purposes, as explained in the article that asks “Does your estate plan use the right type of Power of Attorney for you?” from Next Avenue. Less than a third of retirees have a durable power of attorney, according to a study done by the Transamerica Center for Retirement Studies. Most people don’t even understand what these documents do, which is critically important, especially during this Covid-19 pandemic.

power of attorney
Having the right Durable Power of Attorney makes all the difference.

Two types of Durable Power of Attorney for Finance. The power of attorney for finance can be “springing” or “immediate.” The Durable Power of Attorney refers to the fact that it will endure after you have lost mental or physical capacity, whether the condition is permanent or temporary. It lists when the powers are to be granted to the person of your choosing and the power ends upon your death.

The “immediate” Durable Power of Attorney is effective the moment you sign the document. The “springing” Durable POA does not become effective, unless two physicians examine you and both determine that you cannot manage independently anymore. In the case of the “springing” POA, the person you name cannot do anything on your behalf without two doctors providing letters saying you lack legal capacity.

You might prefer the springing document because you are concerned that the person you have named to be your agent might take advantage of you. They could legally go to your bank and add their name to your accounts without your permission or even awareness. Some people decide to name their spouse as their immediate agent, and if anything happens to the spouse, the successor agents are the ones who need to get doctors’ letters. If you need doctors’ letters before the person you name can help you, ask your estate planning attorney for guidance.

The type of impairment that requires the use of a Power of Attorney for finance can happen unexpectedly. It could include you and your spouse at the same time. If you were both exposed to Covid-19 and became sick, or if you were both in a serious car accident, this kind of planning would be helpful for your family.

It’s also important to choose the right person to be your POA. Ask yourself this question: If you gave this person your checkbook and asked them to pay your bills on time for a few months, would you expect that they would be able to do the job without any issues? If you feel any sense of incompetence or even mistrust, you should consider another person to be your representative.

If you should recover from your incapacity, your Power of Attorney is required to turn everything back to you when you ask. If you are concerned this person won’t do this, you need to consider another person.

Broad powers are granted by a Durable Power of Attorney. They allow your representative to buy property on your behalf and sell your property, including your home, manage your debt and Social Security benefits, file tax returns and handle any assets not named in a trust, such as your retirement accounts.

The executor of your will, your trustee, and Durable Power of Attorney are often the same person. They have the responsibility to manage all of your assets, so they need to know where all of your important records can be found. They need to know that you have given them this role and you need to be sure they are prepared and willing to accept the responsibilities involved.

Your advance directive documents are only as good as the individuals you name to implement them. Family members or trusted friends who have no experience managing money or assets may not be the right choice. Your estate planning attorney will be able to guide you to make a good decision.

Reference: Market Watch (Oct. 5, 2020) “Does your estate plan use the right type of Power of Attorney for you?”

Did You Inherit a House with a Mortgage?

When a loved one dies, there are always questions about wills, inheritances and how to manage all of their legal and financial affairs. It’s worse if there’s no will and no estate planning has been done. This recent Bankrate article, “Does the home you inherited include a mortgage?,” says that things can get even more complicated when you inherit a house with a mortgage.

inherit a house with a mortgage
There are several options available to anyone who inherits a house with a mortgage.

Heirs often inherit the family home. However, if it comes with a mortgage, you’ll want to work with an estate planning attorney. If there are family members who could become troublesome, if houses are located in different states or if there’s a lot of money in the estate, it’s better to have the help of an experienced professional.

Death does not mean the mortgage goes away. Heirs need to decide how to manage the loan payments, even if their plan is to sell the house. If there are missing payments, there may be penalties added onto the late payment. Worse, you may not know about the mortgage until after a few payments have gone unpaid.

Heirs who inherit a house with a mortgage have several options:

If the plan is for the heirs to move into the home, they may be able to assume the mortgage and continue paying it. There may also be an option to do a cash-out refinance and pay that way.

If the plan is to sell the home, which might make it easier if no one in the family wants to live in the home, paying off the mortgage by using the proceeds from the sale is usually the way to go. If there is enough money in the estate account to pay the mortgage while the home is on the market, that money will come out of everyone’s share. Here again, the help of an estate planning attorney will be valuable.

Heirs who inherit a house with a mortgage also have certain leverage when dealing with a mortgage bank in an estate situation. There are protections available that will provide some leeway as the estate is settling. More good news—the chance of owing federal estate taxes right now is pretty small. An estate must be worth at least $11.58 million, before the federal estate tax is due.

There are still 17 states and Washington D.C. that will want payment of a state estate tax, an inheritance tax or both (Florida is not one of them). There also might be capital gains tax liability from the sale of the home.

If you decide to take over the loan, the lender should be willing to work with you. The law allows heirs who inherit a house with a mortgage to assume a loan, especially when the transfer of property is to a relative. Surviving spouses have special protections to ensure that they can keep an inherited home, as long as they can afford it. In many states, this is done by holding title by “tenancy by the entireties” or “joint tenants with right of survivorship.”

When there is a reverse mortgage on the property, options include paying off or refinancing the balance and keeping the home, selling the home for at least 95% of the appraised value, or agreeing to a deed in lieu of foreclosure. There is a window of time for the balance to be repaid, which may be extended, if the heir is actively engaged with the lender to pay the debt. However, if a year goes by and the reverse mortgage is not paid off, the lender must begin the foreclosure process.

Nothing changes if the heir is a surviving spouse, but if the borrower who dies had an unmarried partner, they have limited options, unless they are on the loan.

What if you inherit a house with a mortgage that is “underwater,” meaning that the value of the inherited home is less than the outstanding mortgage debt? If the mortgage is a non-recourse loan, meaning the borrower does not have to pay more than the value of the home, then the lender has few options outside of foreclosure. This is also true with a reverse mortgage. Heirs are fully protected, if the home isn’t worth enough to pay off the entire balance.

If there is no will, things get extremely complicated. Contact an estate planning attorney as soon as possible.

Reference: Bankrate (Oct. 22, 2020) “Does the home you inherited include a mortgage?”

C19 UPDATE: Guide to Resources Available for Small Business Disaster Relief

If the coronavirus pandemic has hurt your business, visit the US Chamber of Commerce resource site for a wealth of resources to help your business survive.

Priority reading on this site includes

Other resources include expert articles on business strategy and analysis, technology, managing a remote team, and their Coronavirus Response Toolkit, with shareable graphics and helpful information suitable for posting to social media to help boost your business’s visibility online.

Resource: Coronavirus Small Business Guide, https://www.uschamber.com/co/small-business-coronavirus

Can I Trade Options in My Roth IRA?

There are opportunities to trade options using Roth IRAs, but investors must follow many of the same rules that apply to traditional IRAs.

From the time they were introduced, Roth IRAs were quickly adopted by many Americans. The appealing features: you pay taxes on contributions, but generally not on withdrawals, and not on capital gains in the future. It’s a good option for those who expect taxes to be higher after retirement. However, there’s even more that you can do with a Roth IRA.

MP900422543In Investopedia’s article,“Trading Options in Roth IRAs,” the use of options in Roth IRAs and some important considerations for investors are examined. Unlike stocks themselves, options can lose their entire value if the underlying security price doesn’t reach the strike price. This makes them much more risky than the traditional stocks, bonds, or mutual funds that are typically in Roth IRA retirement accounts.

Although risky, there are situations when they might be good for a retirement account. Put options can be used to hedge a long stock position against short-term risks, by locking in the right to sell at a certain price. Covered call option strategies can be used to generate income, if an investor is okay selling her stock.

Many of the riskier strategies in options aren’t permitted in Roth IRAs, because retirement accounts are designed to help individuals save for retirement—not become a tax shelter for risky speculation. Investors should understand these restrictions to avoid issues that could have potentially costly consequences. IRS Publication 590 has several of these prohibited transactions for Roth IRAs. The most important is that funds or assets in a Roth IRA can’t be used as security for a loan. Since it uses account funds or assets as collateral by definition, margin trading usually isn’t allowed in Roth IRAs to comply with the IRS’ tax rules and avoid any penalties.

Roth IRAs also have contribution limits that may prevent the depositing of funds to make up for a margin call, placing more restrictions on the use of margin in these accounts. In addition, the IRS rules imply that many different strategies are off-limits, such as call front spreads, VIX calendar spreads and short combos. These all involve the use of margin.

It’s also important to note that different brokers have different regulations, when it comes to what options trades are permitted in a Roth IRA. The brokers permitting some of these strategies, have restricted margin accounts, where some trades that traditionally require margin are permitted on a limited basis.

A word of caution: these strategies depends on separate approvals for certain types of options trades, and some may not be permitted. Traders need to have substantial knowledge and experience to avoid taking on too much risk. Remember that Roth IRAs were not designed for active trading. An experienced investor may be able to use stock options to hedge their portfolios against losses, or generate income. However, if you are using your Roth IRA funds as a speculative tool, you may want professional input to ensure that you are not creating problems with the IRS, or putting your retirement at risk.

Reference: Investopedia “Trading Options in Roth IRAs”

How Does a Corporate Trustee Differ From a Family Member?

Most of us consider naming a friend or relative with a background in finance or law to be a trustee for our family, but there is an alternative that is important to consider.

A corporate trustee will have a very different approach to managing a trust, and depending on your situation, may be a far better choice than a family member or friend. They’ll bring sound investment management skills and knowledge, minus the distractions of emotions.

MP900422638The Dallas Business Journal’s recent article, “Fiduciary investment management and corporate trustees,” explains that one of the many benefits of appointing a corporate trustee, is that they are held to a fiduciary standard of care when managing a trust investment portfolio. That means that they’re legally required to place their client’s interests above their own when making investment decisions. While this may seem like a no-brainer, it’s not the rule for all financial professionals.

While an individual trustee is held to the same fiduciary standard of care, they often don’t possess the same level of professional investment expertise and resources that a corporate trustee does.

There are a few factors to consider from an investment standpoint, when selecting a corporate trustee. The most important consideration is that a corporate trustee should take the time to do an in-depth analysis to fully understand the client’s short-term and long-term goals, as well as the clients’ current situation and foreseeable liquidity needs and risk tolerance. This will give the trustee the necessary foundation, upon which to build a prudent and diversified investment portfolio.

Deciding on the right investment allocation is just the initial step in the continuing process of managing the investment portfolio appropriately. In addition to looking at an investment’s historical performance, he or she should perform ongoing research and oversight to gather information and implement decisions, based on the future economic outlook with respect to current market conditions. The trustee should practice due diligence in implementing any new investments and continue overseeing a client’s existing investments to be certain the objectives continue to be in sync with those of the trust.

Everyone’s circumstances change, and developing a close relationship with the chosen trustee, and keeping the trustee up-to-date about important events and happenings will help ensure the trust is able to support the beneficiaries in a time of need, while still being able to accomplish long-term goals.

Before you select a corporate trustee, conduct in-depth research on the bank or trust company. Understand their fee structure from the beginning to the end of their appointment. Get a clear picture of how the organization works and whether or not you and your heirs will be comfortable with the institution, as well as the individuals involved.

Reference: Dallas Business Journal (September 24, 2018) “Fiduciary investment management and corporate trustees”

Teach Your Children Early About Retirement Planning

Most young adults are not thinking about retirement when they get their first jobs, but starting early, even if on a very small scale, can make a big difference.

Most young adults are not thinking about retirement when they get their first jobs, but starting early, even if on a very small scale, can make a big difference.

Th (1)When you are working to pay off student loans and trying to save enough to get a place of your own, retirement takes a backseat, saysThe Milwaukee Community Journal, “How parents can help their kids with retirement.” About 66% of millennials haven’t set aside any money for retirement, according to a report from the National Institute on Retirement Security. However, parents can counsel their young adult children on how and why to start a retirement plan now, before it gets to be an issue. Many workers early in their careers think retirement isn’t worth considering because it’s so far off, and they have other obligations. But getting a late start is a big mistake, because they’re missing out on years of compounding returns.

Here are five tips parents can give their young adult children to help them to begin planning for retirement:

Get Going. Explain the importance of starting retirement savings when the new job starts. Although their beginning salary is low, and they have bills, they need to make saving a disciplined habit. Start small.

Understand the Basics.Linking retirement planning’s importance to a new job gives a child the opportunity to get ahead financially and can instill pride in learning some retirement basics. Young workers should learn the purpose of target-date funds, which automatically adjust how a person’s money is invested, based on their age and how near they are to retirement.

Jump on the 401(K).With pensions all but gone, kids should understand this great way to save and the importance of a 401(k) company match.

Up Contributions Over Time.You should save between 10-15% of your pay for retirement. That is usually a lot for someone in their 20s, but you can work toward it by increasing your contribution by one or two percentage points every time you get a raise.

Stay on an Honest Budget.Help them learn to budget money with three categories: give, save, and spend.  This will help them to learn how rewarding it is to set a savings goal and to regularly put aside money to reach it. This is the basis for successful retirement investing.

It’s easier to understand the importance of saving for retirement, when it is around the corner. That makes parents the best candidates to talk with their children about getting an early start on retirement investing. It can also segue into a larger discussion about parental finances and estate planning. These are all important conversations.

Reference: Milwaukee Community Journal(June 13, 2018) “How parents can help their kids with retirement”

Barred Broker and Megachurch Pastor Charged with Defrauding Elderly Churchgoers

Trusting members of the Houston church were scammed out of millions.

Trusting members of the Houston church were scammed out of millions. Instead of real financial investments, they were sold memorabilia.

MP900202201The pastor of one of the largest Protestant churches in the country, a barred broker and an attorney have been charged by the SEC (Securities and Exchange Commission) with defrauding elderly members out of $3.4 million. They were sold interests in what turned out to be worthless pre-Revolutionary Chinese bonds.

Think Advisor’sarticle, “Megachurch Pastor, Banned Broker Nabbed for Defrauding Elderly Churchgoers,”explains that the SEC’s complaint alleges that, in 2013 and 2014, Kirbyjon Caldwell, senior pastor at Windsor Village United Methodist Church in Houston, and Gregory Alan Smith, a self-described financial planner, who the Financial Industry Regulatory Authority (FINRA) barred from the broker-dealer business after his firing in 2010, targeted vulnerable and elderly investors with false claims that the bonds—collectible memorabilia with no meaningful investment value—were worth millions of dollars.

The SEC also brought actions against their attorney, Shae Yatta Harper. She’s charged with aiding and abetting their fraud.

According to the complaint against Harper, at the pastor’s instruction, “Harper drafted participation agreements in the bonds that were sent to investors,” and she also “controlled the bank account to which most investors sent their funds to invest in this investment opportunity, and distributed investor funds to Caldwell and Smith at their direction.”

Between April 2013 and August 2014, the complaint says the defendants raised at least $3.4 million through a scheme to defraud nearly 30 investors through the fraudulent offer and sale of the bonds. Some of the elderly participants liquidated their annuities and savings to participate in the scheme.

Caldwell has been a board member of various public companies. He currently serves on the board of NRG Energy, which is traded on the New York Stock Exchange. The pastor also acted as a director to a mutual fund complex during the time of the scheme. Caldwell and his wife are the co-owners of LDT LLC, a Wyoming limited liability company that received and held money from investors.

Smith, who is from Shreveport, Louisiana, was associated with a registered broker-dealer from December 1999 to July 2010, according to prosecutors. He was permanently barred from association with any FINRA member in any capacity in July 2010 for commingling investor funds in his business account and for misappropriating investor funds.

Caldwell took advantage of the trust placed in him by elderly churchgoers, exploiting their trust in an example of outright fraud and greed.

Reference: Think Advisor (March 30, 2018) “Megachurch Pastor, Banned Broker Nabbed for Defrauding Elderly Churchgoers”

Making a Financial Plan? Watch Out for These Mistakes

A failure to plan is a big reason why many people’s financial goals are missed, year after year, until it’s too late to fix things.

You wouldn’t fly a plane without a flight plan. The same is true for a financial plan. You need to know where you want to go, and how you are going to get there.

MP900303002A failure to plan is a big reason why many people’s financial goals are missed, year after year, until it’s too late to fix things. Those who succeed in investing, are more likely to be people who create and follow a long-term, well-thought out financial plan.

Arecent article in Forbes, “3 Common Mistakes to Avoid When Making A Financial Plan,”describes these miscues:

  1. Not Creating a Comprehensive Plan. A major error most people make when creating a financial plan, is that their plan is too narrow. A sound financial plan is comprehensive in nature and covers all areas of your life, rather than only a single area like an investment portfolio. It should address tax issues, risk management, estate planning, and long-term care needs. These are all vital when creating a solid long-term financial plan.
  2. Creating a Balanced Portfolio but Never Re-Balancing. Another frequent mistake people make is creating a balanced portfolio—and then not re-balancing it on a regular basis. You should maintain the portfolio balance, as the market ebbs and flows. The original portfolio can and will change over time, as events like market rallies naturally increase overall equity exposure, or retirees take required minimum IRA distributions that may cause an over- or underweight to equities.
  3. No Follow-Through. The third mistake commonly committed by investors when creating a financial plan, is that they spend time creating their plan, but they don’t follow-through and act. You must implement your plan.

These are far from the only classic investment mistakes that people commonly make. Others are selling into a down market, failing to follow through their financial plans, trying to time market swings and reacting to short term trends. Create a financial plan with the long-term in mind, execute the plan and remember that a portfolio needs tending like a garden, as you proceed through the seasons of life.

Reference: Forbes(April 6, 2018) “3 Common Mistakes To Avoid When Making A Financial Plan”

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