There are Statistics, and then there are Statistics

On Saturday, February 6, the New York Times had a great article about disability insurance. As a lawyer dedicated to helping people protect their families and businesses, the article shed light where there had been little in the past.

My experience is that disability planning tends to be neglected. Few do it, but nearly everyone should. In an earlier blog entry, I discussed one element of disability; setting aside cash equal to six months to two years of gross income. The New York Times article discusses disability insurance as a legitimate planning tool. The article points out that insurance companies and planners have been overstating the odds of being disabled. For years we have been hearing that a 25-year-old has an 80 percent chance of suffering a disability before age 65 that would result in being out of work for at least 90 days.

As it turns out, for a variety of reasons, this was not accurate. An analysis by the Disability Experience Committee of the Society of Actuaries shows that a 25-year-old actually has a 30 percent chance. Actuaries are high-power mathematicians trained to do these studies.

Personal factors can make your chance even less. White collar workers have less chance. If you have no chronic conditions, eat healthy, and avoid cigarettes, your odds may drop to 10 percent.

Even then, disability planning is important. You may get little or no disability pay from your employer. Social Security may not provide help. It can take more than a year for your claim to be processed. If you have to appeal, it will be much longer. Besides, Social Security disability payments may be too small to cover your needs.

If you are interested in more information on this subject, you can find the original article and additional details here.

Top 10 Facts about the 2010 Homebuyer Credit

If you are in the market for a new home, you can still claim the Homebuyer Credit. Here are 10 important things to know:

1. You must buy – or enter into a binding contract to buy a principal residence – on or before April 30, 2010.
2. If you enter into a binding contract by April 30, 2010, you must close on or before June 30, 2010.
3. For qualifying purchases in 2010, you have the option of claiming the credit on either your 2009 or 2010 return.
4. First-time buyers get an $8,000 credit.
5. You can qualify for a credit if you’ve lived in the same principal residence for any five consecutive year period during the eight year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009. The maximum credit for long time residents is $6,500. However, married individuals filing separately are limited to $3,250.
6. There are income limits to getting the credit in 2010. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers. It phases out between $125,000 and $145,000 ($225,000 and $245,000 for joint filers).
7. Use IRS Form 5405 to claim this credit.
8. No credit is available if the purchase price of the home exceeds $800,000.
9. The purchaser must be at least 18 years old on the date of the purchase. For a married couple, only one spouse must meet this age requirement.
10. A dependent is not eligible to claim this credit.

A Good Real Estate Broker? Priceless.

Some may have gotten the impression from my last blog entry that I don’t value the services of real estate brokers. Nothing could be further from the truth.

Real estate brokers are experts at marketing. They know what buyers in your area are looking for. They know what needs to be done to your property to make sure it sells. They know how to get the word out to buyers and other brokers.

Keep in mind that time is not on your side when selling your house. It needs to be ready for sale from day one. Most sales actually occur in the first 30 to 45 days. That doesn’t mean you won’t sell your house if it has been on the market longer. It just gets harder.

If you don’t like what your broker is telling you about what you should do to your home, ask to be taken on a tour of houses in the area that are your competition. Your broker should be able to show you why he/she is making the recommendations to you. You might also tune into some of the shows on HGTV that address getting properties ready for sale.

Real estate brokers are experts in getting people to write offers. This is a real skill. Buyers want to be sure they are doing the right thing. They will have concerns – about the property, about whether or not they can afford it, about financing, about how the buying process works. Brokers will support them in working through their concerns. They will encourage them to write an offer. This takes time and the seller can rarely do this.

Real estate brokers also provide another invaluable service. Wisconsin law requires them to make sure that buyers who submit offers have the financial ability to buy your property. Generally buyers get a letter from their banker stating that they have money for the earnest money and are eligible to borrow the rest. Sometimes the buyer is preapproved for a mortgage. Make sure you get this information from your broker when you get an offer.

I have always used full-service brokers in selling property and have been glad I did, but I recognize that I need an appraiser when it comes to establishing the fair market value (selling price). I also recognize that when it comes to legal matters (reviewing offers, counter-offers, and the myriad of issues/conflicts that may arise with buyers), an attorney is necessary. Brokers are neither appraisers nor lawyers.

So you want to sell your house?

We are quickly approaching the home selling season in Wisconsin. In my experience, buyers get busy on the first warm sunny weekend in February or March so it’s time to get ready.

What’s the first step? Find out what your home is worth. That means getting it appraised. Yes, that will cost you. In Wisconsin it may be $350 or more but it’s well worth it. You need to know the right price to offer it for sale. Later, when you get an offer, you need a basis for negotiating price.

Many will bypass the appraisal step to their detriment. Frequently they think getting a market analysis from one or more real estate brokers is a fine substitute. It is not. Appraisers are trained and skilled at establishing the fair market values of properties. Real estate brokers are trained and skilled at selling properties. Brokers’ market analyses are really sales tools. They use them to get listings and convince buyers/sellers to take action. They do not use the same procedures and techniques as appraisers.

Because market analyses are sales tools, brokers have a built-in conflict of interest. My past experience with Mrs. H is a good example. Mrs. H wanted to sell her home. I recommended that she get an appraisal. She agreed, but she also wanted to get market analyses from a few brokers. I suggested she wait for the appraisal. What happened next reminded me a lot of “Goldilocks and the Three Bears.”

Three brokers provided market analyses. The first broker said Mrs. H should ask for $560,000. She was not happy. The second broker said Mrs. H should list for $625,000, suggesting that the first broker did not know what she was doing. Mrs. H was much happier. Then she met with the third broker. He said the other brokers were not as experienced as he was, and clearly Mrs. H should list her house for $700,000. Mrs. H was ecstatic. FINALLY someone understood how special her home was. She hadn’t yet received the appraisal, but she signed.

The appraisal came in at $600,000. The property sat without an offer for six months, despite lowering the asking price twice. The week the listing contract was set to expire, the broker brought her an offer for $560,000. Mrs. H was floored and took the property off the market. The following spring, Mrs. H had the property reappraised. She listed it accordingly and got a $600,000 offer in five days.

Brokers will tell you that the most important thing you can do when selling your home is to offer the property at a realistic price right from the start. Your property gets the most exposure and buyer activity when it is first on the market. Lowering the price later is a failing strategy. When a property doesn’t sell, buyers may think there are problems. Besides, it is very hard to get buyers to come back for a second look.

Get an appraisal now so you are ready to talk to brokers and buyers. Get recommendations for appraisers, but not from your broker. Do not use an appraiser who is also a broker. You need someone who is independent, someone whose only income comes from the fees charged for appraisals. A fee-only appraiser has no conflict of interest. Their success is directly tied to establishing an accurate opinion of the fair market value of the property.

Next time I’ll address what brokers bring to the table when selling your property. A good broker makes a difference.

Lessons Lost

Our parents (parents of baby boomers and earlier generations) emphasized savings. We were told that credit was a last resort. There were layaway plans in which desired products were set aside by shop keepers until the price was fully paid in installments. There were Christmas Clubs at the local bank or savings & loan so we could sock a little away each month and have the money for Christmas presents in December. Even most cars were purchased largely with cash (until the early 60s when financing became freely available). About the only thing purchased with credit was houses, but you were expected to have at least 20 percent for the down payment. Again, it wasn’t until the 60s, with the acceptance of mortgage insurance, that people started buying houses with as little as five percent down. And, as we all know, by 2005 purchases were being made with zero down.

Prior generations had two frequently expressed rules. First, you should have at least six months of living expenses saved before you used credit or invested in anything. Second, you should pay off your home mortgage before you retire. With the financial meltdown of the last couple of years, many believe we should return to these principles and this view of credit.

Here’s my take. In order to have a financial safety net, access to cash (financial liquidity) is important. Many of us thought having an equity line of credit was enough. Clearly it is not. Financial institutions called them due during the crisis, leaving borrowers with no way to pay them off much less meet other needs. Our parents were right. You need ready cash available for emergencies. Six months worth may be enough but for us baby boomers I think it should be more.

Because I think having cash is so important, I don’t necessarily agree with the second rule. If you want to stay in your home and have cash protection, the best alternative may be getting a long-term, flat rate mortgage while you are working and still can. This requires some figuring out because you will need to be able to pay the mortgage after you retire, and for as long as you want to stay in your current home. Seeing a good financial planner is recommended.

That’s what I did. I got a 30-year mortgage at age 61. I took enough cash out of my home to pay 2+ years of expenses, and put it in safe, short-term investments. I have always slept well and now I am assured I will continue to do so.

Baby Boomers’ next steps

“Retirement at sixty-five is ridiculous.  When I was sixty-five I still had pimples.” – George Burns

For those of you who are younger, I promise to move on to other things shortly but I first want to complete my thoughts about the current challenges to baby boomers. We have been called the “Me” generation that lives for “now.” What we see in our law practice bears out the conclusions of studies stating baby boomers are not in good shape financially. The recent (current?) recession has made this even worse.

I mentioned previously that one strategy is to continue working past your normal retirement age. This plan has two weaknesses – the availability of good paying jobs and the need for good health. Addressing them will require flexibility.

On the jobs front, we will need to change. Jobs may not be available where we live (or want to live) so we may have to move to where they are located. Probably more important, though, is a willingness to get new training and try new jobs. I recall that when I was in college (a long time ago – my 40^th reunion is this June), a labor economist was fond of emphasizing that big changes were coming. Unlike our parents who may have had only one employer for their entire lives, we were going to face having three to five employers in our lifetimes.  And this was true, but most of us stayed within the same job type or profession. About a decade ago I accompanied my kids to meetings at the high school for vocational counseling. These counselors informed us that the kids would change employers more than five times, and at least half of those employers would be hiring them for jobs that do not even exist now. The meaning of this aside? We need to be aware of the changed economy and get the necessary training to get and keep good paying jobs.

Of course you can only do the job if you are healthy. A report released Wednesday by the Centers of Disease Control and Prevention confirms that 68 percent of adults are too heavy and 34 percent are obese. Being overweight strongly correlates to health problems, but health (and weight) is something we can do something about. It’s hard. It involves lifestyle changes; changes in eating and exercise habits.

I know if I am going to practice law as I have planned (forever if possible), I need to be in good health. I belong to the YMCA and have a personal trainer. Call me in a year. I intend to be a fraction of my current self.

Next time I am going to address some of the financial lessons from the last couple of years that can help – not only baby boomers but everyone.

Continued Travails of a Baby Boomer

Like many, I get my health insurance through my spouse’s employer. It’s great coverage, but things really change when I turn 65 and am eligible for Medicare. I will no longer get coverage. That is not necessarily the result for all employer plans. You need to check the actual policy to be sure.

In any event, I have to make sure I have alternative insurance in place when I turn 65. I don’t want to be like a client I once had who also lost coverage at 65 and assumed that he was automatically enrolled in Medicare. He continued to work and did not apply for Social Security. About three months after turning 65, he had a major medical problem that cost tens of thousands of dollars. That’s when he found out that he did not have insurance and did not have Medicare. He was on the hook for all of it. Needless to say, it put a dent in his retirement plans.

Medicare has four components: Part A is hospital insurance, Part B is medical insurance (physicians, outpatient services, medical supplies and home health care), Part C is the alternative option of managed care, and Part D is the prescription drug benefit.

People are automatically enrolled in Part A when they apply for Social Security. For people like me who are not going to apply for Social Security until later, there is a separate Medicare application. I intend to get started on that application at least 90 days before I turn 65.

I am also going to get Part B. It’s not hard because everyone who gets Part A is automatically enrolled in Part B. You have to decline enrollment if you don’t want it. I am going to enroll in Part B (regardless of whether or not there is coverage under my wife’s insurance at that time) because there is a 10 percent penalty tacked on to the premiums for each 12 months of delay after age 65. I don’t want that additional cost later.

Besides Medicare, I am going to get long-term care insurance and a medigap policy. A medigap policy is health insurance sold by private insurance companies to fill the gaps in Medicare plan coverage. Medicare does not have any really effective benefits for long-term care, whether in the home, assisted living, or a nursing home. Medicare has gaps in coverage (some great names for them… donut holes). These policies will address those gaps.

We are all waiting anxiously for the outcome of the continuing healthcare debate in this country. It’s likely to go on for quite some time. But these are my conclusions for handling the baby boom problem, especially if you are not retiring at 65.

“It takes as much energy to wish as it does to plan.” – Eleanor Roosevelt

Travails of a Baby Boomer

I admit, begrudgingly, that I am a baby boomer and will turn 62 this year. Like many of my generation, I have no intention of retiring. Some are making that decision as a matter of necessity. Others, like me, are continuing to work because they like what they do.

In any case, age 62 (and then 65) requires some real important decisions.

The first decision is whether to start taking Social Security. This decision is laden with fear about the financial soundness of Social Security. You can start at 62. Right out of the box, many will say, “I am going to take Social Security now because Social Security is bankrupt and I want to get as much of my hard-earned money back as I can.” Understandable, but for some this may not make sense. There are other things to consider. If you take Social Security at 62, you get less. How much less? About 20 percent as compared to the amount received if you wait until your full retirement age.

And this reduction affects more than just you. If your spouse will receive Social Security based on your account at your death, then your spouse will also get less.

If you continue working like me, there is another consideration. There is an earnings penalty. If you earn more than a certain amount (It changes, but in 2009 it was $14,160), you lose $1 of every $2 above that amount. There is a different penalty in the year you would have been entitled to get full Social Security benefits. Once you reach full retirement age (66 for me), you can earn any amount without penalty. Besides the penalty, Social Security may be taxable to you. It’s complicated but it depends on your income.
I’ve decided to hold off on Social Security until age 69. The amount I will be entitled to will grow by eight percent between now and then. Plus, my income would wipe out my getting Social Security before the year I turn 68 anyway. And, taking it earlier would hurt my wife in terms of the amount she might receive after my death.

Next topic… Medicare.

Collection of Child Support

Does anyone remember the series that aired in the last couple of years called “Deadbeat Dads” on TODAY’S TMJ4? Investigative reporter John Mercure would search out dads who owed a huge amount of child support. He would confront them on their yachts and ask them why they weren’t paying. Entertaining TV, but it is more than that. Kids are being deprived.

Recently Wisconsin stepped up its efforts to collect from parents not paying support. Starting January 1, 2010, anyone applying for a passport will have to pay up all arrearages before they can get one. The only real exception is if the person can prove there is a life or death situation involving an immediate family member.

“The time is always right to do the right thing.” – Martin Luther King Jr.

Many states have enacted zero-tolerance policies requiring full payment of the balances before a passport is released. These states report significant increases in collections after enacting this policy. Nationwide, over $23 million has been collected in passport release payments. States that have a zero-tolerance policy have reported that payers frequently make the full payment, which has increased their collections from passport releases by as much as 45%.

Estate Tax Reform

There’s another fine mess you’ve gotten us into…

You can hardly pick up a newspaper right now without reading about the estate tax mess we’re in.

There are winners and losers. The Economic Growth and Tax Relief Reconciliation Act of 2001 lowered estate taxes and eliminated them entirely in 2010.

Unfortunately, Congressional budget rules required the act to have a sunset provision, which means the entire act would disappear on December 31, 2010. Then we would be back where we started in 2001 – no reform. But who cared in 2001? There were nine years to address the problem.

Well, here we are in 2010 and Congress has done nothing. Right now there are all sorts of predictions, but no one really knows what will happen. The question is what to do with people dying in 2010, before new legislation is enacted? Many in Congress want to adopt legislation in 2010 and make it effective retroactive to January 1, 2010, but that may be unconstitutional.

Regardless, you need to review your estate plan now, especially if you are in a second marriage, have a marital trust and/or family trust.  Otherwise your plan might not work as you intended.

Only put off until tomorrow what you are willing to die having left undone. – Pablo Picasso

For more detailed information, you can read our latest Wealth Counselor newsletter, Planning After “Repeal” of the Federal Estate Tax, available here.

(Swendson/Menting Law Ltd. offers this free monthly newsletter to our clients, friends and strategic partners that addresses current issues and developments in the law. If you would like to receive future editions, please contact us.)