Planned Assets Planning Blog

With mortgage rate at one of the lowest rates in history, now is a good time to consider refinancing if you mortgage is over 5% interest, but which mortgage is best 15 year or 30 year.

Most people think the quicker you pay your home off the less you have to pay so those that can afford a 15 year mortgage so choose.  Those who can’t afford a 15 mortgage send in extra premiums to get the principal down and pay off the mortgage as soon as possible.  The common belief is paying your mortgage off as soon as possible will save you money.  We were all raised to believe this; it’s possibly in our DNA.  But will you really save more money paying off your mortgage?   If you are disciplined, the answer is NO!

The answer is based on a number of factors but the two most important are arbitrage and opportunity cost.  The first factor that must be understood is that there is math and there is money and using straight math the answer favors a shorter term mortgage while the math of money does not.  Consider if I have a mortgage of $250,000 at 4% for 15 years my premium is $1,849.22 per month $9,018 per year more than a 30 year note.  Over the 15 year period I have paid $82,859 in interest with a 30 year mortgage at the 15^th year I still owe $151,954, using safe investments, if I invest my money not spent on the 15 year mortgage over this period I could have earned $203,825 at 6%.  With this amount it is my choice to pay off the house or maintain control of the money for other opportunities and a higher return at the end of 30 years.

If I complete a 15 year mortgage and then invest the after tax house payment at 6% for 15 years I will have $410,632, but continuing to use the 30 year mortgage concept I will have $665,123.  More importantly I will have maintained control of my money for other opportunities of higher return.  What impact would an extra $254,491 have on your retirement income?

Is now the time to have a conversation concerning your plans for wealth management, how you can stop wealth transfers and develop a retirement income you can count on?  When you lose a dollar you did not have to lose, you not only lose the dollar but the future return that dollar could have earned. Time is not on your side concerning wealth transfers.  A conversation with us today could save tomorrow.  Please call us at 888 270 9870 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it. , today!

The unified gift and estate tax credit is the lifetime federal credit available to each taxpayer to reduce the tax on taxable transfers that he or she makes during life and at death.

Prior to 2011 the gif tax credit schedule and estate tax credit schedule were not unified from 2004 through 2010.  That is, the maximum gift before taxes were imposed was $1,000,000 which was only a part of the estate tax exclusion during that period.  In 2011 the two were united and you could gift the full amount of the estate tax exclusion but only for 2011 and 2012. 

The unified gift and estate tax exclusion for 2012 is $5.12 million (adjusted for inflation) or $10.24 million for couples.  Taxable assets gifted or passed above these thresholds will be taxed at 35% if you die this year.  By having a unified gift and estate tax exclusion you do not have to wait until death to use the exemption.  This year an individual could gift $5.12 million and a couple $10.24 million without incurring the 35% gift tax, but you still must file the correct forms to notify IRS.

This gifting is often confused with the annual gift-tax exclusion which in 2012 is $13,000 for an individual and $26,000 for couples.  To add to the confusion, the annual gift-tax exclusion is per gift and is not a total. That is, I can give as many gifts of $13,000 to as many individual as I desire or my wife and I could give as many gifts of $26,000 as we desire, as long as they are to separate individuals.

Admittedly not many of us have $5.12 million or $10.26 million estates and with land values at current reduced levels you might think only large farms and ranches may reach this number, but even a farm or ranch of 40 to 50 acres could reach the $5.12 million level fairly easy as well as many medium to large family businesses. Next year, the estate and gift tax exemption is set to return to $1 million ($2 million for couples) and the tax for taxable property over that amount increased to 55%.  Will it, most likely not, but the one thing we can count on is the unified gift and tax exclusion will not remain at $5.12 million and most likely will not remain unified.

Numbers often mentioned is an estate tax exclusion of $3.5 million and gift tax exclusion of $1 million.  This means that for purposes of transferring property 2012 is a window about to be shut.  Assuming you don’t plan to die this year, we are talking about gifting of property.

The problem for small business is most families have no idea how much the family business is worth or how much it may be worth in the future.  Then there is the problem of control and an inability to turn loose of control.  But there are ways to transfer ownership without giving up control or losing income.  The other question is does the next generation of family members want to be involve in the business or even have the ability to take control and survive?  Extending ownership of a family business is a very difficult question and one without an answer sometimes until the very last moment, but the prudent business owner will not let this opportunity pass without significant investigation. 

Family farms and ranches are usually somewhat more stable in selecting future ownership and why 2012 is an important benchmark.  If future ownership can be qualified 2012 is the last year ownership may be transferred tax effectively.  Again it is not always necessary to give up full control or income making the transfer, but any family with farm or ranch of 40 acres or more should consider now how much it might cost to pass ownership at death in the future.

Unlike standard businesses, most of the money available to the farm & ranch businesses is tied up in land, equipment, the next crop or all three.  Estate tax is due within 9 months, and although there are delaying alternatives all are expensive.  If you have not obtained enough life insurance and do not have enough cash on hand how will you meet the tax and do you really want to give up the cash?  Starting the transition now may allow the farm to remain within the family rather than most or some of it remaining in the family.

Whether a nonagricultural family business, farm or ranch the window will shut December 31^st, not considering your alternatives only available for the rest of 2012 is not a viable option for any family business.

Is now the time to have a conversation concerning your estate plans and how you may tax effectively maintain the family business, farm or ranch within the family.  Time is not on your side, 2012 will be over before you realize, and we are not likely to see these tax rates again in our life time. A conversation with us today could save tomorrow.  Please call us at 888 270 9870 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it. , today!

Let’s assume you’re turning 62 or somewhere between 62 and 66 and considering retirement, your primary concern is income.  What then is the best way to structure your various streams of income?  At this point, most of us have three buckets of money:

1.     Invested non-deferred assets (stocks, certificates of deposit and other non-deferred assets), any earned income before or after you retire including deferred compensation.

2.     Deferred assets (401(k), IRA, etc)

3.     Social Security income.

The order in which you use these assets will determine your income and if you do it wrong you may reduce your long term income unintentionally by 20% or more.  Unfortunately, an overwhelming percentage of individuals do just that.  All of us are endowed with a certain amount of greed, when we see we are eligible for Social Security we assume it is free money and take it at 62 without regard to when our full retirement is.  Often we start taking money from our deferred money bucket as soon as we retire because we don’t want to use up our non-deferred money bucket.  Unless you have no choice, this is the absolute worst way to start your retirement and why you are going to wind up losing about 20% of your available retirement income.

Let’s break it down:

Bucket 1. The money you have in non-deferred assets producing income (interest, capital gains, etc) is taxable income.  Earned income is not only taxable but if you have not reached full retirement age (currently 66+) and earn to much your Social Security income is reduced one dollar for every two dollars earned.  Also total income may cause up to 85% of Social Security income to be taxable at your current tax rate.

Bucket 2. The money you have in deferred money is increasing in value, when you start taking it, it becomes taxable.  Once you start taking money from this bucket it is considered income, not earned income.  You not only have to pay income tax on it, but it will be used to determine if up to 85% of your Social Security will be taxed.

Bucket 3. If you start taking Social Security prior to full retirement age benefits are significantly reduced. [Benefits at age 62 are between 25% and 30% reduced]   If you apply more than 36 months before full retirement age the reduction is even higher. [Full retirement age for those born between 1943 and 1954 is 66, those born after 1960 it is 67.] After full retirement age your Social Security benefits increase at 8% per year until age 70.

Generally speaking by spending down money in buck one first, then moving to bucket two and finally when you reach age 70 start bucket three, you may increase you income significantly.  Of course this advice may not be right for every one, each person is different.  The point here is it pays to look before you leap.  Researching and understanding your options before you make you decesions could stop you from making a mistake.  It is always worthwhile to consult with an advisor before making a decision you may not be able to fix later.

Is now the time to have a conversation concerning your plans for retirement income and how you can develop a retirement income you can count on?  Time is not on your side concerning retirement planning; regardless of when you plan for retirement it will get here before you know it.  A conversation with us today could save tomorrow.  Please call us at 888 270 9870 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it. , today!

A typical retired couple may add as much as 20% to their after-tax retirement income by coordinating when to use different categories of their money in retirement?

Most individuals have three financial legs to support them in retirement: (1) Social security benefit; (2) qualified retirement savings and (3) non-qualified savings and investments.  A majority of couples and individuals may by selectively coordinating how they use assets within these three sources actually improve after-tax retirement income up to 20%.  Unfortunately, most overlook the importance of coordinating use of available assets, resulting in higher tax.

Why?  There are several reasons why many Americans lose up to 20% of possible retirement income:

1. Knowledge:  The United States Income Tax system actual consist of two systems.  Those understanding the system, rules and loop holes always pay less in percentage of income.  Of course those who do not have this knowledge always pay a greater percentage of income.  The problem is most are not even aware of what they do not know and spend most of their energy obtaining minor savings and missing savings opportunities contributing to successful retirement.
2. Planning:  The majority of American retired retire without a written retirement plan.  Successful business requires an effective written plan if it hopes to succeed and your retirement is your business.
3. Conventional Wisdom:  Too many professional planners, as well as pre and post retired people stick with conventional wisdom even if it is wrong.  As all of us have told our children, “just because everyone else is doing it does not make it right”.  Conventional wisdom may actually cost you 20% more in tax than necessary.