Want to Give Your Home to Your Kids? Hold On.

Keeping a home in the family after the owners’ death is a frequent desire. There are many ways to effect transfer of ownership within a family, and some are more cost effective than others. Expensive mistakes are all too common. Knowing the rules before acting is likely to result in a smoother and more efficient transaction.

We frequently hear phrases such as, “I put my kid’s name on the house,” or “I want to give my home to my kids to keep it in the family.” Hearing things like that makes us cringe. Most often, it is the exact wrong thing to do.

There is generally no actual advantage to accelerating the turnover of the property during the life of the owner, and in fact there are several potential pitfalls.

Remembering that we are not giving legal advice, but rather financial planning tips, here are some possibilities.

Let’s start easy. The simple way for a homeowner to transfer a property to heirs in to die with a valid Will. This may sound a little insensitive, but in plain English, it works. You will not be involved in any estate messes that may arise either, assuming you have prepared a valid Last Will and Testament.

Far too often, the owner believes that by waiting until death to transfer the home, they run the risk of the home being taken by a financial institution or the government. Many people believe that an additional name (or names) on the title will prevent that outcome. These are generally not valid assumptions.

If changing ownership while alive, and also remaining in your beloved home as long as possible are priorities, it can be done, but caution is advised. One easy way to keep a home in the family is through an outright gift. With the large gift tax exemption today, it will almost never trigger gift taxes. That sounds good enough, but there are some longer-term tax complications with this methodology, and it is almost never the best idea.

Another option is the Qualified Personal Residence Trust, or QPRT, designed to accommodate homeowners whose estates will be large enough to possibly trigger unwanted estate taxes when the owners pass. Again, these households are rare, due to current large estate tax exemption limits. QPRT rules are numerous and exacting, so professional legal help is a must.

Frequently, people ask us about selling their home to their beneficiaries for a bargain price. This is seldom a good idea, because taxation rules are complicated, and mostly work against the recipient of any gift or bargain. This method may also expose the original owner to unwanted displacement from the residence.

An alternative option is to sell your home to heirs at full price. You can hold a mortgage that way, charge a low interest rate (check IRS guidelines for the current minimum interest rate). This method may offer the best overall tax arrangement for the seller, but other family considerations must be meticulously examined.

An old saying reminds us that the road to Hell is paved with good intentions. Be very careful how “nice” you are with your most valuable assets, and especially your residence. Getting professional financial and legal guidance will likely save money and potential family turmoil.

Van Wie Financial is fee-only. For a reason.

Despite a robust economy, many people are feeling a pinch in their living standard. As prices rise steadily over time, wages (especially after-tax) haven’t risen with the same determination. Inflation is winning, and Americans are losing.

Inflation affects each and every one of us, so we should at least be able to understand how the rate of inflation is measured. The government’s measurement of general price levels and ongoing inflation rate is dubbed the “Consumer Price Index,” or CPI.

The very government that defined the term “inflation” (which is also the government that charged itself with calculating the rate of inflation), would be consistent in applying the inflation rate to its various functions. So it would seem, but reality is sharply different.

There are many designated governmental applications for the CPI, including granting cost-of-living wage increases to government employees, Social Security recipients, and government contractors. We call that the “income side” of the CPI. There is also a “tax side” use for the CPI. Most income tax calculations and rules are also indexed to changes in the CPI.

In recent days, the government has released significant new data for the upcoming 2020 Tax Year. The application that affects most Americans is the modifications to the Income Tax Brackets for all taxpayers. Tax Brackets have been expanded by 3.68% to prevent what is called “bracket creep” among taxpayers. In other words, inflationary wage increases do not push the taxpayer into a higher marginal tax bracket.

Affecting a significant portion of the population is the cost-of-living increase for Social Security recipients and various types of government employees and contractors. Based on the CPI change being applied to income tax brackets, these people could be expected to receive a pay increase of 3.68%. Right?

Wrong! The government employees’ pay increase for 2020 will be 1.6%, which is less than half of the tax bracket increase. What’s up with that? I thought the CPI was a fixed, calculated number, didn’t you? Adding insult to injury for “Seasoned Citizens,” your Medicare premiums are rising 7%, eating up a good chunk of the Social Security increase. Worse yet, Medicare (out-of-pocket) deductibles are also rising by 7%. Pay more, get less – what a deal!

For years now, it has been apparent to me that the government’s calculation of the inflation rate has dramatically under-reported the true cost of living. Most people seem to agree, but one of them did something about it. Several years ago, Ed Butowsky, a well-known financial advisor, developed an index of his own, and dubbed it the “Chapwood Index.” His methodology remains consistent over time, and his price level tracking has shown the government’s CPI measure to have dramatically understated the rising cost of living.

The Chapwood Index, which is computed twice annually, has been released for 2019’s first six months. The Chapwood Index conclusion is mind boggling, showing the average price level rise in the USA to be 9.8% for 6 months.

In the meantime, couldn’t we at least ask for consistency among the government’s applications of the CPI? Somehow, the system seems to be working against our best interests. The 3.68% expanded tax brackets are welcome, but the 1.6% “cost-of-living” increase seems a bit paltry by comparison. Neither respects the Chapwood Index’s 9.8% increase for only 6 months.

For more information, go to the Chapwood Index website and read the history, methodology, and results. It is an eye-opener.

Van Wie Financial is fee-only. For a reason.

Rather than a traditional blog post, I thought we’d share a correspondence sent to our clients and friends this week. The topics are timely and important.

To our valued clients and friends,

Monday, all three of the major stock market indices (DJIA, S&P500, and NASDAQ Composite) reached new highs; both intra-day and at the close. This Bull Market, the second-longest in history, is alive and well. With all the negativity clouding the media and politics, it may seem surprising that the market has turned a deaf ear. In reality, though, it is easily explained.

Remember our prior communication regarding politics and economics? In the long-term, economics drive markets, and right now our economy is strong. Political influences are primarily short-term aberrations. Investors understand this and are signaling their support of the economy by driving markets upward. Where will it end? When will it end? Nobody knows, despite the propensity of “talking heads” to prognosticate.

This is the season when financial advisors turn their thoughts to RMDs – the often-dreaded Required Minimum Distributions. Many of you have made plans with us as to the timing and taxation of your RMDs, and we are merely counting days until mid-December to make the actual distributions. Retirement account owners who turned 70-1/2 this year, or anyone who inherited retirement accounts last year (or even this year), should be planning RMDs at this time.

After Thanksgiving, and throughout the rest of the year, everyone gets busy, and could easily overlook these necessary transactions. For that reason, we make sure that every client’s annual RMD obligation, if any, is satisfied. The consequence of a missed RMD is a tax penalty of 50%. That is unacceptable.

For the charitable among the group, remember (or learn) the Qualified Charitable Distribution, or QCD. Using this tool, donations are made directly from the account custodian to the qualified charity, bypassing the account owners 1099. This means that no income is reportable for the amount of the QCD, and no tax is due, even if the donor does not itemize tax deductions.

2019 has been a solid year in the markets, erasing the dramatic downturn of last December, and charging ahead to set multiple new records throughout the year. Hurdles remain, as always, including the impeachment mess, remaining trade deals that include USMCA and China, the cloud overhanging Brexit, and a host of others. On any given day, one or more of these may add more volatility to the market. Expect and embrace volatility, and pay attention to the real economy, job creation, and the factors that drive markets over time.

As always, we will be here reporting what is actually happening and doing our best to guide our clients through the volatility.

Please accept our heartfelt wishes for a safe and happy Holiday Season, and a healthy, prosperous New Year.

The intermittent chill in the air reminds us that summer is gone, and autumn is gaining hold, even here in North Florida. As year-end 2019 approaches, the financial planning community turns to Tax Planning and Required Minimum Distributions. Today we will concentrate on a portion of Tax Planning called “Buying a Dividend.”

Dividends are nice, as they give us positive financial feedback that our investments are working for us. Sometimes, however, good tax planning would have us avoid a dividend in order to reduce our potential taxable income. Avoiding a dividend is sometimes as easy as postponing an intended equity purchase.

When a company pays a dividend, it is taxable to the owner of the shares on which the dividend was paid. If the owner has the asset in a tax-deferred account, no current tax will be due, as it will be delayed until money is drawn from the account. If the owner of the shares is a mutual fund, the funds keeps a record of the dividend, and at least once per year pays the accumulated dividends to the shareholders of the fund.

There is no avoiding taxation of dividends forever, except to hold the shares in a Roth IRA or Roth 401(k). Note that taxpayers who are in the lowest two tax brackets are taxed on dividends at a rate of zero, essentially eliminating the tax. They do need to include the dividends in computing their total income, so the dividends are included in the tax formula.

Understanding the term “Buying a Dividend” requires understanding the steps that lead to a dividend being paid:

• The Board of Directors determines (“declares”) the amount and payment date of a dividend on the Declaration Date
• The Board then determines the Record Date, when owners of shares at the close of businesses will qualify to receive the dividend when it is paid
• The day following the Record Date is called the Ex-Dividend Date, meaning that buyers of new shares beginning that day will not receive the dividend just declared
• Finally comes the Payment Date, which is the day on which the actual dividend will paid to shareholders at the close of the Record Date

On the Ex-Dividend Date, the opening market price of the share is reduced from the previous closing by the amount of the dividend. For example, if a $20.00 per share stock or mutual fund declares a $1 dividend, on the Ex-Dividend Date (the first day that a purchase will not earn you the dividend), the market share opens at $19.00. For example, Purchaser “A” buys a $20.00 share on the Record Date, andon the next day owns a $19.00 share and a $1.00 Dividend, which will be paid on the upcoming Payment Date. Notably, that purchaser also has a tax bill for the $1.00 dividend.

Purchaser “B” buys a share on the Ex-Dividend Date, and only pays $19.00, the opening price, but has no $1.00 dividend, and no tax bill. Both “A” and “B” have the amount paid, except “A” has incurred a tax liability.

If Purchaser “A” bought the share in a tax-deferred account, there is no problem. However, if “A” bought the share in a taxable account, taxes will be owed for the year of the dividend. Only if the dividend is paid to “A” in cash will the money be available. If, instead, the dividend is reinvested in fractional shares, the tax money will have to come from another source. “A” just Bought a Dividend, and should have planned and executed the purchase on the Ex-Dividend Date, rather than the Record Date. What a difference 24 hours would have made.

Determining the ex-dividend date is as easy as going to the website of the stock or mutual fund and looking for the notice of size and date of coming distributions. Most funds have not yet determined that date for 2019, but through periodic checking, a potential buyer will be able to time the purchase after the announcement is made.

We have seen many examples of investors getting stung by a large tax bill from mis-timing purchases of mutual funds. Of course, once investors own the shares, the next dividend will be an unavoidable taxable event. Just don’t add insult to injury by getting an unwanted distribution “up front.”

Van Wie Financial is fee-only. For a reason.

Advisors throughout the Financial Planning Industry utilize many business models, with the Registered Investment Advisor, or RIA, being one of the fastest-growing formats. Van Wie Financial is organized as an RIA, which means that we are fee-only and serve our clients as fiduciaries. Our primary services include comprehensive personal financial planning and asset management. We do not sell any products, nor do we accept any commissions.

There is little regulation regarding use of terminology in the financial services industry. Insurance salespeople, stockbrokers, mutual fund representatives, and various other practitioners are allowed to claim the “financial planner” title, but the most comprehensive service is provided by Certified Financial Planners™ operating as independent Registered Investment Advisors (RIAs).

Rising popularity among clients for the RIA model is spearheading an explosion of firms adopting the fiduciary RIA business model. But despite the popularity and growth of this industry, shortages of qualified advisors exist, and there appears to be no end in sight to opportunities for growth and expansion.

Young people seeking a rewarding career should be aware of opportunities available in the field of financial planning. Yet, in a recent survey, only 37% of those surveyed knew of the profession. Once informed, 63% claimed to be interested in taking a further look.

Not many years ago, young people with an interest in becoming independent financial planners had little no opportunity to be compensated while learning the job. Existing businesses were unwilling to pay an aspiring planner to acquire on-the-job training. In economic terms, barriers to entry were high. Those barriers have been coming down as the industry recognizes the need for new talent. Internships (paid) are now available for new candidates, providing better opportunities for students trying to enter the industry.

What does it take to become a success in the arena of modern-day financial planning? At a minimum, solid math and computer skills, people skills, a college degree, and good character are required. Experience, however, is an absolute prerequisite for independent success. Look for internships and entry-level jobs in the financial planning arena, where valuable experience can be gained.

Having advised many people as to the best preparation for a career as a financial planner, I always suggest starting with a career in another endeavor. Becoming successful elsewhere enables a good planner to approach the business with a client-centric orientation. Understanding both points of view (client and adviser) is critical to success as an independent financial adviser professional.

What do successful RIAs have in common? Most are owned and operated by Certified Financial Planner™ (CFP®) professionals, who have been certified competent and ethical by the premier worldwide organization.

Interested people of any age can go to the CFP Board website (www.cfp.net) to learn more.

Van Wie Financial is fee-only. For a reason.

Garnishment is an avenue of last resort for creditors. Most of us would be less than thrilled to take a person’s income against their will, much less have our own earnings taken away. Real people don’t take the income from of another person’s labors, unless necessary. I am not so naive as to believe that there has never been anyone who didn’t need to be treated harshly.

Knowing that garnishment is an option for people in financial trouble, it is also important for everyone to understand that the law is not so harsh as to take every penny of a person’s livelihood. This is more so for the nation’s senior citizens, and even more so for people in Florida.

Today’s subject, garnishment of Social Security, is a particularly touchy subject. Far too many American seniors are totally dependent on Social Security for their financial independence. For those people, taking all or part of their monthly benefit would assure that they became wards of the State. Fortunately, Federal and State laws have considered that very possibility.

I am just going to throw this into the mix, but in my opinion, Florida has done an excellent job over several decades to make the lives of older people more comfortable by protecting necessary assets and income. By doing so, more of Florida’s retirees are self-sufficient, and less of a societal burden because of these protections. Can you poke a hole in that system? I cannot.

Since we are writing to a mostly-Florida audience, I decided to concentrate on Florida’s laws. This topic came up recently because my Research Department found an article that indicated something I did not know or understand. The article said that only $750 of monthly Social Security is protected from garnishment. Could that be true?

Checking the articles’ veracity, here is what I found:

• First, no creditor can simply garnish any of your income; they must first sue you, and they have to win
• In all states, Social Security is at least partially exempt from garnishment
• Usually, Social Security can only be garnished for child support, alimony, and (you probably guessed it) federal taxes.
• Florida is more protective than most States, and protects all Social Security retirement benefits (as well as most Social Security Disability payments)

As if we needed another reason to live in Florida, this can be added to the list. Senior financial protection is a complex problem, and scammers are everywhere. We appreciate any and all help the State of Florida provides.

Van Wie Financial is fee-only. For a reason.

Government costs money; therefore, it must take in revenue. Governments have three ways to raise money; taxes, sales of assets, and a printing press. Every American has a stake in this country, and most people pay taxes of some sort. We all appreciate some of the ways the government spends our tax money, and we all resent some of the ridiculous ways some of our tax money is squandered.

Unfortunately, taxes and asset sales are historically insufficient to cover the annual spending of our behemoth government, “forcing” the government to print money (we know that today’s “printing press” is electronic, but the end result is the same). Reducing the annual Federal budget shortfall would be better accomplished by growing the economy. The nation’s economy is expansive, and also expanding. Economic growth is critical to paying our increasing national bills.

Sadly, many people do not understand that our economy is both flexible and responsive to good policy. Mistakenly ignoring economic expansion leads to implementation of bad policy. “Robbing Peter to pay Paul” is not only bad policy, it is unnecessary. Current proposals to tax wealth in addition to income are anti-growth, and therefore constitute bad policy. Unfortunately, supporters of a Wealth Tax believe that our economy (the national “economic pie”) is, and shall always be, fixed at the size it is now. Under that premise, if you or I gain a dollar, someone else must lose it. This is wrong-headed and ignorant.

The best example I have found is Mark Zuckerberg, founder of Facebook, whose estimated Net Worth right now is estimated to be about $66.9 Billion. Under the Elizabeth Warren proposal, Mr. Zuckerberg would pay (on top of all the other taxes he currently pays), about $2 Billion in annual Wealth Tax. Many Americans would be delighted to see this Silicon Valley mogul taxed heavier, but I am not among them. In fact, I would like to see him taxed less.

Americans are the world’s leaders in innovation and entrepreneurship. That has propelled the USA into the economic leadership position we have enjoyed for decades. Those who seek to make their fame and fortune by practicing capitalismshould be encouraged, not discouraged. That is the essence of America and its free economy. In short, entrepreneurship will grow the economy.

Mark Zuckerberg is rich. He is, in fact, fabulously rich. Good for him; good for us. The Wealth Tax on Zuckerberg’s net worth would generate about $2 Billion in annual government revenue. At the current rate of government spending, that would be spent within about 3 hours. How would that help?

Van Wie Financial is fee-only. For a reason.

Last week we began a discussion on a real-life question that arose in our office a couple weeks ago, when a new client asked, “What earnings are considered for Social Security benefits?” There are two central issues in discussing earnings and Social Security; “How much you will receive,” and “How much you will keep.” Last week we discussed the former, meaning the actual monthly benefit you will receive for life. That topic involves your Individual Earned Income, ignoring both your own Unearned Income and Total Family Income.

This week, we are looking at the second issue, how much you will be allowed to keep. In the “keeping” side of the formula, Total Family Income is the major consideration. Once monthly benefits are being determined, the monthly amount will usually be reduced in one or two ways:

• Medicare. Most Social Security recipients are covered by Medicare. Premiums for Medicare are subtracted from gross monthly Social Security benefits payments if possible.
• Income Tax. Not all Social Security benefits are taxed. The Taxable Portion is dependent on Household Income, and can range from Zero to 85% of gross benefits. That portion is taxed at the taxpayer’s marginal tax rate.

The basic monthly cost of Medicare Part B is currently $135.50. Many people do not realize that premiums are higher for higher-income households, but there is no difference in coverage. There are 5 levels of “Income-Related Monthly Adjustment Amounts (IRMAA)” that can raise the individual monthly Medicare premium as high as $460.50 per person.

Remember that the gross amount of Social Security benefits, rather than the net (after Medicare costs are deducted), is used to compute the taxable portion. Since no Medical itemized deductions are going to be allowed after this year, unless Congress changes the law by year-end, not overpaying for Medicare is more important than ever to your personal finances.

Can you control how much you pay for Medicare? In some cases, yes. Enter the “Life-Changing Event” letter. Under specific circumstances, Social Security will accept a written request to reduce your Medicare premium immediately due to certain income-lowering Qualified Events, which include:

• Divorce or annulment of marriage
• Retirement (of either spouse)
• Reduced work hours
• Pension plan altered by sponsoring company
• A prior non-recurring settlement
• Loss of income from owned property

If the Social Security Administration accepts your request (because you have submitted ample proof), they will inform Medicare, and Medicare will lower your costs immediately. That can save you hundreds of dollars for that year. Overpaying for Medicare B gets you nothing. The amount of your Social Security you keep is in your hands.

Van Wie Financial is fee-only. For a reason.

Have you ever received an offer for zero percent interest to finance a large purchase at a store? One of those deals where you have a year to pay it off, and if you do, there will not be any finance charges? Sounds great right? Well, it is great, right up until you miss the fine print and they charge you interest on the entire amount financed at the end of the financing period.

This actually happened to one of my family members recently, and it is such a duplicitous business practice that I thought everyone should know about it. My family member purchased a fairly large item at a Jewelry Store in the St. John’s Town Center. The experience in the store, they claimed, was amazing. The service was top notch, and they were very pleased with the item purchased. On top of the great service, they were offered another great deal. For the same price as what they would have paid up front, they could get zero percent financing for a year.

As a Certified Financial Planner™, I love zero percent financing deals. If you are already going to buy something, and somebody says you can pay the same amount later that you can pay now, this is a great deal for the buyer! I have used these deals many times in my life to pay for medium to large purchases, and they have all worked out very well.

Because this seemed like such a good deal, my family member took them up on their offer to provide them with interest-free financing through First Comenity Bank. They received the first statement in the mail a couple of weeks later, and everything looked correct. The total balance was what they had agreed to pay in the store, and the APR was listed as 0.0%. The minimum payment was 1/12^th of the total balance, which would put them on track to pay the entire balance in the 12 month period. They immediately paid the minimum payment, and set up recurring equal payments for the next 11 months. When month 12 arrived, they sent the last payment and had a small celebration to enjoy having paid off the balance in full. However, that was not the end of the story.

One month later, they received another statement, and much to their surprise, this statement listed their minimum payment due as $35. Upon further examination of the statement, it showed that they had been charged for interest on the entire purchase to the tune of several hundred dollars. How was this possible when they had paid the amount in full within the 12 month period? They picked up the phone and called First Comenity Bank and asked that question. It turns out that the 12 month grace period on the interest rate had started ticking when they made the purchase at Jared, not when they received their first statement!

The company had set their minimum payment to pay off the balance in 12 months, but not within the time limit for the actual zero percent interest deal. Had they divided the total amount due by 11 instead of 12 and made those payments, the interest would have never been charged. But because their 12^th payment actually fell more than 365 days after the purchase, the bank went back and charged them interest on the full amount financed.

According to Comenity Bank, they had done nothing wrong, they could not erase the finance charge, and in short, they were out of luck and had to pay it. They got angry, threatened to publicly disparage the company and their business practices, but First Comenity Bank held firm that they had done nothing wrong. What do you think?

Once in a while, a real-life question arises in our office that is simply too complex for an immediate answer. That happened a couple weeks ago, when the question arose, “What earnings are considered for determining Social Security benefits?” Like most Social Security issues, the answer is complicated, reflecting the complexity of the entire Social Security system.

There are two central issues regarding Social Security benefits; (a) What You Will Receive, and (b) What You Will Keep.” Explaining these concepts requires an understanding of a few basic concepts:

• Earned Income is money you received as direct compensation for current work, plus compensation for some of your past efforts that are classified as work
• Social Security Earnings are computed from Earned Income per individual
• Lifetime Social Security Earnings means the aggregate Social Security Earnings of an individual’s lifetime
• Filing Date refers to the day you choose to start receiving Social Security benefits.
• Full Retirement Age (FRA)is the first day when you are allowed by law to file for unreduced Social Security monthly benefits.

What You Will Receive (in monthly benefits) is a function of both your personal Lifetime Social Security Earnings and your Filing Date relative to FRA. (For this discussion, we are ignoring the possibility that at some point you might claim spousal benefits.) Pensions, retirement annuities, etc. do not count, as those are considered fringe benefits, similar to insurance payments.

Items classified as Earned Income are primarily reported on Line 1 of your 1040, plus Schedule C if applicable. The highest 35 Earned Income years of a person’s working life are aggregated for the Lifetime Social Security Earnings.

FRA is a moving target, depending on your year and month of birth. Initially, FRA was 65 for everyone, but in the 1980s the Social Security System was amended to delay its own future bankruptcy. One of the primary changes was to increase FRA for people who would not be claiming for many years. We received sufficient notice of the changes. (A similar revision is likely in the next few years to again delay bankruptcy of the Social Security System.)

“What You Will Receive” is a function of individual earnings: “What You Will Keep”is an entirely different topic, and will be the subject of next week’s Blog.

Van Wie Financial is fee-only. For a reason.