Brian's Blog: Thoughts on Estate Planning, Business, Asset Protection, Family & California Life

Why 2008 Should Be A Great Year To Purchase A Home

It’s no secret that the real estate market has declined steadily during 2007. Most experts think this trend will continue into and even through 2008. But waiting for the “bottom to hit” before jumping in could be a costly mistake for at least three reasons.

First, interest rates on home loans are still at historical lows. Buyers’ markets like this come around only once every 15 years, but interest rates are usually much higher when they do.  In fact, we’ve never had interest rates this low during this type of market.

Second, potential buyers have more choices now than ever. For years people were forced to purchase homes that they only “kind of liked.” They were spending top dollar, settling for neighborhoods they didn’t love, and getting into homes that didn’t fit their true needs or desires. Now, things are quite different. A buyer can find the house and neighborhood they want, plus they can negotiate an amazing deal.

Third, it will probably be too difficult to know for sure when we really hit the bottom of the market.  From past experience, we see that the media begins to report a market turnaround about six months after it actually starts happening! That means people who jump in when the media tells them the coast is clear will do so six months into a sellers’ market.  In the meantime, interest rates could have gone up and/or valuable financing programs may have disappeared, limiting the buyers’ options.

The reality is that a declining real estate market provides fantastic opportunities for most buyers. In particular, first time home buyers, homeowners who want to upsize, and long-term investors should be looking to take advantage of current conditions.

• First-time buyers who were priced out of the market over the past few years may finally be able to afford a home. With improved federal loan programs, low prices, and a huge selection, first-timers would be wise to start looking.
• Homeowners wanting to “buy up” have a real advantage in this market. Yes, they may take a price hit on their current home, but they will be able to take advantage of the even larger hit someone else has taken on a more expensive home. Not only that, but buying in this low market means the buyer’s property taxes will be lower than they would otherwise be. 
• Long-term investors are already starting to do their research. Investors know that while real estate goes through peaks and valleys its value has always gone up. This is not the market for fix-and-flip investors, but it’s a great time for the ones looking to hold for five or more years.

If you have been thinking about buying real estate, it’s time to get serious about it. Talk to a real estate professional who can help you search for opportunities and watch prices. A realtor can streamline the buying process for you and provide you with the information you need to make the best choices. In addition, you might consider meeting with a lender to find out what loan programs you’re qualified for and to go over your credit. A good lender can help you improve your credit score and save you lots of money in interest. To be sure, this is not the market to “go it alone”! But there are great deals and great loans out there.  Make sure you take advantage of them.

Traci Butler, an experienced Realtor with Lyon Real Estate in Roseville, contributed this article.  Traci has a reputation for guiding her clients through the sometimes confusing process of buying or selling real estate, including whether it’s best for them to buy, sell, or wait.  She may be reached at (916) 276-9975 or tbutler@golyon.com. 

How You Can Turn Even A Small IRA or 401(k) into Millions of Dollars in Protected Wealth for Your Grandchildren.

As any IRA owner who is nearing 70-1/2 will tell you, there is a limit to how long the government will let you simply accumulate and avoid withdrawing tax-deferred money from your traditional IRA.   That’s because 70-1/2 is the age at which you must soon begin to take required minimum distributions (also known as “RMDs”) and pay income taxes on those withdrawals. 

Many people think that the RMD rules will force them to exhaust their IRA savings, but that's not what the rules are designed to do.  If an IRA owner takes only the minimum distributions, there will be money left for the next generation when the owner dies. 

That opens up some incredible planning opportunities.  The IRS changed the RMD rules in January 2003 to allow non-spouse beneficiaries to “stretchout” the taxable required minimum distributions.  In other words, if your child inherits your IRA, he or she can now use his or her life expectancy (as calculated per IRS rules) to determine how big the required minimum distributions will be for the rest of the child’s life. 

Let me give you an example of how this works.  Assume your son is 45 when he inherits your $200,000 IRA.  Also, assume that your IRA is growing at a modest six percent (6%) per year.   Because of his young age, your son’s required minimum distributions will be much smaller than yours.  At the end of his life, that account would be worth $300,000, even though he took all of his required minimum distributions.  Plus, those RMDs that your son had to take will add up to $400,000.  This means that, all things considered, your $200,000 account will benefit your son to the tune of at least $700,000.  Nice. 

Now, what if your son didn't spend the $400,000 he had to take in minimum distributions from your IRA?  In other words, what would happen if he took that money and reinvested it?  Well, then, the account that was worth $200,000 when you died could be worth over $1,000,000 when your son dies (assuming 6% growth).  Very nice.   

That’s when the real advantage of these stretch rules kicks in, because your grandkids will inherit your IRA, which retains your name by the way, and use their life expectancy to calculate the RMDs.  With the right planning, your account could be worth well over $10 million by the time your grandkids pass away!

Sounds great, right?  Well, not so fast.  The stretchout is not automatic.  A number of things can foul it up, including your son's decision to withdraw more than his RMDs or an IRA custodian who unwittingly writes one very big check to your son after you die instead of leaving the money in your IRA.  Plus, lawsuits, divorce, and estate taxes can eat into the IRA before (or after) your grandchildren inherit it.

Sadly, you can’t look to your revocable living trust for help with these risks.  The IRS has made it very clear that living trusts make horrible IRA beneficiaries.  In fact, if you leave your IRA to your living trust, the rule in many cases is that your successor trustee would have to withdraw all of your IRA savings over 5 years, paying income taxes at the highest state and federal rates. 

So how do you both ensure the stretchout and protect the wealth for your grandkids?  You do it by using a Retirement Account Trust.  Think of a Retirement Account Trust as a “living trust for your IRA,” without the nasty tax consequences.  Thanks to recent IRS rulings approving the techniques used in a Retirement Account Trust, it’s become the only way you can leave an IRA to your heirs, preserve the stretchout, and protect the money for generations.

Very few financial planners and estate planning attorneys know how to set up and use these trusts.  Our office does, and we’ll be writing and speaking more about them in the future.  In the meantime, if you’d like to know more, please contact me.  I'd be glad to give you and/or your financial advisor more information.

P.S.  Thanks to the Pension Protection Act of 2006, people who have corporate retirement accounts (like 401(k)s, 403(b)s and 457s) can use Retirement Account Trusts as well.  The law allows each plan participant to set up a Retirement Account Trust, make it the beneficiary of his or her corporate account, and then let that corporate account rollover into an "inherited IRA" after the participant passes away.  Now there are still a few corporate plans that don't allow the rollover to an "Inherited IRA," but that's about to change.  In fact, beginning next year, the IRS will require all qualified retirement plans to make available the non-spouse rollover to an "Inherited IRA."

The bottom line:  If you have invested more than $150,000 in some combination of corporate retirement accounts (like 401(k)s or 403(b)s) or IRAs, then a Retirement Account Trust will give you a realistic shot at leaving millions of dollars to your grandchildren in a way that protects them (and your own children) from lawsuits, creditors, and divorce -- not to mention unnecessary estate taxes.  That is an opportunity not to be missed.