Finance Tips from Roche Financial Partners

Any bank or mortgage broker who wants to loan you money for a home equity line knows it’s in their best interest to lend right up to your credit limit. They make more money that way. Yet just because you qualify for a home equity line doesn’t mean you need to use it, particularly as a bank for investment purposes.

Quite a few things need to go your way for you to use your home equity line effectively. There’s plenty of risk in plowing loan money into investments that may suddenly lose their value if they mirror the Dow’s drop over recent weeks. While home equity loan interest rates may cost you less than borrowing from your investment brokerage firm by purchasing investments in a margin account, you still need to be very careful.

To borrow home equity effectively, you need stable interest rates and rising home values that go with a strong economy. Remember that mortgage professionals are not investment professionals or financial planners – that’s why they’ll always encourage you to borrow if you have the flexibility to do so. For balanced advice, you should consult financial planner.

In all honesty, most planners would tell you that if you need to borrow from home equity, you may not be in the strongest financial position to make an investment in the first place.

It makes sense to go over a few home equity borrowing basics. There are two primary kinds of home equity debt. A home equity loan is a one-time, lump sum that is paid off over a particular amount of time with a fixed rate and number of payments. A home equity line of credit (also known as a HELOC), works more like a credit card because it has a revolving balance – interest is due on the outstanding balance and that rate may vary over time.

Here are the things you should discuss with a trusted financial adviser before you tap home equity to put in real estate, securities or any other form of investment.

• Will your investment deliver a greater after-tax return than you’ll be paying for the loan on an after-tax basis?
• Does your home equity loan or line carry an adjustable rate? If so, a jump in interest rates may make what you owe even more expensive and further offset any gains you make in your investment. If rates fall, it’s good news, but given current conditions, it makes sense to be cautious.
• How much is your property appreciating each year in your neighborhood on average? Is it enough to further offset the cost of your investment? Keep in mind that no one is predicting the type of double-digit property appreciation we saw before 2008.
• How will this loan work for you from a tax perspective? Keep in mind that home equity loans over $100,000 are generally not tax-deductible. 
 • What if you need your home equity borrowing power later for an emergency (the real reason most of us should open a home equity line and then avoid using it)? Could you handle that emergency if your borrowing was strained to the maximum?
• How liquid is this investment? If you had a sudden major expense or lost your job, could you turn it into cash without major hardship?
• How are your other debts? Do you have significant balances on credit card or auto debt? That may raise the rate you pay on your loan – another potential cut in your investment profit potential. As long as you can deduct the interest, you might just be better off consolidating and paying off debt rather than taking a flyer on an investment.
• How close are you to retirement? From a cash flow perspective, will you be able to handle the loan payments assuming your investment using the home-equity funds doesn’t work out? 

Home equity is a good option for many important financial goals, but you have to balance risk against potential reward. In most cases, it is always good to hold home equity in reserve for a real rainy day. 

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Robert Gregov,CFA, CFP®, a local member of FPA and President of Roche Financial Partners. Roche Financial Partners is an independent wealth management firm that specializes in comprehensive financial planning and investment management. Our mission is to make a significant contribution to the quality of life of our clients by empowering them with the peace of mind and personal satisfaction that comes from achieving their financial goals. To learn more about Roche Financial Partners or the article above, please contact us at (609) 575-6762 or info@rochepartners.com. See our website at www.rochepartners.com.

There was a time when family members – grandparents, parents and children alike – lived in close proximity to each other, often in the same house. But that was then and this is now. And now, it’s becoming increasingly common for family members to live in different parts of the country. That trend is fast colliding with care-giving for the elderly.

According to the MetLife Mature Market Institute’s Since You Care guide, there are some 34 million Americans providing care to older family members. And 15 percent of these caregivers, or 5.1 million, live one or more hours from the person for whom they are providing care.

According to MetLife, these “long-distance caregivers,” in many instances, are caring for a parent or other older relative and are also employed and have dependent children of their own. Because of this, they are often referred to as the sandwich generation. “In some circumstances, due to actual physical distance and/or other constraints, the long-distance caregiver may be unable to provide the direct, everyday, hands on care, but is responsible for arranging for paid care and coordinating the services that are provided.”

And that’s no easy task. In many cases, long-distance caregivers must often juggle the demands of two households. Often, they have to rely on reports from others about daily events. Just as often, they have to arrange and then rearrange work schedules, business trips and doctors’ appointments. In short, the task can be difficult, stressful, and time consuming, according to AARP. But there are a number of steps you can take to make the task more manageable.

Gather information and assess the need. Adult children should determine with their parents (and other family members) what help is needed. In some cases, adult children should consider hiring a professional geriatric care manager who can assess a family member’s needs and who, if need be, can provide ongoing case management. Geriatric care mangers are often familiar with the services that are available to aging parents. Finding a professional geriatric care manager is easy enough, say experts. The National Association of Professional Geriatric Care Managers has a Web site that provides links to association members, many of whom are former nurses or social workers (www.findacaremanager.org). A professional geriatric care manager might charge $100 to $500 for an assessment and $60 to $90 an hour for on-going care. If you choose this option, work with geriatric managers who are licensed or certified by the states in which they work and be sure to conduct a full background check before you hire. Many states and municipalities typically have benefits and resources that can be used by qualifying individuals to help cover the costs of some of these services. Another resource, the Eldercare Locator (800.677.1116) can tell you which local agencies provide services and will refer you to the area agency on aging in your parents’ community.

Be prepared. Before a crisis occurs, caregivers and older family members should complete and distribute widely a “caregiver emergency information” kit. That kit should contain all necessary medical, financial, and legal information, including doctors, medications, insurance information, assets, and Social Security numbers, wills, living wills, durable powers of attorney and health care proxies. Adult children should ask their parents to complete privacy release forms, HIPAA compliant, and keep copies on file with their parent’s doctor’s office. That way, the parent’s doctor can discuss an older family member’s health. MetLife has a caregiver booklet that can be downloaded from its Web site, www.maturemarketinstitute.com. AARP also has useful long-distance care-giving resources at its Web site, www.aarp.org. Caregivers might also consider using a personal medical alert emergency response system.

Develop an informal network. Experts say adult children should establish an informal support network composed of family, neighbors, friends, clergy, and others who might help. Adult children, when visiting their parents or older family members, should introduce themselves to neighbors and friends and keep their phone numbers and addresses handy. If an adult child can’t reach a parent, calling that informal network can provide peace of mind. Plus, they may also be able to help with some needed tasks.

Visit as often as you can. Long-distance caregivers should visit their older family members every few months to check for signs of trouble – which might include changes in personal hygiene, old food in the refrigerator and chores not done. Long-distance caregivers should note, however, that such care can be expensive. According to MetLife, caregivers spend an average of $193 per month on out-of-pocket purchases and services for the care recipient and another $199 per month in traveling and long-distance phone expenses.

It might make sense to consult your financial planner early-on, to ensure that your loved ones are properly cared for in the future.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Robert Gregov,CFA, CFP®, a local member of FPA and President of Roche Financial Partners. Roche Financial Partners is an independent wealth management firm that specializes in comprehensive financial planning and investment management. Our mission is to make a significant contribution to the quality of life of our clients by empowering them with the peace of mind and personal satisfaction that comes from achieving their financial goals. To learn more about Roche Financial Partners or the article above, please contact us at (609) 575-6762 or info@rochepartners.com. See our website at www.rochepartners.com.

Many self-employed people want to hire family members to work for them. But as with many things in life, there’s a right way and a wrong to do this. Doing it right can promote family togetherness. But it can also create tax savings for you.

How so? In essence, you are shifting business income to a relative. And your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you according to the AICPA’s financial literacy Web site, www.360financialliteracy.org.

Of course, you have to do it right. The IRS can, for instance, question compensation paid to a family member if the amount doesn’t seem reasonable, considering the services actually performed. Also, the AICPA says to be sure that your business complies with child labor laws when hiring a family member who’s a minor.

There are other benefits to hiring a family member. As a business owner, you are responsible for paying Federal Income Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes on wages paid to your employees. FICA is the law requiring employers and employees to pay Social Security and Medicare taxes. FUTA is the law that establishes federal unemployment taxes.

As with wages paid to all employees, wages paid to family members are subject to withholding of certain taxes in some states. Typically, the payment of these taxes will be a deductible business expense for tax purposes. But if you hire family member – a child, spouse, or parent as an employee – to work for your business you may not have to pay FICA and FUTA taxes.

For instance, you don’t have to pay FUTA taxes for services performed by your child who is under 21 years old. And you need not pay FICA taxes for your child who is under 18 and works in your trade or business or a partnership owned solely by you and your spouse, according to Working for Yourself (Nolo Press, $39.99). For family members under age 18, the parent does not have to withhold for FICA, Medicare, FUTA and SUTA.  If the spouse is employed, one does not have to withhold for FUTA and SUTA, but must withhold for FICA and Medicare.

For example, Jacob, age 15, proofreads press releases for his mother’s public relations business, which is operated as a sole proprietorship. Jacob is his mother’s employee, but she doesn’t have to pay FUTA taxes until Jacob turns 21 and need not pay FICA taxes until he reaches 18.

Of note, these rules don’t apply if you hire your child to work for your corporation or your partnership, unless all the partners are parents of the child. In other words, you must pay both FICA and FUTA taxes in the aforementioned cases. For example, Jack works in a landscaping business that is half owned by his father and half owned by his father’s brother. FICA and FUTA taxes will have to be paid because it’s a partnership and not all the partners are Jack’s parents.

Also of note, if your child has no unearned income (dividend income or interest) then you must withhold income taxes from your child’s pay only if it exceeds the standard deduction for the year. The standard deduction for 2011 was $5,800, but it’s adjusted every year for inflation. Children who are paid less than this amount need not pay any income taxes on their earnings. You must, however, withhold incomes taxes if your child has more than $250 in unearned income for the year and his or her total income exceeds $750. If you pay your child more than $600 or more during the year, you must file a Form W-2 reporting the earnings to the IRS. Regardless of how much you pay your child, each year you should fill out and have your child sign IRS Form W-4, Employee’s Withholding Allowance Certificate. If you pay your child more than $200 per week, keep a copy of the form for your records and file a copy of the form with the IRS.

For small business owners who are engaged in what is often called succession planning, hiring children can provide non-tax benefits as well. Children who play a role in a business can help it survive past the owner’s involvement. “Family Affair: The Emotional Issues of Succession Planning,” which can be found in the Journal of Financial Planning’s July 2005 issue, is one story worth reading on the subject.

Meanwhile, if you employ your spouse to work in your trade or business, the payments are subject to FICA taxes and federal income tax withholding, but not FUTA taxes. This rule doesn’t apply if your spouse works for a corporation, even if you control it, or a partnership, even if your spouse is a partner along with you. In that case, you will have to pay FUTA taxes.

If you employ a parent in your trade or profession, meanwhile, his or her wages are subject to income tax withholding and the FICA taxes, but not FUTA taxes.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Robert Gregov,CFA, CFP®, a local member of FPA and President of Roche Financial Partners. Roche Financial Partners is an independent wealth management firm that specializes in comprehensive financial planning and investment management. Our mission is to make a significant contribution to the quality of life of our clients by empowering them with the peace of mind and personal satisfaction that comes from achieving their financial goals. To learn more about Roche Financial Partners or the article above, please contact us at (609) 575-6762 or info@rochepartners.com. See our website at www.rochepartners.com.

Despite some positive stirrings in real estate in various parts of the country, it’s wise to take cautious steps when strolling back into the investment property market that was so overheated just a couple of years ago.

A good first step is consulting with a tax or financial adviser, such as a CERTIFIED FINANCIAL PLANNER™ professional, who can help you assess your own financial situation before you begin. Getting your own financial house in order first is critical.

Some thoughts:

Remember that real estate investment is part of an overall financial plan.  Investing in real estate requires specific tax, spending, budgeting and people management advice. Based on your other assets and your overall financial plan, investment property might be a worthy goal, but only if it fits your investment strategy and if you’re willing to put the time and effort into creating a successful business.

Don’t spend until you study.  If you don’t have an intimate knowledge of neighborhoods, rental rates, commercial traffic or any of a dozen more factors that make real estate investments a particular success in one community and not in others, don’t even start. The most successful people in real estate investment have taken the time to learn about the properties they’re buying, sensible ways to borrow and economical ways to manage the buildings they have.  Make sure you assemble a good advisory team around you starting with your financial planner, your tax adviser and an attorney knowledgeable about real estate transactions. They’ll teach you and keep you from making serious mistakes.

A slower market doesn’t mean a bargain market.  Even though the gains of the past 15 years aren’t what they used to be, keep in mind many sellers aren’t terribly desperate to sell and they’re not dropping their prices all that much. Make sure you take the time to study a particular market not only for gains in price, but for stability in rent and overall quality of the property and neighborhood you’re examining.  You might hear about a downtrodden neighborhood ready to “turn,” but that rotation might take years – start slow and pick properties with the best chance of appreciation.

Home ownership is not real estate investment.  If you’re thinking about leapfrogging from one residence to a new one in hopes of huge gains when the market returns, give yourself a reality check. An investment is something you can sell when the moment is right without any hesitation. Is that something you can really do with a home you’ve grown comfortable in? When the market goes up or down, we don’t necessarily think of dumping our principal residence. There are emotional ties as well as physical ties to a home – whereas real estate bought as an investment must produce income during ownership or a profit at the time of sale without exception.

 
Real estate is not an automatic ticket out of financial trouble.  Some people have gambled their way out of debt by buying distressed properties and reselling them at a profit. They’re the lucky ones – and after hearing so much about the “flipping” phenomenon, many of those success stories might be apocryphal. Be aware of your risk tolerance at all times.

Enter the foreclosure market carefully.  With all the reports of subprime borrowers losing their homes in recent months, don’t think those foreclosure numbers will automatically provide you with a can’t-miss opportunity in real estate. Taking advantage of the foreclosure market is both a learning exercise and an emotional one. It takes time to learn all the correct avenues in a community toward investing successfully in failed properties, and actual contact with families losing their homes can be wrenching even if you do know what you’re doing.  Foreclosure and pre-foreclosure investing is not for the faint-hearted.

Cash is king.  During the white-hot real estate market, people were buying and selling property for little or no money down because lenders were willing to take that risk. Today, in a higher rate environment, that’s definitely changed. While many successful real estate investors choreograph borrowing seamlessly into their strategy, cash is an important decision for down payments and covering ongoing expenses. This is where your advisory team comes in.

Keep your credit report clean.  Only borrowers with the highest credit scores will find the best lending deals if they need to borrow. Make sure your credit report is clean before you enter the market.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Robert Gregov,CFA, CFP®, a local member of FPA and President of Roche Financial Partners. Roche Financial Partners is an independent wealth management firm that specializes in comprehensive financial planning and investment management. Our mission is to make a significant contribution to the quality of life of our clients by empowering them with the peace of mind and personal satisfaction that comes from achieving their financial goals. To learn more about Roche Financial Partners or the article above, please contact us at (609) 575-6762 or info@rochepartners.com. See our website at www.rochepartners.com.

Investors sometimes get bored with traditional investments, such as U.S. stocks, investment-grade bonds, and the mutual funds that are invested in those asset classes. Especially when such investments fail to generate adequate returns as they did in 2011. And when that happens, investors often tend to hunt for what some refer to as “alternative” investments, investments with exotic names that hold out the promise of higher returns.

Alternative investments are, in simple terms, nothing more than investments that offer investors the chance to diversify their portfolio with instruments that may reduce overall risk of the portfolio and potentially improve returns. Typical alternative investments include hedge funds, commodities (futures and options), direct ownership of real estate, REITS (public and private), limited partnerships, private-equity funds, venture capital or angel investing, mutual funds (absolute return funds, long-short funds, and covered writing funds) and managed futures.

Besides the potential for higher returns and lower portfolio risk, alternative investments also have these general characteristics: higher fees, higher investment minimums, minimum net worth and income requirements for investors, and illiquidity (3 to 5 year commitments are not uncommon). In addition, investors may find it difficult to find appropriate benchmarks against which to measure performance and risk, unlike, for example, using the Dow Jones Industrial Average or the S&P 500 to measure the performance of stocks.

As with all investments, alternative or not, it would be useful to remember what the Romans used to say: “caveat emptor” – or “let the buyer beware” – when researching such investments.

So, if you are considering adding alternative investments to your portfolio be sure to get a sense of your current assets’ combined potential for return and risk and consider whether it would be realistic to make changes that could significantly enhance your potential return without an excessive increase in your potential risk. Often, a major benefit of adding alternative investments is that it tends to reduce the overall risk of a portfolio because the value of such investments doesn’t always follow that of stocks and bonds. In other words, traditional investments and alternative investments are not “correlated.”

Here’s a closer look at some of the more common alternative investments out there:

Hedge Funds.  Hedge funds are nothing more than investment partnerships and, as such, are often precursors of mutual funds. Some do nothing more than allow the investor to share the results of the expertise, experience and talents of a respected manager. Others may pursue very conservative strategies focused on principal protection. The key thing to recognize, according to financial planners, is the focus on absolute returns as opposed to relative returns and benchmarking. That said, it’s important to note that hedge funds may resemble mutual funds but are far from identical. For instance:

• The costs of owning them are a lot higher because they not only charge annual management fees (around 1-2 percent), they also commonly charge performance fees of 20 percent of the funds’ profits.
• They may use speculative techniques, such as borrowing money to supplement investors’ money and investing in illiquid securities that can make them more risky.
• Neither the funds nor most hedge fund managers are required to register with the SEC.
• Because of their higher level of risk and little or no SEC oversight, hedge funds tend to be made available only to the wealthy—those who have net worth of at least $1 million.
• They may only accept redemption requests quarterly, as opposed to daily, and may impose “lockup” periods of a year or more during which no shares may be redeemed.

Futures and Options.  Futures contracts commit you to buying or selling something for delivery in the future at a certain price while options contracts give you the right—but not the obligation—to do so.

Once primarily used for agricultural commodities, futures contracts now are also available in a growing variety of markets from metals and fuels to financial instruments including foreign currencies, U.S. and foreign government securities, and U.S. and foreign stock indices.

Prices can be highly volatile to reflect ever-changing balances between supply of and demand for the underlying assets.

Precious Metals.  The volatility of the price of gold, for example, the most widely watched metal worldwide, illustrates why it is, at best, a speculative asset when not purchased for actual use. Now trading near $600 an ounce, it remains far below its all-time high of around $1,000 about 25 years ago—but more than double its most recent lows around $250 at the end of the 1990s.

Anyone who bought gold 25 years ago as a long-term investment and held it would have lost a lot of money if he or she sold today—not to mention the missed opportunities for capital gains in securities. The lesson to be learned is that alternative investments are available for those who want to diversify their portfolios, however, they should be fully understood before you invest in them.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Robert Gregov,CFA, CFP®, a local member of FPA and President of Roche Financial Partners. Roche Financial Partners is an independent wealth management firm that specializes in comprehensive financial planning and investment management. Our mission is to make a significant contribution to the quality of life of our clients by empowering them with the peace of mind and personal satisfaction that comes from achieving their financial goals. To learn more about Roche Financial Partners or the article above, please contact us at (609) 575-6762 or info@rochepartners.com. See our website at www.rochepartners.com.

Charitable gift accounts are popping up at major mutual fund companies and may be a good idea for individuals looking for a tax-advantaged way to support their favorite charities, improve their estate tax situation or bring more order to their gift-giving strategy. These are not necessarily inventions for the rich – some of these funds can start with an initial contribution of $10,000 and allow additional contributions of as little as $1,000.

Charitable gift accounts offered by the mutual fund companies come in two varieties — donor-advised funds or pooled-income funds.  Donor-advised funds allow a donor to deposit a specific amount in the fund for an immediate tax deduction equal to the full value of the contribution, allow the donor to direct the investments within the choices provided by the fund and then direct where the money is given over time. Pooled-income funds, meanwhile, allow the donors to receive lifetime income from the funds’ investments while allowing the value of the account to go to designated charities after the last designated beneficiary dies.

Depending on a donor’s particular situation, these two options can be a relatively attractive idea depending on whether the donor’s focus is on obtaining the maximum tax deduction or retaining income for life. That’s why it’s a good idea to discuss either option with a trusted financial adviser such as a CERTIFIED FINANCIAL PLANNER® professional or a trained tax advisor to see if either of these choices or other tax advantaged charitable options are right for you.

Some general points about these options:
 
Know the kinds of assets you can deposit:  Most funds will allow you to deposit cash (by checks), publicly traded stocks, bonds and mutual fund shares and, in some cases, life insurance policies. Highly appreciated securities are often a good choice since the tax deduction is based on the fair market value of the asset.

You can reduce the overall size of your estate:  In 2011, the estate tax exclusion amount is $5 million, and $5.12 million in 2012, but it is set to drop to $1 million after 2012. No one can know the future, but for taxpayers with significant estates, charitable gift funds might be a good way to reduce the size of a taxable estate.

You need to keep an eye on fees:  These are not passively managed accounts, so you will probably be paying higher fees than the average index fund or similar pooled investment.  Always consider management fees when considering any potential benefits. However, this option is typically cheaper than starting your own foundation or similar charitable giving vehicle.
 
This decision is irrevocable:  Understand that your gift is final. Because of the tax-advantaged treatment, you’re not going to be able to reverse this decision if you find you need the money later. Give careful consideration to how prepared you are for retirement and long-term care spending before you make this choice.

Watch the IRS:  The Pension Protection Act of 2006 attempted to tighten some of the rules for donor-advised funds, and has directed the Internal Revenue Service to investigate these funds’ personal uses in more detail.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Robert Gregov,CFA, CFP®, a local member of FPA and President of Roche Financial Partners. Roche Financial Partners is an independent wealth management firm that specializes in comprehensive financial planning and investment management. Our mission is to make a significant contribution to the quality of life of our clients by empowering them with the peace of mind and personal satisfaction that comes from achieving their financial goals. To learn more about Roche Financial Partners or the article above, please contact us at (609) 575-6762 or info@rochepartners.com. See our website at www.rochepartners.com.