Welcome to South Bay Financial Partners, here to help with over 20 years of expertise.
22nd August 2017

21515 Hawthorne Blvd. Suite 200

Torrance, CA 90503

Month: April 2016

Tara Unverzagt April 6, 2016 No Comments

What happens when you’re gone?

I was asked recently why one would establish a trust when estate planning. If you have a “simple situation”, a trust isn’t necessary. A simple situation would be if you and your spouse have only been married once, are still married, are US citizens, and don’t have children. If you want and expect your assets to go to your surviving spouse, you probably don’t need a trust. You may not even need a will. Many states have “default” actions when someone passes away that usually include assets being transferred to a surviving spouse.

If your estate is large or you have plans other than leaving your assets to your spouse, you may want to invest in a trust. A trust can help minimize estate taxes and control how your assets are distributed. If you have kids and do or don’t want to leave assets to them, a will may be sufficient, but the state and federal government can overrule your will. Also, a trust can give more options in transferring assets to a charity. If it’s important to you that your assets be distributed in a certain way, you will want to consider a trust.

Executing a will incurs probate tax which can be 2% to 7% of your assets. Since probate involves lawyers, you may have additional legal costs if there are disagreements on how assets should be distributed. The cost of a trust is approximately $2,000 and may need to be updated at various points of your life at additional expense. With a will or trust, you won’t have Federal estate tax if your assets total less than $5,430,000 in 2015 (this amount changes every year). If your assets are over this amount, you may be able to avoid some or all Federal estate taxes. You may have state taxes that vary from state to state.

If you have remarried, you also will want to consider a trust. In some states “surviving spouses”, even in a second marriage, have a right to claim up to half the estate. If there are children from more than one marriage, a trust is the best way to ensure assets are distributed the way you want.

To help minimize estate taxes, trusts can be generated at death. From a living trust that is active during your life, people often generate a marital trust at death to provide funds to a surviving spouse for the spouse’s life, with remaining assets going to the children upon the spouse’s death. This is usually paired with a family trust which has assets go directly to the children at death but retaining income for the remainder of the surviving spouse’s life. In some cases, there are more than two trusts generated to take care of various family members.

Most parents with special needs family members understand that they require special estate planning. A special needs trust can help them maximize the benefit of their resources after they pass. A trust can also help articulate what will happen to special needs family members and minor children. You can name a person to manage your financial assets and a different person to take care of your family members’ personal health and wellbeing.

If your situation is more complex than the “simple situation”, it’s important to contact an Estate Planning Attorney that understands the current laws. A good lawyer will also write provisions into a trust to automatically change as laws change. If you have a “simple situation” you will still want to research how your state handles assets on a person’s death. You may be surprised at what you learn.

If you’re comfortable with your assets going to your spouse and/or children in whatever way the state indicates, you don’t need a trust. If you care about what happens to your assets after death, a trust is sometimes the best way to go. A will can be contested which delays distribution, can be expensive, and may end in assets being distributed inappropriately. If you document your wishes in a trust, the courts make sure the instructions are executed as written.

All information provided is general in nature and not meant to be advice for you in particular. If you’d like to know more about how this topic relates to your situation, contact me at tara@southbayfinancialpartners.com.

Tara Unverzagt April 4, 2016 No Comments

Use Debt to Your Advantage

Debt has fueled much of the growth in the world over the last four decades. Debt has made many business owners, investors, and individuals wealthy. But debt has also been the ruin of many businesses, investors, and individuals.

The “final exam” of my MBA involved a business simulation. Each study group was tasked to run a business manufacturing hairdryers. My study group was mostly made up of bankers. When our door shut at the start, the bankers immediately said, “We need to get a line of credit.” I said, “We’re starting with a lot of available cash.” They explained that bankers only loan you money when you have money. At some point down the road, we may need money, but we should secure it in the beginning. That 10 minutes was more valuable to me than the two years that led up to it. Indeed, “down the road” the hairdryer market was booming, but we didn’t have enough cash to build a new plant. That line of credit provided the opportunity to grow our business. Our study group ended with millions of dollars more than any other study group. We had that line of credit right when we needed it while the others were just starting to negotiate with the banks.

This was a lesson in how debt can make you wealthy. The other side of that coin occurred as the housing boom went bust in 2008. There were a lot of people who borrowed money to buy a house, but didn’t have the funds to pay the debt. They lost their house and their wealth.

Debt helps magnify your return. If you want to buy a house, most people can purchase a bigger house with a loan than if they only used savings to purchase the house. If the value of that house goes up, there is a larger gain on the larger investment. But if the value of that house goes down, there is a larger loss.

So how do you use debt to your advantage? As the bankers in my MBA study group pointed out, you will only get debt when you have money. The more money you have, the more debt you will be allowed to carry. If you think like a banker, and only incur debt that you can pay off, you can use it to your advantage.

You can’t predict what’s going to happen to the housing market in the next 2-5 years, but the longer you are in the housing market, the more likely you are to see the value grow above what you invested. If you plan to stay in the housing market for the long haul, it’s fine to incur debt to purchase your home. But make sure you have enough funds to pay the mortgage for 6-12 months, even if you lose your job. This should be part of your Emergency Fund. If you don’t have enough savings to make future mortgage payments, you may find yourself in the position that so many people did in 2008 and risk losing your home.

When you buy a car, you do not typically expect it to increase in value. As a matter of fact, as soon as you drive a new car off the lot, it loses value. Buying a car with debt increases the cost of the car and therefore increases your loss. If you have a 10%, five year loan on your $20,000 car, you are really paying $25,500 for the car. In addition to the decrease in the value of the car, you are losing an extra $5,500 from interest payments. Many people lease a car instead of buying. Keep in mind this is just building the loan costs into the price of the car. Typically it’s easy to hide higher loan costs in the “low” monthly payments of a lease agreement. The more expensive the car, the more you lose in value and interest paid.

In order to sell more cars, dealers often offer 0% loan deals. This can be a way of using debt to your advantage. If you can get a 0% loan for $20,000 and then invest that money in a bond giving you 4%, you win. Make sure you have the $20,000 to pay off the loan. If the 0% interest is only for a limited time, pay the balance as soon as the interest rate goes up. Typically, if you miss a payment, you will pay high fees and/or the interest charges. So make those payments.

Bottom line, you can use debt to make money, but you can also lose money with debt. Follow some basic guidelines to use debt to your advantage.

  • Make sure you have the cash to pay the debt on time. For long term debt, have enough in cash to make payments for 6-12 months.
  • Use debt to increase your income, like paying for college tuition, but not for consumables like going out to eat or a nicer apartment.
  • Use debt when you can invest those funds at a higher return or in a business that can make more income than the cost of the debt.
  • If the item you purchase is not an investment that can increase in value, pay cash.

Debt always increases risk, but the risk can be managed if debt is used wisely.

 

All information provided is general in nature and not meant to be advice for you in particular. If you’d like to know more about how this topic relates to your situation, contact me at tara@southbayfinancialpartners.com

Top