If you’ve watched TV lately, you’ve likely seen ads selling reverse mortgages. A reverse mortgage can be a great tool to help you realize your dreams.  However, it is a very specific type of tool for a very specific type of situation.  If used incorrectly, it can cause a borrower to lose their home.  You owe it to yourself and your loved ones to learn the good, the bad, and the ugly of reverse mortgages.

How they work
A reverse mortgage is a loan which allows homeowners 62 and older to convert some of the equity they have in their primary residence into cash. The amount of equity required to obtain a reverse mortgage depends on your age. Younger borrowers need about 60% equity in their homes to qualify, while those over 80 may need just 45%.

Once approved, you can receive the money in one of three ways: as a lump sum, as monthly installments, or as a line of credit. Because you receive payments from the lender, your home’s equity decreases over time, while the loan balance gets larger, thus the term “reverse” mortgage.

With a reverse mortgage, you no longer have to make monthly mortgage payments, and you can stay in your home as long as you keep up with property taxes, pay insurance premiums, and keep the home in good repair. Lenders make money through origination fees, mortgage insurance, and interest on the loan balance, all of which can exceed $10,000 to $15,000.

Be aware, the reverse mortgage loan (plus interest and fees) becomes due and must be repaid in full when any of the following events occur:

  • Your death
  • You are out of the home for 12 consecutive months or more, such as in the case of needing nursing home care
  • You sell the home or transfer title
  • You default on the loan by failing to keep up with insurance premiums, property taxes, or by letting the home fall into disrepair

A still evolving industry
In 2011, the Consumer Financial Protection Bureau cracked down on some of the misleading advertising practices by lenders. All reverse mortgage advertisers are now required to disclose that the loans must be repaid after death or upon move-out. Additionally, advertisers can no longer claim the loans are a “government benefit” or “risk free.” 

In 2014, HUD developed new policies to better protect surviving spouses who were often being “left out in the cold” literally under the old rules. Now, if a married couple with one spouse under age 62 wants to take out a reverse mortgage, they may list the underage spouse as a “non-borrowing spouse” with rights to retain the home if the older spouse dies.

Despite these recent changes, however, the number of ads for reverse mortgages hasn’t declined and too many borrowers (and non-borrowing spouses) still end up going through foreclosure.  The industry continues to need to offer better protections for the elderly against unscrupulous reverse mortgage lending practices.

Dedicated to empowering your family, building your wealth and defining your legacy,

Marc

 

 

 

 

 

 

 

 

 

 

 

 

It’s the middle of the night.

The authorities just notified you that you have 20 minutes to evacuate your home before a raging wildfire cuts off the exit from your neighborhood, leaving you trapped.

The fire is advancing at the rate of a football field every second, so the actions you take in the next few moments will determine whether you and your family can get to safety or not.

While this may sound like a scene from a blockbuster disaster movie, it’s the very scenario faced by many California families recently. And it’s a possibility we should all be ready to face.

Be ready to go
I’ve always believed the responsibility for protecting my family lies squarely with me. I may not be able to count on, or in the worst of circumstances even hope for, outside help. If I can’t shelter in place and protect my family, evacuation is my Plan B. And as the recent wildfires should remind us all, when you have mere minutes to evacuate, you won’t have time to think about what you should bring with you to survive the days—or weeks—to come.

To be optimally prepared, have a “go-bag” on-hand packed with the essential items needed to survive for AT LEAST three days following a disaster.  While numerous online retailers sell fully equipped go-bags for such emergencies, and both FEMA and the American Red Cross provide checklists to help you pack your own, I’m providing a basic summary of the most-recommended supplies here.

1) ID and other essential documents: Bring copies of your passport, driver’s license, and/or state ID card and store them in a sealed Ziplock bag. Other documents to consider packing include the deed to your home, vehicle titles/registration, printed maps, and a recent family photo with faces clearly visible for easy identification.

2) Cash: Carry at least $250 in relatively small bills and keep it with your ID in a waterproof bag.

3) Shelter: A lightweight tent, along with mylar emergency blankets can help keep you warm and dry no matter where you must spend the night.

4) Water and filter: One gallon of water per person per day is a good estimate of needs. Bring as much bottled water as possible, but also include a water purification straw and/or purification tablets, along with a steel container to boil water in.

5) A multi-tool: These modern-day cousins to the Swiss Army knife come with a wide array of essential tools, from a knife and screwdriver to tweezers and a can opener.

6) First-aid kit and prescription medications: Whether you buy one ready-made or pack your own, the likelihood of injury skyrockets in the wake disasters, so not having a first-aid kit can make a bad situation worse. And don’t forget to include prescription medications and other life-sustaining medical supplies if needed.

7) Light: Flashlights with extra batteries are great, but headlamps are even better because they’re ultra-compact and leave your hands free.

8) Fire: Fire can keep you warm, purify water, and cook food. I keep a plasma lighter, waterproof matches, a small portable stove, fuel and tinder in my personal go-bag.

9) Solar-powered emergency radio and cellphone charger: Without power, you’ll need a way to stay in touch with the outside world. Today you can find devices that include a combination radio, cell-phone charger, and flashlight all in one, with the extra option of hand-cranked power to keep things charged even in the dark.

10) Sanitary items: Pack toilet paper, baby wipes, hand sanitizer, soap, as well as tampons and/or pads if needed.

11) Clothes: You only need enough clothes to keep you warm and comfortable for a few days, so don’t try to bring your entire wardrobe. Stick to essentials like underwear, socks, extra shoes, a jacket, a poncho, a hat, and gloves.

12) Food: Focus on high-protein, high-caloric foods that will give you the energy you need to live and get from point A to point B. The most recommended options include, energy bars, MREs (Meals-Ready-to-Eat), freeze-dried survival food, and meal-replacement shakes.

Stay totally safe and secure
While go-bags are a critical part of helping your family survive the immediate aftermath of a natural disaster or other emergency, they’re just a start. For instance, this list doesn’t address any of your precious sentimental items, such as photos, old love letters, and treasured cards from the past. Nor does it mention estate planning documents or insurance policies.

Copies of your insurance policies and estate planning documents should be uploaded to the cloud and stored online. You should also store sentimentals, like family histories and photos online, so you don’t have to worry about packing any of that in the event of a natural disaster. Indeed, safely storing your sentimentals online is so important, we are constantly innovating ways to help our clients do more of this.

Of course, to keep your family totally safe and secure, you’ll need to make sure you have the right insurance coverage and necessary legal documents in place to cover possible emergency contingencies. Contact us if you have questions about what you need or how we can support you.

Dedicated to empowering your family, building your wealth and defining your legacy,

The recent wildfires in California were devastating to the communities and families affected by them. The threat of earthquake is always present for those of us in the Golden State. Yet despite the danger posed by natural disasters, many California homeowners still lack the insurance needed to protect their property and possessions from such catastrophes.

In fact, roughly two-thirds of all homeowners are underinsured for natural disasters, according to United Policyholders (UP), a nonprofit organization for insurance consumers. One contributing factor to this lack of coverage is the mistaken belief that homeowners insurance offers protection from such calamities. In reality, natural disasters are typically not covered by standard homeowners policies.

In order to obtain protection, you often need to purchase separate policies that cover specific types of natural disasters. Here, we’ve highlighted the types of insurance coverage available and how the policies work.

Wildfires

While homeowners insurance typically doesn’t pay for damage caused by natural disasters, most policies do protect against fire damage, including wildfires like the recent ones in California. The only instances of fire damage homeowners policies won’t cover are fires caused by arson or when fire destroys a home that’s been vacant for at least 30 days when the fire occurred.

That said, not all homeowners policies are created equal, so you should check your policy to make certain that it includes enough coverage to do three things: replace your home’s structure, replace your belongings, and cover your living expenses while your home is being repaired, known as “loss of use” coverage.

In certain areas that are extremely high-risk for wildfires, it  can be be difficult to find a company to insure your home. In such cases, you should look into California’s FAIR Plan.

Earthquakes

Unlike fires, earthquakes are typically not covered by homeowners policies. To protect your home against quakes, you’ll need a freestanding earthquake insurance policy.

While earthquake insurance is available throughout the state, policies in high-risk areas (such as on fault lines) typically come with high deductibles. What’s more, though earthquake insurance covers damage directly caused by the quake, some related damages such as flooding are likely not covered. Carefully review your policy to see what’s included—and what’s not.

Floods

Though homeowners insurance generally covers flood damage caused by faulty infrastructure like leaky pipes, nearly all policies exclude flood damage caused by natural events like heavy rain, overflowing rivers, and hurricanes. You’ll need stand-alone flood insurance to protect your property and possessions from these events.

The threat from flooding is so widespread, Congress created the National Flood Insurance Program (NFIP) in 1968, which allows homeowners in flood-prone areas to purchase flood insurance backed by the U.S. government. To determine the risk for your property, consult FEMA’s Flood Map service center.

Get the disaster coverage you need today
To make certain you have the necessary insurance coverage to protect your home and belongings from natural disasters, consult with your insurance agent or let us know and we’ll be happy to refer you to one of the trusted insurance advisors we know.

Dedicated to empowering your family, building your wealth and defining your legacy,

With the cost of long-term care (LTC) skyrocketing, you may be concerned about your (or your elderly parents’) ability to pay for lengthy stays in assisted living and/or a nursing home. Such care can be massively expensive, with the potential to overwhelm even the well-off.

Because neither traditional health insurance nor Medicare will pay for LTC, some people are looking to Medicaid to help cover this cost. To become eligible for Medicaid, however, you must first exhaust nearly every penny of your savings.

Given this, you may have heard that if you transfer your house to your adult children, you can avoid selling the home if you need to qualify for Medicaid. You may think transferring ownership of the house will help your eligibility for benefits and that this strategy is easier and less expensive than handling your home (and other assets) through estate planning.

However, this tactic is a big mistake on several levels. It can not only delay—or even disqualify—your Medicaid eligibility, it can also lead to numerous other problems.

Medicaid Changes
In February 2006, Congress passed the Deficit Reduction Act (DRA), which included a number of provisions aimed at reducing Medicaid abuse. One of these was a five-year “look-back” period for eligibility.

This means that before you can qualify for Medicaid, your finances will be reviewed for any “uncompensated transfers” of your assets within the five years preceding your application. If such transfers are discovered, it can result in a penalty period that will delay your eligibility.

If you transfer your house to your children and then need LTC within five years, it may significantly delay your qualification for Medicaid benefits—and possibly prevent you from ever qualifying.

A potentially huge tax burden

Another drawback to transferring ownership of your home is the potential tax liability for your child. If you’re elderly, you’ve probably owned your house for a long time, and its value has dramatically increased, leading you to believe that by transferring your home to your child, he or she can make a windfall by selling it.

Unfortunately, if you do that, she or he will have to pay capital gains tax on the difference between your home’s value when you purchased it and your home’s value at the time she or he received it. Depending on the home’s worth, these taxes can be astronomical.

In contrast, by transferring your home at the time of your death, your child will receive what’s known as a “step-up in basis.” It’s one of the only benefits of death, and it allows your child to pay capital gains taxes based on the value of the home at the time of inheritance, rather than the value at the time you bought it.

Debt, Divorce, Disability, and Death

There are numerous other reasons why transferring ownership of your house to your child is a bad idea. If your child has significant debts, his or her creditors can make claims against the property to recoup what they’re owed, potentially forcing your child to sell the home to pay those debts.

Divorce is another problematic issue. If your child goes through a divorce while the house is in his or her name, the home may be considered marital property. Depending on the outcome of the divorce, this may force your child to sell the home or pay his or her ex a share of its value.

The disability or death of your child can also lead to trouble. If your child becomes disabled and seeks Medicaid or other government benefits, having the home in his or her name could compromise eligibility, just like it would your own. And if your child dies before you and has ownership of the house, the property could be considered part of your child’s estate and be passed on to your child’s heirs, creating a problem for you.

No substitute for proper estate planning
Given these potential problems, transferring ownership of your home to your children as a means of “poor-man’s estate planning” is almost never a good idea. Instead, follow a sound estate planning strategy designed to protect your assets while enabling you to better afford whatever long-term healthcare services you might require.

Dedicated to empowering your family, building your wealth and defining your legacy,

Aretha Franklin, heralded as the “Queen of Soul,” died from pancreatic cancer at age 76 on August 16th at her home in Detroit. Like Prince, who died in 2016, Franklin was one of the greatest musicians of our time. Also like Prince, she died without a will or trust to pass on her multimillion-dollar estate.

Franklin’s lack of estate planning was a huge mistake that will undoubtedly lead to lengthy court battles and major expenses for her family. What’s especially unfortunate is that all this trouble could have been easily prevented.

A common mistake
Such lack of estate planning is common. A 2017 poll by the senior-care referral service, Caring.com, revealed that more than 60 percent of U.S. adults currently do not have a will or trust in place. The most common excuse given for not creating these documents was simply “not getting around to it.”

Whether or not Franklin’s case involved similar procrastination is unclear, but what is clear is that her estimated $80-million estate will now have to go through the lengthy and expensive court process known as probate, her assets will be made public, and there could be a big battle brewing for her family.

Probate problems
Because Franklin was unmarried and died without a will, Michigan law stipulates that her assets are to be equally divided among her four adult children, one of whom has special needs and will need financial support for the rest of his life.

It’s also possible that probate proceedings could last for years due to the size of her estate. And all court proceedings will be public, including any disputes that arise along the way.

Such contentious court disputes are common with famous musicians. In Prince’s case, his estate has been subject to numerous family disputes since his death two years ago, even causing the revocation of a multimillion-dollar music contract. The same thing could happen to Franklin’s estate, as high-profile performers often have complex assets, like music rights.

Learn from Franklin’s mistakes
Although Franklin’s situation is unfortunate, you can learn from her mistakes by beginning the estate planning process now. It would’ve been ideal if Franklin had a will, but even with a will, her estate would still be subject to probate and open to the public. To keep everything private and out of court altogether, Franklin could’ve created a will and a trust. And, within a trust, she could have created a Special Needs Trust for her child who has special needs, thereby giving him full access to governmental support, plus supplemental support from her assets.

While trusts used to be available only to the mega wealthy, they’re now used by people of all incomes and asset values. Unlike wills, trusts keep your family out of the probate court, which can save time, money, and a huge amount of heartache. Plus, a properly funded trust (meaning all of your assets are titled in the name of the trust) keeps everything totally private.

Trusts also offer several protections for your assets and family that wills alone don’t. With a trust, for example, it’s possible to shield the inheritance you’re leaving behind from the creditors of your heirs or even a future divorce.

Don’t wait another day
Regardless of your financial status, estate planning is something that you should immediately address, especially if you have children. You never know when tragedy may strike, and by being properly prepared, you can save both yourself and your family massive expense and trauma.

Don’t follow in Franklin’s footsteps; use her death as a learning experience. Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, or need your plan reviewed, call us today.

Dedicated to empowering your family, building your wealth and defining your legacy,

 

estate planning 91024To many people, living debt-free is a lifelong dream. It’s the picture of the easy life. Retired with no debt. . .

You may be surprised to learn, however, that debt-free is not always the best decision – particularly if the choice is between paying off a mortgage or using the money more wisely to invest in the future using low-interest rate funds.

What? I Shouldn’t Pay Off My House?

Most of us don’t have huge piles of extra cash lying around. We simply don’t have the luxury of being able to pay off our family home and maxing out our retirement contributions or investing in a side business. It’s pretty much an either-or proposition.

With that said, from a financial standpoint, it is usually most favorable to make additional contributions to a company 401(k) program, if your company is matching your contributions, or investing in growing a side business, rather than using extra money to pay off the mortgage.

Putting money into a 401(k) plan has many advantages:

  • Taxes on these contributions are deferred;
  • Employers often max 401(k) contributions, doubling your money;
  • Money can be liquidated for unexpected expenses; and
  • In most cases, if you are connected to how your 401(k) is invested, investing the extra money could result in a more significant return than the interest you are paying on your mortgage, leading to greater net wealth in retirement.

 

Creating a side business has many advantages as well:

  • You can create a side income stream that provides you with the kind of security a job working for someone else never can;
  • You can write off business expenses for things you are already paying for already, such as using the home office deduction to deduct part of your home costs;
  • You can use your creativity, knowledge, experience, and other resources gained over a lifetime of learning to help others and get paid for it;
  • You can employ your children, teaching them financial principles and how to be personally sovereign from a young age;
  • You can learn, grow and evolve — starting and running a business is one of the best ways to push the edges of your own comfort, bringing you closer and close to true internal liberation.

 

And, remember this: Mortgage interest deductions help during tax time.

After all is said and done though, the mortgage versus 401(k) versus side business decision is a personal one that you must ultimately make for yourself. Just keep in mind that if your priorities are financial, it is probably best to lean towards making additional contributions to your retirement account or starting a business rather than paying off your mortgage.

Dedicated to your family’s wealth, health, and happiness,
Marc Garlett 91024

real estate 91024It seems that we can’t turn on the television or radio without hearing an ad for a “reverse mortgage.” So what is a reverse mortgage exactly, and who can benefit from using one?

A reverse mortgage is a type of loan taken out against your home. With a reverse mortgage (as with a traditional mortgage) you are borrowing against your home equity which is the difference between your home’s market value and the amount you owe on your mortgage. The difference in a reverse mortgage is that you do not have to pay it back while you are alive. Instead, the loan is paid off after you pass away.

What Are Some of the Benefits of a Reverse Mortgage?

Reverse mortgages can be a fantastic tool, depending on your goals. They can provide additional income and improve your cash flow, particularly if you have already paid off your home. Here are some reasons to consider a reverse mortgage:

  • They can help you maintain your financial independence by providing additional income;
  • They can allow you to stay in your home until you die;
  • For most people, the risk of default is low; and
  • They are not taxed.

One of the best things about a reverse mortgage is that the amount paid back will not exceed your home’s value.

What Are Some of the Disadvantages of a Reverse Mortgage?

As with any financial tool, reverse mortgages are not for everyone or every situation. Before you decide to take out a reverse mortgage on your home, you should consider the following potential disadvantages:

  • Interest costs are higher because you are making no payments;
  • The amount paid back after your death will cut into the estate left for your family or heirs; and
  • Because they are based on a formula, the amount you can borrow is lower than with traditional home equity loans.

Reverse mortgages can also be complicated and rather difficult to understand.

The bottom line is this: A reverse mortgage is one financial tool you can use to achieve your goals. However, before you commit to a large loan, you should make sure you understand all aspects of the loan. If you are not sure whether or not a reverse mortgage is right for you, talk with a trusted financial adviser or attorney.

Dedicated to your family’s health, wealth, and happiness,
Marc Garlett 91024

real estate 91024As our parents and other loved ones age, they may need a little more attention from us. Parents, grandparents, aunts and uncles, or and even neighbors who are aging may want to be seen as strong and independent. Often, however, their abilities to take care of household and financial affairs begin to erode as they get older.

What’s at Risk?

One such example which can have catastrophic consequences is the failure to pay property taxes. A lot of retired people are struggle to make ends meet and may not be able to pay their taxes as they come due. This puts their home at risk because unfortunately, governments have processes in place to collect back taxes by placing liens against the property.

Worst Case Scenario

Different locales have different approaches to filing liens against property, but one of the worst is Washington, D.C. There, the city made a policy change in 2001 that has had devastating effects on homeowners. Prior to that time, the city would sell a lien at auction to individuals who could then charge interest on the amount due until it was paid. If it was not paid, the city could move to foreclose on the property.

The change in 2001 allowed the purchasers of the liens to go directly to court to foreclose on the property they purchased. This attracted predatory lenders from other states that became very aggressive in pursuing the foreclosures. In many cases, people who owned their homes free and clear lost them over unpaid taxes of less than $500. Once investors buy the liens, they can begin charging interest and legal costs, which makes it more expensive for the homeowner to pay off the lien.

While it is true that homeowners have ample time and notice to pay the taxes, even after the liens are sold, Washington’s story is replete with cases of owners with dementia or other serious illnesses. Because of these types of conditions, many owners were not aware of or did not understand what was happening. And without family or friends looking out for them, the predators can have a field day.

What Can be Done?

Thankfully, Washington is in the minority of governments that allow this predatory approach to tax collection. But it points out the need for those of us with elderly family members and friends to pay attention. Respect their pride, but make sure they get the help they need so they are not taken advantage of.

One of the main objectives of our law practice is to keep families out of court and out of conflict. Our lawyers can help you protect those you love by starting with a Family Estate Planning Session. Call our office today, mention this article, and we’ll waive the fee for your session.

Dedicated to your family’s wealth, health, and happiness,
Marc Garlett 91024

real estate 91024My wife and I were both apartment renters in our younger years. Now we are landlords with several 3 and 4-unit residential properties in and around Los Angeles.

Good landlords aren’t looking to take advantage of their tenants. Without even going into the legal and ethical implications, that’s just bad business. And good tenants respect their landlord’s property and time. That’s good business on their end of things as well (again, not to mention the legal and ethical consequences of not doing so).

But even when there are good, moral people on both sides of the landlord-tenant relationship, problems can – and do – still arise. Often, these problems are because of simple misunderstandings. So to help prevent those kinds of problems, here’s what prospective renters should ask before signing a lease:

Number 1: What Will My Total Cost Be and When Is It Due?

You might be surprised at how many people sign leases without understanding all of the associated costs and when they must be paid. Renting an apartment or house is exciting and it can be easy to simply just scan the document and jump straight to the signature line. Most tenants think about obvious costs, such as monthly rent and typical utilities. However, some leases require tenants to pay less obvious costs, such as application fees, credit check fees, parking fees, and optional service fees, such as cable and Internet. Review your lease carefully and compare leases from different landlords–what may seem like a better deal may not actually be better after everything is taken into consideration.

Be sure you know what the deposit is, what will be necessary to get your deposit returned after you move out, when your rent payment is due and what the late fee is if you are late (and whether or not there is a grace period for being late).

Number 2: What Rules and Regulations Will Apply to Me?

Many landlords impose rules on their tenants, particularly those living in close quarters, such as apartment buildings. More common rules include mandatory quiet times, as well as prohibitions on pets or parties. However, other important rules are also found in leases. For example, many landlords prohibit tenants from redecorating their property, from changing locks, from using propane grills or from storing items on balconies or porches. Read the lease carefully to ensure you understand and can abide by each of the rules.

Number 3: When Will My Lease End, and What Happens When It Does?

Many leases define how long they will last (called the “term” of the lease) and under what circumstances they will renew. If the lease does not provide this information, California state law will set the term of the lease and its renewal. Before you sign a residential lease, make sure you know how long you are locked into it and under what circumstances you can move out and owe no more rent. If you are not sure, consult with an attorney.

Dedicated to your family’s wealth, health, and happiness,
Marc Garlett 91024

Protecting Real Estate 91024Many parents believe that by adding children’s names to a property deed, they can easily pass along that property to their children. Unfortunately, those who act on that belief often find they have invited more problems than they have avoided.

This is because in California, when more than one person owns property together and they are not married, the default form of title ownership is referred to as tenants in common. This means that if one of the owners dies, his or her ownership share does not transfer to the other owner(s). Instead, it goes to the deceased owner’s heirs through probate.

The problems of probate (and there are many) can be avoided if the deed designates property ownership as joint tenants with the right of survivorship. However, there are several big reasons why it may not be advisable for you to deed real estate to your children in this manner, with adverse tax consequences topping the list. This is because deeding property to children is actually considered a gift, and the cost basis for that gift is what you paid for your home.

For example, let’s say you paid $150,000 for your home many years ago. You then add your children to the deed at some point, which the IRS deems a gift. After you die, the children sell the home for the current market value of, let’s say, $550,000. They will be taxed on the difference between the cost basis of $150,000 and the sale price of $550,000 – or $400,000. That’s a huge tax burden you’ve left for your children.

It would be better if your children inherited the property via your will, then selling it under the scenario described above would not create the same tax liability because their cost basis would be what the property was worth when they inherited it (that being the current market value of $550,000).

But there is an even better way; much better in fact. While inheriting property through a will does avoid some of the tax issues discussed above, it does NOT avoid probate. The way to avoid tax issues AND probate is by creating a living trust and titling the property in the name of the trust, and naming your children as the trust’s beneficiaries. You avoid – or more accurately, your kids avoid – the problems and costs of probate and do so in a tax-advantaged way.

So if you own real estate, give us a call today. We will review your current deed and advise you on on the easiest and most cost effective ways to pass it to your children.

To your family’s health, wealth, and happiness,
Marc Garlett 91024