Category

Retirement

Do You Have an Exit Strategy for your Rental Properties?

By Estate Planning, Retirement, Tax Planning, Wealth Management

Owning rental properties is one of the most common investments that Americans make along with their 401k or other retirement accounts. The primary reason why real estate is so popular is because it is easy to understand from an investment standpoint. There are four primary wealth builders associated with real estate; the rental income, price appreciation, loan pay down (equity) and the tax benefits. Additionally, the ability to use leverage (borrow money to purchase a property) makes real estate investing accessible to many people and not just the rich. All of the reasons listed above are why many Americans end up nearing retirement with a few rental properties or in some cases, a substantial real estate portfolio, without a clear exit strategy.

Let’s go over an example to explain how an investor’s real estate investing career may unfold. The investor bought six rental properties over the past few decades for $75,000 each. The properties are fully depreciated and entirely paid off. Throughout the years, the properties have all appreciated and are currently worth $200,000 each. The investor is interested in selling and finding a more “passive” investment vehicle until he realizes the tax ramifications associated with selling the properties. One option for the investor is to hire a property manager. The investor could achieve his desire for a more passive involvement and would not have to pay the taxes that would be due with a sale, however, the headaches of owning real estate do not go away when one hires a property manager. The owner is still responsible for the repairs and expenses and all of their associated costs. Remember, these properties have been owned for decades, they are older and have seen their maintenance costs tick up as they continue to age. Major potential repairs such as fixing a roof or replacing major appliances can seriously threaten an investor’s “stress-free” retirement.

After much thought and debate with his wife, (who by the way I forgot to mention wants nothing to do with the rentals and prefers to be able to travel extensively throughout retirement; often being gone for weeks or months at a time), he decides to sell the rentals and face the significant tax liability. His decision to sell only lasts a few days until he realizes the second major problem of selling the rentals, which is the loss of the income stream during retirement. The income can be replaced with a new investment but the amount in the new investment will be considerably lower after the taxes are paid from the initial sale. Since the amount invested will be lower, the new income stream will likely be lower too.

Afraid of the drawbacks listed above, our investor and many owners of investment real estate simply deal with the headaches of being a landlord and continue to hold the rentals throughout retirement in conflicting views with their spouse. However, there is another option that will allow an investor to sell their rental properties, defer the capital gains (potentially forever) and maintain their current stream of monthly income without the headaches of being a landlord. That option is a DST 1031 exchange into a real estate fund.

A 1031 exchange is a method to exchange an investment property for another “like-kind” investment property and avoid the tax implications from the initial sale. A Delaware Statutory Trust (DST) is a legally recognized trust for conducting business and can be used in a 1031 exchange. The replacement property now becomes an interest in a professionally managed real estate fund.

The benefits of a DST 1031 exchange can be substantial with the primary benefit being the ability to defer capital gains and depreciation recapture. The taxes are deferred until the real estate fund liquidates and distributes the proceeds of the sale. Once the fund is liquidated, the investor has the option to invest the proceeds received into another DST 1031 exchange in order to defer the taxes again. The investor can continue to defer, defer, defer until the original owner passes away. The heirs will receive a step up in cost basis, effectively eliminating the taxes owed from the original sale of the investment real estate. This deferment of taxes is a powerful wealth building strategy that can accelerate the growth of a family’s wealth.

The second benefit of a DST 1031 exchange is the elimination of property management responsibility. As with other passive investments, the investor will not have to make decisions regarding the investment management. Dealing with tenants will be over and the only work required will be the monthly walk to the mailbox to pick up the check.

Diversification is the third benefit achieved. The investor is able to diversify from a concentrated property in one location into a more diversified fund with several properties in different geographical locations. Examples of some property types available include multi-family apartments, NNN retail, self-storage, assisted living facilities, office buildings and medical offices. Often these newer commercial buildings are unattainable to the individual investor but a real estate fund pools the assets of many investors and can access these newer commercial property types.

The final benefit associated with a DST 1031 exchange is the use of the 20% qualified business income (QBI) deduction. This deduction, which was passed with the 2017 Tax Cuts and Jobs Act, allows eligible taxpayers to deduct up to 20% of their qualified business income. Individual owners may not qualify for the 20% QBI since they’re not in the business of owning and managing real estate but since the real estate fund is in the business of managing real estate, the fund qualifies for the 20% reduction.

In conclusion, the DST 1031 exchange provides an investor with a great exit strategy for their real estate portfolio. The headaches of being a landlord are eliminated, the tax liability from selling the properties is deferred (or in some cases eliminated through a step up in cost basis), and the investor benefits from the 20% QBI deduction and continues to receive monthly income from a real estate investment fund.

To learn more, please visit our 1031 exchange webpage at www.EndowmentWM.Com/1031-exchange or contact us by phone at 920-785-6010.

Have Questions? Need an expert opinion?

If you have more questions I’m happy to help you! We make getting answers super easy, without having to talk to some high-pressure sales person. Just use the secure contact form to ask a question, or email me directly at Sam@EndowmentWM.com, and I’ll get back to you via email within 48 hours to help point you in the right direction. I also offer a free wealth discovery meeting where we can discuss your personal situation and make sure you’re on the right path. Remember, it’s free to contact us and we are fiduciary advisors putting your personal needs first and foremost.

Best of Success,

Samuel Moore

Do I “lose” money by waiting to take Social Security?

By Retirement, Social Security

Executive Summary

Many retirees choose to take their social security benefit as soon as possible at age 62. But is this the right decision? We all know that the longer you wait to get started, the larger your monthly payment will be. In fact, for every year you wait, you earn an 8% increase in the monthly benefit payment. But for those who DO choose to wait, the missed monthly payments can begin to add up (in their mind), which can cause some uncertainty and have retirees asking the question: “Am I losing money by not taking my Social Security benefit payment?” Read More

Is Your Wealth Advisor a Fiduciary?

By Family Office, Retirement

EXECUTIVE SUMMARY

In the universe of financial professionals you will come across many types of individuals all with differing educational and experience backgrounds. Due to the overwhelming number of financial professionals it can be extremely difficult to distinguish one advisor from another. However, one simple distinction can help sort through a vast number of advisors within seconds. Ask them one question: are you a fiduciary advisor? Yes or No!

A fiduciary advisor is one that is required by law to act in your best interests whereas the non-fiduciary advisor (ie: stock broker) may face a strong conflict of interest when recommending “suitable” investment solutions to you which often lead you, the investor, down a path that is not in your best interest. Read More

Should I Take A Loan From My 401(k)?

By 401k, Retirement

EXECUTIVE SUMMARY

401k loans are a feature that some 401k’s offer and may be an option you have in your financial toolbox. But is it the right choice?

The answer: It depends.

Your 401k is designed and works best as a tax efficient way of investing for your future retirement. Using the 401k loan feature as your own personal piggy bank is ill-advised.

But in some cases, considering a 401k loan may actually make financial sense and safeguard your retirement portfolio.

Keep reading as we discuss 401k loans.

Read More

Things To Know About Kimberly-Clark’s 401(k) Plan and Voluntary Severance Package

By Retirement No Comments

Founded in Neenah, WI in 1872, Kimberly-Clark is a multi-national personal care corporation that employs approximately 43,000 people worldwide. While the company is now headquartered in Texas, Kimberly-Clark still has a major presence in Wisconsin. 

Last week, K-C announced they are laying off approximately 5,000 employees, many through a voluntary severance program.  

John Weninger, CFP® of Endowment Wealth Management researched the Company’s Plan and the severance package.  He compiled a list of important things to know about the company’s 401(k) plan, and also issues that K-C employees who are considering accepting the severance package should evaluate when making their decision. 

In his blog post, 10 Things to Know About the K-C 401(k) Plan, John comments on the Plan’s wide ranging benefits and features, including annual contribution limits, Roth conversion features, profit sharing, vesting benefits, investment options, loan provisions, asset reallocation, rebalance notifications, and withdrawal provisions for both existing and former employees.

In K-C Voluntary Severance Package 2018, John covers the basic items employees should consider when reviewing a severance offer.  Since 401(k) contributions cannot be made from severance pay, anyone thinking about accepting a severance should consider increasing their 401(k) contribution for their remaining employment.

John’s extensive reviews on this issue are posted to his blog at MyCompanyRetirementPlan.com.  If you work for a major employer and would like to request that John review your company’s retirement plan on a future blog post, send him an email.  

Educational purposes only.  Not legal or tax advice.  You should talk to an investment professional before making investment decisions.

 

November is National Family Caregivers Month- Time to Plan for Long-Term Care

By Retirement No Comments

November is National Family Caregivers Month. Caregiving often involves providing for the needs of our older family members, friends, and neighbors. As the number of older Americans rises, so will the number of caregivers. While we take this time to recognize our caregivers, it’s also a good time to consider planning for long-term care. According to the U.S. Department of Health and Human Services, almost 70% of people over age 65 will need some type of long-term care during their lifetimes. Between the ages of 40 and 50, on average, 8% of people have a disability that could require long-term care services. The average yearly cost for long-term care in a nursing home is about $74,820 for a semiprivate room, while the average annual cost for care in an assisted-living facility is $39,516.

Now is a great time to get educated on the significance of long-term caregiving in general and the importance of planning for long-term care within your overall financial plan.
5 Questions about Long Term Care

Retirement Plan Excessive Fee Lawsuit Reaches Supreme Court

By Retirement No Comments

The ongoing litigation in Tibble vs. Edison reached the Supreme Court recently in a dispute over the high cost of retail mutual fund share classes in 401(k) plan when lower cost institutional share classes were available.  The defendants argue that the statute of limitations alleging the fiduciary breach had expired.

The case serves as a reminder that Plan fiduciaries should review plan investments each year to see if there are changes and if they are appropriate for the plan.

 

National Retirement Deficit is currently estimated at $4.13 trillion

By Retirement No Comments

As per EBRI’s recent report, the aggregate national retirement deficit number is currently estimated to be $4.13 trillion for all U.S. households where the head of the household is between 25 and 64, inclusive. When the scenario in which prorata reductions to Social Security retirement benefits are assumed to begin in 2033 is analyzed, the aggregate deficit increases by 6 per-cent to $4.38 trillion. If Social Security retirement benefits are assumed to be eliminated in 2015, the aggregate deficit increases by 88 percent to $7.87 trillion.

THESE ARE STAGGERING NUMBERS!!! READ THE COMPLETE REPORT HERE: EBRI_IB_410_Feb15_RSShrtfls

The Largest Wealth Transfer In History Is About To Begin

By General, Retirement No Comments

In the next thirty years, it is estimated that over $16 trillion will be transferred to a younger generation as the ultra-high net worth individuals (those with wealth in excess of $30 million in assets) pass their wealth on to their children.  Of this wealth, at least $6 trillion is expected to occur in the U.S. Most of those passing on their wealth will be first generation, or self-made individuals, or those that have little or no experience with wealth succession planning.  Without adequate planning, up to half of these fortunes may be captured by inheritance taxes, as estate taxes can be as high as 50% in some developed nations.  Source:  Wealth-X and NFP Family Wealth Transfers Report.

A Better Option Than Target-Date Funds

By Retirement No Comments

An article titled “A Better Option Than Target-Date Funds” written by Prateek Mehrotra, CIO of ETF Model Solutions and Endowment Wealth Management was recently published in the Industry Voices column on PlanSponsor.com.

In the article, Prateek discusses the following drawbacks of TDFs:

  • TDFs assume a “one-size fits all” and fail to take into account unique risk profiles and investment objectives of participants
  • TDFs mechanical shift to conservative assets in later years sacrifices growth opportunities
  • There is no industry standard for the optimal portfolio allocation
  • TDFs with higher allocations to long-term bonds are more sensitive to interest rate risk

He also suggests that because equity prices are extended, investors in retirement plans might want to consider reducing their interest rate risk and equity risk by diversifying into alternative asset classes with lower correlation to stocks and bonds, such as commodities, real estate, hedge funds and private equity- asset classes to which TDFs do not typically allocate.

The entire article can be read here.