Financial Advice

Wednesday, November 30, 2011

Family Lawyer in Houston Says, "Make These Tax Moves Now Before 2012"

As promised, I have compiled some information on expiring tax breaks for 2011, as well as some suggested moves to make before December sees its ball-dropping end.

Filed under: Increased-Deduction Strategy

With one caveat: increasing deductions could cost you if you end up owing under the Alternative Minimum Tax (AMT).

1. Pre-Pay and Accelerate
Mortgage bills, college tuition, property taxes -- all of these can add deductions to your bottom line, so cherry-pick some 2012 bills if cashflow allows, and you will get to mark them against this year's taxes (only January's mortgage payment counts for this, I should hasten to say).

And you can "accelerate" certain expenses like optional medical procedures (dentistry is always a ripe source for procedures to implement, unfortunately ?), again, doing so if cashflow allows.

2. Donate
It is not just because 'tis the season, but often (if we are all honest) because the year-end is so close. So, obviously, when it comes to taxes, giving to a nonprofit can be like a money-saving gift to yourself. If you itemize your deductions, you can claim your charitable donations, both of cash or goods.

In fact, if you are *close* to being able to itemize deductions, making some nice gifts this month can push you over the top into some major tax-savings. And, of course, there is the added benefit of what happens to YOUR mindset when you give.  If you need any help on recommendations to worthwhile non profits, please let us know!

Filed under: Buying stuff you already need -- and saving on taxes

3. Energy-Savings and Big Cars
The accountants have been pounding this drum for a while, for the simple fact that (because of the last "stimulus" package) replacing windows, doors, and HVAC  systems-- as well as installing new insulation--could net you a $500 tax credit on your 2011 tax bill! Credits always beat deductions. A solar energy system gets a 30% credit with no upper limit.

How about that fancy new vehicle you have been eyeing? Or that energy-sucking flatscreen? Buy it before the end of the year, and you are eligible for a deduction on the state and local sales taxes.

But you can't deduct both state income taxes and general sales taxes, so the deduction is usually most beneficial to our clients who actually live in the no-income-tax states. By the way, this sales tax deduction is scheduled to expire on Dec. 31.

Filed under: Common sense

4. Please stop loaning extra funds to Uncle Sam

Do you intentionally get a big refund each filing season? Quit that! You are providing Uncle Sam an interest-free loan of your money.

Submit a new W-4 now so that your payroll withholding is more closely in line with your future IRS bill. It could even give you a few extra dollars at the end of the year to spend on holiday gifts!

Oh, and just so you know, it is growing very likely that whatever Congress decides on tax law changes, payroll calculators may not have time to update by January 1st. This means that even if you request the changes, your withholding may not reflect things until 2012 ... but making the change will still impact your taxes -- it just might not be obvious until next year.

5. Make your family happy  (our specialty)

The clock is ticking on the very generous estate and gift tax exclusions that allow you to give up to $13,000 this year to any number of recipients -- and a total of $5 million over your lifetime -- without owing any federal gift tax. The $5 million lifetime exclusion expires at the end of 2012, and Congress may decide to reset it at a lower level.

While you are at it, you can always do it again on January 1st!

I hope these are easy, and that they give you some good ideas. Remember-- I am in your corner, and not just about generational wealth issues.

Monday, November 21, 2011

Business Attorney in Houston Says, "Your House May Not Be The Investment You Thought It Was"

By: Kim Hegwood, Business Attorney Near Houston, TX

Just because something costs a lot doesn't mean it is an investment. An investment is something that pays you money.

Therefore the house you and your family live in is not an investment. Neither is the vacation home you rent occasionally. Nor that piece of land next to your house you bought to preserve your view. It is human nature to justify a purchase by calling it an "investment," but if it does not pay you money, it should not be treated as an investment in financial planning.

Historically, equities appreciate at a rate of about 6.5% above inflation. If inflation has historically been 4.5%, equities average about 11%. Equities include stocks, stock mutual funds and stock exchange-traded funds (ETFs). Your portfolio should be invested mostly in equity investments to appreciate at a rate greater than inflation.

Fixed income is more stable, but averages interest payments of 3% over inflation. If inflation averages 4.5%, fixed-income investments average 7.5%. Fixed income includes bonds, bond mutual funds and bond ETFs.

Real estate as an investment falls somewhere between stocks and bonds. On average commercial real estate produces a real return of about 4.9% over inflation. If inflation averages 4.5%, commercial real estate averages 9.4%.

Commercial real estate as property with no income does not appreciate at the rate of inflation. It actually depreciates against inflation by about 1% a year. Fortunately, it should produce 5.9% in profit to overcome this depreciation and produce a real return of about 4.9% over inflation.

Handling commercial real estate privately requires more work. If your commercial real estate is not generating a lot more income than it costs to maintain it--including depreciation--it isn't pulling its weight. Only if it can produce significant income and grow at a real return of 4.9% over inflation will a $100,000 investment in real estate grow to $331,000 after 25 years.

Similar equations can be used for residential real estate. On average it produces slightly less income, giving a real return of 4.1% and growing to have a buying power of $273,000. Obviously all real estate is subject to the increasing desirability of the area where it is located. Some excellent school districts have experienced appreciation significantly greater than inflation. But many rural communities have barely kept up.

These historical averages provide benchmarks as a way to judge the investment worthiness of a particular piece of property. If you own a $300,000 rental home, you should expect to average at least $3,000 each year in repairs and upkeep. One year it might be lower only to have major bills the next. Your benchmark is a real return of 4.1%. After repairs and all other expenses, you should have a profit of $12,300, or 4.1% of your investment. That means you have to have a profit of at least $15,300 (5.1%) or more for your investment to pay you the appropriate amount.

Real estate that pays you appropriately can be considered an investment for the purposes of wealth management. But you need to run it like an investment and track your return after all of your expenses.

This analysis helps explain why property that you do not rent is not an investment. Every $100,000 of equity put into property that lies fallow costs you $1,000 in expenses just to keep up with inflation. And although keeping up with inflation is good, without the 4.1% income there is no way your $100,000 investment will grow to have the increased purchasing power of $273,000.

A family's home, however, does not, typically, keep up with inflation. Some couples sell a large expensive home, purchase a smaller house and invest the difference. Many believe they will, but when the time comes, their downsized house is so much nicer that little is left over to invest.

Additionally, for many couples the value in their home is used as equity toward an assisted living arrangement. The larger their home, the more expensive the retirement community they buy into. For these and other reasons, it is helpful to not assume that the equity in a family's home will be available during retirement.

To reiterate, just because something costs a lot does not mean it is an investment. Investments should appreciate at a rate that grows faster than inflation and gains purchasing power. And spending your money on non-investments can jeopardize a plan to reach your goals of financial freedom.  As a rule, investments should work FOR you, paying you money that you can spend or reinvest elsewhere.

Thursday, November 10, 2011

Houston Family Lawyer Discusses The Expanding Higher Education Bubble

According to the most recent College Board Annual Survey of Colleges, the sticker price of a college education keeps rising, faster than the price of groceries, health care and almost everything else in the basket of goods used to determine the Consumer Price Index (CPI). In the last 10 years, in-state tuition and fees at public four-year colleges increased 5.6% annually on top of a CPI growth of 2%. The average estimated total expenses for most public in-state four-year students (depending on the state) vary in the astounding range of $65,000 to $90,000.

S0, that means that if you were blessed with the birth of a child recently, you will need to save $430 monthly to pay for in-state college tuition, fees, room and board. Double this rate to cover the full costs at the average private institution. And this does not even include money for a cell phone, pizza, room decor or other stuff that college students deem "necessities."

Now it's true: most students do not pay full price for college. In 2009-10, undergraduate students received an average of $12,894 in financial aid, split almost equally between loans and grants. Grants are the most attractive because students are not saddled with a repayment plan after college. Federal grants make up 26% of total aid. Institutional college grants account for 17%, state grants for 6% and private and employer grants (scholarships) for 4%.

But that has not stopped the fact that students are graduating with larger debt loads than they were 10 years ago. This is one of the driving factors of the recent-graduate-laden Occupy Wall Street movement. Public four-year college borrowers graduate with an average of $19,800 in debt; their nonprofit private college counterparts graduate owing $26,100. This private college debt is 17% more than it was 10 years earlier, even after accounting for inflation. In addition, a growing percentage of all college debt is unsubsidized and begins accruing interest immediately.

Perhaps there are some good things which are shaking out here. That is to say, degrees might have to be evaluated a little more closely -- that anthropological art history degree might should be scrutinized a little more, yes?

So, students will have to make smarter education choices. Today's global marketplace places more value on hard skills such as engineering, computer technology, teaching and finance. Technical degrees and certificate programs will become commonplace. A liberal arts education will likely diminish in popularity and become more focused at the elite institutions. More students are likely to begin their education at lower cost community colleges and complete a four-year degree at schools that specialize in their concentration.

Parents may feel overwhelmed about the amount they need to save for college. But college education is one of the two lifetime investments for which we approve borrowing money (the other is a home mortgage). Students should plan to graduate with a debt load no higher than half of what they can reasonably expect from their first year's salary. For example, those with a starting salary of $40,000 should keep their debt at or below $20,000. Thus graduates can dedicate 10% of their annual salary to school debt and pay it off in five years.

New parents who are able should immediately begin saving $430 a month for college. Alternatively, a onetime $50,000 investment should cover tuition, fees, room and board at an in-state college 18 years from now. Yes, this is pretty scary. But there's other options...

Giving a child the gift of a college education and a debt-free start to adulthood is one choice. Other parents believe their children should participate in financing their college education and can apply the 50/50 savings approach. Parents commit to saving half of the money needed, and their children commit to the other half. Students participate by working hard in high school, applying for scholarships, taking summer jobs, seeking out work study opportunities and accepting reasonable loan levels.

The support of grandparents can help tremendously. The vast majority of the college accounts that I have seen are owned and funded by grandparents. Instead of buying the latest gadgets for their grandchildren, they make annual contributions to a college savings account. If the grandparents own the account, it has the added advantage of not being included as a resource on the student's financial aid forms -- and that is a beautiful advantage, trust me!

One last thing: I am not a stocks advisor, but--I do NOT recommend prepaid college tuition plans. At best, they tend to match college inflation, and if used at an out-of-state institution, returns are based on money market rates, which are abysmally low right now.  Even worse ... who knows? This bubble may just burst, and you don't want to have locked into a tuition which might fall through the floor on its own some years from now.

I do hope this helps, if it didn't scare you too much! Let me know if there is anything I or my team can do to help. As you can see, both with estate taxes and family finances, we make it our mission to think ahead on your behalf!

Tuesday, October 18, 2011

Common-Sense Identity-Theft Protection For Families

Sure, commonly-advertised services for regular families can seem like an easy button. But the problem is that most of these products are unnecessary or ineffective, or they duplicate things you can do yourself--for free.

Here are some basic things you can set into place right now, which will cover you in the vast majority of circumstances:

1) Please don't carry your SSN in your wallet. Ever.

2) Don't post your full DOB on your social profiles. If you really like the messages on your wall for your birthday, just take out the year at least! (Besides, it makes you more mysterious!)

3) Don't check your bank balances on public wi-fi. Even if you do it on a secure connection, hacker programs to "snift" your info are as commonly-accessible as pirated video on the internet. This includes your mobile phone.

4) Um, don't let your wallet get stolen.

5) In case it does, keep a photocopy of every important item in there. (Except cash, of course. That's, er, against the law.)

6) Check your credit annually.  www.AnnualCreditReport.com is the one where you don't have to pay for it.

7) Shred important stuff you don't need -- including credit card solicitation offers. In fact, stop those for good by going here: www.optoutprescreen.com or calling 888-567-8688. Opting out should stop most offers, and it is free.

There. I said it would be short, sweet, and full of common sense. As usual, I hope!

Don't forget -- we are only a phone call or email away, and our consistent question for you is this: "What more could we do for you, to help?

Friday, September 30, 2011

Family Laywer In Houston Talks Hidden Financial Mistakes ... And How To Fix Them

By: Kim Hegwood, Family Lawyer in Houston

You pay your bills on time. You try to save as much as you can. You even follow the advice which you read in books and hear on the radio about how to keep your finances in check.

But you are still not getting ahead.

Well, sometimes, it's the unchallenged assumptions about how we are handling our money which rise up and bite us in the keister.

So, in the course of working with clients, I have identified some mistakes I see (as well as ones I have made myself!), which can be fixed. All it takes is thinking a little differently...

Hidden Mistake #1: Inappropriate Mental Accounting
Definition: Tendency for families to divide money into separate accounts based on subjective criteria.

Typical Example: Treating $100 you received as a gift from Grandma, differently than a $100 bill earned.

Typical Example #2: Having money languishing in a savings account earning 0.25%, while carrying high-interest debt to pay off at 12%.

Cure: Funnel income, no matter the source, into one savings account.

Any "found money", such as a tax refund or gift from Grandma, quickly decide where that money is best utilized.

As for expenses, occasionally change how you pay. If you always pay with a credit card, try cash. This will get you remembering that all of it, for the purposes of your mental "books", should be lumped into one, monthly bucket.

Hidden Mistake #2:  Manipulative Price Anchoring
Definition: Our tendency to relate the value of a purchase to a price point which, rationally, should have no bearing on the amount spent.

Typical Example: The "rule of thumb" to spend two months' salary on an engagement ring.

Typical Example #2: A realtor will tell you that "in 2007 this house was going for $500,000 and is now listed at only $350,000!" ... causing you to think this house is undervalued.

Cure: For big ticket purchases like a house, car, or engagement ring, ask a friend whose financial values you respect for their input.

For everyday purchases, avoid looking at the MSRP or sticker price.

Ask yourself:

    Can I afford this today?
    What do I really want to spend?
    What is this really worth to me?

Marketers are experts at this sort of price-anchoring, and we really should know better ... but yet we still fall prey to it. Try not to let outside sources set up the comparison by which you should be considering such large purchases.

I think I have a couple more up my sleeve, but I will save those for next week. But let me know: is this helpful to you? And what more could we do for you, to help?

Until next week then...

Friday, September 16, 2011

Family Lawyer In Houston Offers Tips For The College Student In Your Life

By: Kim Hegwood, Family Lawyer in Houston

Financial independence training is a short-term pain, for a long term gain. Because "untrained" college students are sitting ducks for unscrupulous financial service companies and their own lack of financial sense.

So, with that in mind, here are some off-the-cuff guardrails to consider for your son or daughter entering, or continuing on through college...

1. Make a definite plan to leave college with no consumer debt. And I am talking a real PLAN. Credit cards, car loans -- college kids are ripe for the plucking. Consumer debt is a real killer, simply because it depreciates so much. In a short matter of time, these items lose their value, but the payments and interest continue to inexorably pile up. So set up a clear budget for travel, late-night snacks, and other miscellaneous lifestyle expenses (heck, going through the process might even prompt some lifestyle evaluation!). Tell your child: "You should have an exact answer if I ask about your weekly spending limit." And have them try to earn enough over the summer that they can afford to skip the part-time job during the spring and fall semester.

2. ATM bank fees are killer. Moving to a new city often means the local debit card will likely be charged from $1.50 to $3.00 for every withdrawal from a foreign ATM. Consider an online bank account like Charles Schwab Bank that reimburses all ATM fees or a local bank with easy ATM access.

3. Overdraft fees are as common as hangovers for the college kid -- avoid both. A recent Pew Foundation study found that the median overdraft penalty fee is $35; an additional $25 accrues if this overdraft is not repaid in seven business days. The average bank allows up to four of these overdrafts to occur in one day for a total fee of $140 or more per day. However, if you open a savings account in addition to your checking account, you can apply for overdraft transfer protection. You might even set up a situation where the college student controls the checking account -- but you control the savings.

4. One cell phone bill gone awry can swamp you. New routines in college will likely mean that calling and texting habits will change. Or just one call to that high school sweetie who is spending the semester abroad might necessitate a different plan. If your child doesn't have an unlimited plan, have them make it a habit to review the account online in the middle of each billing cycle. By the way, this is a very good expense to NOT pay for as a parent.

5. Avoid gimmicky credit card offers. Often the first credit card is awarded at a football game where so-called "free" T-shirts are being handed out. Again, college kids are ripe targets. Shop online for the best rates and terms and purchase a dozen dress shirts with the money saved by finding a card with less onerous terms for interest rates and late fees. Focusing on the so-called "rewards" which credit card companies give you is a distraction in your financial life. Like a casino, credit card companies win most of the time -- which is why they stay in business.

And, of course, having children enter into adulthood changes your estate considerations. Let us know if this applies to you -- we are here to help!

Friday, June 10, 2011

When The Rich Act Like They Are Poor (Part 2)

By: Kim Hegwood, Estates Lawyer in Houston

As I mentioned last week, as an estates lawyer in Houston I have made a close study, over the years, of how money "works", and just what it is that propels certain individuals and families into great quantities of resources ... and what also brings them down.

I hate to see those with resources squander them, simply because they fell prey to the rampant fear.

Watch out for it in your own heart, in that of your children and spouse -- and avoid these behaviors of the poor:

*They use credit habitually for "lifestyle" purchases: Delayed gratification isn't something that they have heard of, and if they want something they just put in on credit.  After all -- it's at a 0% interest rate for the first 3 months!   One purchase leads to another, and before they know it they have got thousands in credit card debt.

Debt loads in the wealthy can look different, but the principles remain the same. Avoid leverage these days; keep your powder dry. Your lifestyle is not worth expensive cashflow.

* Always pay more than they have to: Often people who are broke have gotten there because they do not know how to shop for a deal, negotiate or ask for a discount.  You can get a discount on just about anything -- from electronics to health care.  Never pay more than you have to.

Why is it that the wealthy take perverse pride in paying full retail? It goes before the fall, as they say ... so don't become pennywise/pound foolish -- but neither should you eschew effective negotiation in multiple categories.

* Fall prey to lifestyle inflation and "keeping up with the Joneses": This is a biggie for the wealthy. Even people with higher incomes have problems with staying ahead in their budget because they fall prey to lifestyle inflation.  Instead of banking and saving raises, they raise their standard of living -- buying a bigger better house, a new car and a new wardrobe.  They feel like they have to keep up appearances with everyone in their neighborhood.

Take a good hard look at what motivates your purchasing, and clean out the dustbunnies of comparison, lest they fill your brain with poverty-thinking.

 * They rely on others to fix their problems:  We have probably all known someone who is always going to their parents, family or friends to bail them out.  They create a pile of debt, and then rely on the kindness of others to get them out of their bind.

* They forfeit future gains for fun today:  These people often have a hard time visualizing how saving and hard work will pay off down the road, and instead live for the fun and pleasures of today.  They do not realize how saving for tomorrow can improve their quality of life today.

Do NOT sacrifice your retirement (or estate) on the altar of present-ease.

Obviously, I would like to help you move past these behaviors, if any apply. You may not carry every one of these traits, but just one or two can get you into hot water.

If you feel that you are slipping into any of these traps, please do let us know ... we are here to help as your Family's Personal Financial Guide.