A: Dear May,
First I would suggest a 529 plan instead of custodial accounts (UTMA or UGMA). Earnings on custodial accounts are taxed to the minor. Earnings greater than $1,900 (2012) are taxed at the parents' tax rate (kiddie tax). Also, the child will have access to the funds when reaching the age of majority, which is 18 in CA.
This is not the case for 529 plans. Qualification for student loans and other financial aid have better results when saving in a 529 account than in custodial accounts. 529 account earnings are tax-deferred and withdrawals are tax-free for qualified educational expenses. Do your homework and find a 529 plan that has low fees.

I would suggest the FAFSA4caster: https://fafsa.ed.gov/FAFSA/app/f4cForm?execution=e1s1
It's quite simple and gives a quick estimate of aid available based on income and net worth of the child and parent (to add money available in a custodial account just override the automatically calculated value). Try it with and without the custodial account assets to calculate their affect.
Consider having the student begin using the custodial funds as soon as he enters college. If his parents' resources are limited, he would have a better chance of receiving loans, grants and scholarships based on financial need in the later years of his college education.

Kevin Young, MBA, EA, CFP®

A: Dear Pat,
If your time horizon is 1-2 years, then “park” the money where you will have no loss of principal. Consider an on-line FDIC bank account, such as FNBO direct or Ally bank. These banks tend to have competitive rates compared to “brick and mortar” banks, but unfortunately not much more. Low interest rates today are great if you’re a business owner wanting to expand or a home owner wanting to purchase or refinance but are terrible for fixed-income investors. The time horizon you have provided is short term and I would not invest in anything that would put your principal at risk. It’s important to know that there is no free lunch to investing and when someone wants to SELL you a product that they say is safe and is providing a high rate of return, please run away.

On the subject of risk, there are many risks associated with investing. Money in an FDIC bank account is subject to inflation risk, which is the risk of reduced purchasing power of principal and income. When your money is in a low- to no-yield checking and savings account, the cash is vulnerable to the risk of loss of purchasing power that comes with inflation.

Other risks to investing are as follow: There is interest rate risk which is the negative impact on principal or reinvestment opportunities as interest rates change. When interest rates rise bond prices fall, and so do stock prices. When interest rates fall, bond prices rise and so do stocks. This is why I keep my client's bond durations short. Credit risk is the possibility of a borrower’s failure to pay interest and principal on a timely basis; also known as default risk. The higher the yield the great the chance of default risk. A lot of investors chase yield by purchasing junk bonds (high yield) bonds. These types of bonds have a higher chance of default which is why they pay higher yields. Investors can currently receive high yields on government bonds in countries like Greece and Spain but do you really want to take the default risk associated with these government bonds?

Market risk applies to the loss possibility from situations impacting the market as a whole (recession, global macroeconomic events…). Lastly, there is Liquidity risk which is the loss potential due to the inability of converting your investment to cash quickly and without any loss in value to your investment (e.g., real estate, non traded closely held investments). It’s important to know that risk can actually be measured, and investors should ask their advisors how much risk is being taken in their total portfolio ( traditional measures of risk being volatility, standard deviation of returns and Sharpe Ratios)and if your advisor can’t answer this question or doesn’t understand traditional measures of risk I would recommend changing advisors.
Kevin M. Young,MBA,EA,CFP®

A: Dear Forth child, your question would be best answered by an estate planning attorney who specializes in this area.

A: Dear Barbara,

I just recently had a new client come to my office because she was not happy with her current “advisor”. She “invested” $800,000 with this broker who charged here a 5.5% front load (yes $44,000) and a 1.5% (yes about $11,00/yr) annual expense ratio. The client received no services, no comprehensive planning, the client was not diversified and the funds performed horribly. And this fee was not disclosed to the client because the sales person didn’t have to disclose the fee. I don’t think this is right and I see this all too often with clients who may not be sophisticated in understanding what a loaded “A” “B” & “C” share mutual fund is all about.

When selecting a financial planner I would recommend a financial advisor who doesn’t sell products, who has a CFP® (Certified Financial Planner TM) designation www.cfp.net ,who is looking/creating your plan from a comprehensive perspective and isn’t just focused on selling investment products, as well as having a general understanding of modern portfolio theory. I would also recommend a fee only financial advisor who is a member of NAPFA. www.napfa.org

Lastly, please understand the difference between broker-dealers who have to fulfill a suitability obligation. Under the suitability standard, financial firms and professionals are not required to put the client's interests first. A fee-only advisor is held to a fiduciary standard which requires the advisor to put their client’s interests above their own. This YouTube video is excellent in explaining the difference between a Broker and a Fiduciary. http://www.youtube.com/watch?v=Dg5RRMAc1GY

Best,

Kevin

A: Dear Grandma in Lincoln, I want to apologize for not responding to your questions sooner-but tax season got in the way. The objective of a RM is to change the equity in your home to cash. The loan isn’t required to be paid back until you sell the house or upon your death. In general I look at reverse mortgages usually as a last option for clients mainly because of the fees involved. The fees are higher on reverse mortgages (RM) when taken in your 60’s compared to taking in your 70’s. Other points to consider: If you’re married make sure both spouses are on the loan; the amount of income taken from a RM can impact your needs-based government programs such as Medi-cal; make sure you can pay the property taxes and insurance or the bank will foreclose. If possible, I would recommend consulting with a non-biased professional who is knowledgeable about RMs but doesn’t sell the products.

A: Dear Rick, I apologize for not responding sooner to your question. It’s been a very busy tax season. The risk free rate of return, determined by the interest rate of a 3 month U.S. Treasury bill, is currently yielding just above zero percent. An investment yielding 9%-10% in today’s market is telling you that there is a high risk premium involved. In this type of investment you’re loaning money to the borrower indirectly through the trustee and the note is secured by real estate. I would find out what the loan to value is, what happens if the borrower defaults and what are the fees involved. If you’re considering rolling over your 401K to a “relatively safe investment” I would not consider this a safe investment, but would define this as a high risk, alternative type of investment. For your aggregate investment portfolio I would focus on diversification, tax efficiency, and low fees. Diversification reduces unsystematic risk- this is risk that you can actually control (reduce) just by diversifying, low expenses and tax efficiency can greatly improve your portfolio’s performance over time.
Kevin M. Young, MBA, EA, CFP®

A: Dear Bunky, First I must stress that I’m not an attorney and would recommend that you consult an expert in this area. The objective of this type of trust is to remove assets from ones estate so that they are eligible for Medicaid without having to spend down their assets to qualify. An irrevocable trust of this type would be drafted so that the income is payable to the Grantor (person creating the trust and funding the trust). The Grantor cannot have access to the corpus (principal) once the trust is funded, but only the income from the trust. When the grantor dies the corpus will be paid out to the beneficiary’s of the trust. If the grantor exercises what’s called a special testamentary powers of appointment the beneficiaries can receive the property with a step-up in basis at the grantors death, assuming there is appreciation. Some disadvantages of this type of trust are that once the trust is established and funded there is no turning back. It’s possible that the grantor ends up in a really bad skilled nursing facility and the beneficiaries enjoy the assets that were sheltered. Also, you will need to understand that there is the 5 year look back rule. So if you fund the irrevocable trust you will not be eligible for Medicaid for 5 years. There is also the possibility of Medicaid laws changing retroactively. On a personal note- I don’t think that our taxpayer funded Medicaid program is sustainable if more and more individuals are allowed to shelter assets. Medicaid really should be reserved for the truly needy. Remember our government is broke. Kevin M. Young, MBA, EA, CFP®

A: There are 5 options in paying for Long Term Care. Help from family and possibly close friends, personal assets (self insuring), Insurance (LTCi), Medicaid and other government programs and lastly a combination of any of the 4 listed. As you know health insurance and Medicare DO NOT cover the expense of long term care. If you’re net worth is your IRA balance and maybe a house buying LTCI/Life insurance is not the best use for your limited resources and in my opinion would not be a candidate for funding LTC with the purchase of life insurance policy with a LTC rider. Life insurance protection should be moved at the bottom of your priority list. The policy that is being sold to you is known as a combination policy or bundled policy. It’s a life insurance policy with a LTC insurance rider which can be used to pay for long term care expenses. The selling pitch from insurance agents who sell this type of policy state that if you don’t ever use the long term care benefit you will have a death benefit. The death benefit is reduced dollar for dollar when you use the long term care portion of the life insurance policy amount. Combination policy such as this are expensive and do not offer a good value. Please spend some time analyzing how much coverage you need and the best way to purchase your overall risk management needs. Drawbacks of these types of policy’s include, high costs, couples can’t share the pool of long term care benefits, specific long care benefits may be limited, no compound inflation protection. Based on your current age, statistically, in about 20 years is when you would need long term care. The costs of long term care are estimated to increase by double digits. A long term care insurance policy without compound inflation increases would have little value in 20 years. Also, there can be limitations on where you can receive care, the policy elimination period may not be appropriate. You want a LTC policy that is comprehensive. I would recommend consulting with an objective financial planner, one that doesn’t sell insurance and understands your entire financial plan.
Kevin M. Young, MBA, EA, CFP®

A: Dear Maymay
It’s always difficult responding to questions when I don’t have all the facts. It’s not clear if you're currently renting, living in one of the two homes or own a third home.
The good news is your net worth is over a million dollars (assuming your only debt is the $50,000). The bad news is that you're cash poor. What I can tell you is that you have too much real estate and you should diversify out of your real estate holdings. Most likely there will be a tax consequence in selling your residential real estate, but because I don’t know your specific situation I can’t tell you how much. In short I would sell your real estate.
I would not sell the IRA to pay down the loan. You currently need the IRA liquidity for emergencies. Before you move forward with any decisions, I would suggest you develop a financial plan. Living frugally hoping that everything will “pan out” is not a plan.
Determine your goals and develop a plan to fund your goals. Second, educate yourself on the basics of investing and seek out professionals to assist. As I stated in a previous post, don’t be taken advantage of by individuals who do not have your best interests in mind. Please do your homework and take the time to learn.
In summary, do not sell the IRA to pay down the loan. Determine your specific goals and develop a financial plan to fund your goals. And lastly, get educated before hiring a professional to assist you in your plan.

A: Dear, Erider
Congratulations on your retirement! You have worked a very long time and deserve the best. My first suggestion is to run from this sales person! An annuity is a complicated insurance product and not a pure investment. As insurance, it’s very expensive with substantial surrender charges and other fees. A surrender charge is the fee you have to pay if you sell / cancel before the surrender period. This is your money and you should not tie it up and or force to pay a fee to get some of it back. Annuities are mainly sold (and are not purchased) by insurance agents and others that rely on commissions. Ask the salesperson how much in commission they will make in selling you this product. Before you do anything you must educate yourself. All too often I see seniors being taken advantage of by sales people who do not have the client’s best interest in mind. Think carefully about the most appropriate approach in generating lifetime retirement income. If you want unbiased fiduciary financial advice from a financial professional seek out a Fee-Only advisor who is a Certified Financial Planner. Here is a link of a good website for these types of advisors in your area: www.napfa.org Generating retirement income today is difficult because of the low interest rates. This is forcing retiree’s to add additional risk to their portfolios in order to generate greater returns, which can be a very dangerous game because seniors may not have time to ride out a major market correction. For my clients near or in retirement we invest in conservative, diversified no-load mutual fund portfolio and include treasury strip bond ladders for any income shortfall. If you’re a homeowner and have enough equity, a reverse mortgage maybe an option. I tend not to recommend reverse mortgages because of costs and other factors, but they do make sense some times and in your case it could provide the additional income needed.
Kevin M. Young, MBA, EA, CFP®

A: Dear worried mom,
As a disclaimer, I’m not an attorney and I do not provide legal advice. Many times I’ve seen families making bad decisions regarding the selection of an Executor and Successor Trustee of their living trust. I have many stories where siblings and beneficiaries are torn apart by arguments over inheritances, especially when the trustee is also one of the beneficiary’s. In deciding who should take on this role, consider someone who is honest, is a good communicator, has some business sense and has a good worth ethic. Emotions really take over during the administering of an estate and beneficiaries are less likely to become anxious, suspicious or litigious, if the executor is competent and is keeping everyone up to date. If there isn’t someone in your family who fit’s this description I would recommend a professional fiduciary. A professional fiduciary is someone who is licensed to serve as a trustee, but is not a bank or a large corporate institution. Such people should be licensed in California through the Department of Consumer Affair's Professional Fiduciaries Bureau. In selecting a professional fiduciary I would also recommend someone who is insured, a bonded California Professional Fiduciary, Accredited Investment Fiduciary ® and a National Certified Guardian.

Kevin M. Young MBA, EA, CFP®

A: Dear Maurice Ho,
If you’re married and file a joint tax return, only one spouse needs to have earned income for both to be able to contribute to a Roth-But contributions cannot exceed your earnings. The current maximum contribution is $5,000 or $6,000 if your 50 or older. Therefore, if your wife is earning $10,000 (or $12,000 if your both 50 or older) of income you both can contribute the maximum. Social security is not considered earned income. Sources of earned income that qualify are amounts you earn as a W-2 employee, self employed income, and alimony also qualifies as earned income under Roth IRA earned income rules. Also, unlike traditional IRA’s, contributions to a Roth IRA can continue to be made after you reach age 70 ½ and there are no Required Minimum Distribution (RMD) requirements. The major advantage of the ROTH IRA is that qualified distributions are not taxable income. Both the contributions and the investment gains are distributed free of income tax. Examples of income that does not qualify as earned income for ROTH IRA contributions: Annuity income, Pension income, capital gains, dividends, interest (when banks start offering that again), rental property income, disability payments, and social security payments.

In summary you cannot contribute to a Roth IRA using your SSDI income but by having an employed spouse you will be eligible as long as contributions do not exceed your earnings.
Kevin M. Young MBA, EA, CFP®