Jeff Answers Your Questions

Definitions: Medical Power of Attorney, Durable Power of Attorney, or Living Will

2008-04-26T20:26:00.002-05:00

Q: Where can I get a will and durable power of attorney for that would be legal in the state of Maryland? How many witnesses have to sign these docs. and does it have to be notarized?

Medical Power of Attorney, Durable Power of Attorney or a Living Will.....what is the difference among the three?...

A: You can either work with a local attorney, or you should be able to find suitable documents online.

A medical power of attorney names someone to make decisions on your behalf for all medical decisions should you become incapacitate. The DPOA does the same for financial assets. A Living Will only covers end of life issues such as whether or not you would want to be kept alive with a feeding tube.

Medicaid and a Three-Way House Split

2008-04-26T20:21:00.000-05:00

Q: Hi Jeff, found your financial column interesting. What if my mom sells her house and splits the money three ways (me, my brother and her) and goes into an apartment. Then a few years later needs assisted living. Will they make us pay back what she gave us?

A: It's a gift so it will cause her to be disqualified for the number of months the gift would have otherwise paid for...assuming she applies for Medicaid within 5 years.

Putting a Variable Annuity in a Trust

2008-04-26T19:50:00.003-05:00

Q: I have been told that I should form a Trust, gift substantial funds to the Trust and buy a variable annuity. I would not be taking any income from it but upon my death the proceeds would go to my son...

The one I am looking at has a "lock up" clause that would lock in the value on the anniversary date if it is higher than the amount I put into it. The costs seem to me to be around 2% which is high on $300,000.00.

Would I be better off to buy a no load fund or funds and have the trust pay the taxes each year on the dividends and capital gains, or to get the annuity. The fellow I am dealing with says that I would be saving substantial taxes by using the annuity.

A: The fellow you are talking to is only trying to sell you an annuity.

First, it's true that an annuity inside an irrevocable would prevent the trust from having to pay taxes on the earnings each year. What he didn't tell you is that those taxes are only being deferred and would all be due at once when you die. So you will end up losing 30-40% of it.

Secondly, the earnings are taxed at ordinary income rates, not the lower capital gains/dividends rates.

Third, what is your main reason for the trust?

Can you tell me more about your situation?

Retired Ohio Department of Aging Communication Specialitst

2008-04-25T06:29:00.002-05:00

Q: As a retired Ohio Department of Aging communication specialist, I commend you on the service your do by providing this information. As a free-lance writer I've researched the issue and have attended any number of sales "lunches," and you are "spot on" in your analysis. I've researched some of the "letters" added to their names alleging their specialty and it confirms what the media found.

Thanks for your frank articles for seniors.

A: You're welcome.

How Does the Pension Protection Act Affect "Craft" Employees?

2008-04-20T12:03:00.000-05:00

Q: Hi Jeff, I am a Verizon Company employee. There is a lot of rumor and speculation about how the pension protection act will affect those of us “craft” employees who are covered by a Union contract and there a many people who are retiring because they’ve been told that in January 2008, we will start losing pension money because the company will be allowed to calculate differently our pension amounts. Do you know anything about this?...

A: The issue is that a different discount rate will be gradually phased in. The higher the rate of return used in the calculations, the less the company must set aside to provide the benefit per employee they've promised. When you take a lump sum, you get that 'set aside' amount. So if a higher discount rate is used, the lump sum amount decreases.

The real issue is how much it will affect you. For some employees, it could be the equivalent of a year's salary, others not that much. So you need to see how it affects you and factor that into your calculation.

Can I Use Property Sale Money for College Tuition and Still Avoid Capital Gains?

2008-04-19T21:59:00.000-05:00

Q: I found your article on exchanging real estate tax free when searching for help in reducing our capital gains tax on an investment property we will be selling in the next three months.

Our situation is as follows...

My husband is a retired military officer, currently in the private practice of law. I do not work. We have two children, ages 18 and 15. Our 18 year old will begin college in the fall at a private university costing approximately $45k/year. Due to my husband's income as well as property and investments that I inherited, our children do not qualify for any financial aid for college.

We will be netting approximately $150k on the sale of an investment property, and have been advised to do a like-kind exchange for more investment property. However, I would like to have that money available for tuition payments and not tied up in property.

Is there any way we can set up a fund to pay for tuition using these proceeds and avoid the huge tax we would pay on the capital gains of this property?

A: Not that I know of...

"Oversight Needed on Equity-Indexed Annuities"

2008-04-18T09:01:00.000-05:00

Q: I recently read an archived version of your article titled “Oversight Needed On Equity-Indexed Annuities” from October 24, 2005. In the conclusion, you mentioned that there are many better ways to achieve market returns with low risk. Could you point me towards a resource showing some of the options?...

Obviously with return comes risk. The appeal of the no loss guarantee of the Equity Indexed Annuities is strong. I would prefer to have the actual cost of that guarantee stated more clearly.

A: The problem with EIAs is that you must be very careful because the way they work is often not how they are explained. The costs can’t be determined, nor are there any actual performance statistics. Moreover, the insurance company can change the variables from year to year.

It’s like buying real estate with a partner, but you are the one that puts up all the money. Then the partner has complete control over what you make and can change it from year to year, since you’re pretty much locked in.

There’s absolutely no reason to buy a 20 year product. If you want to compare apples to apples, you must look at a 20-year period being in the market. It doesn’t matter what happens between year 0 and year 20, only where the market is at after 20 years.

Go back and look at the markets. You’ll find that there isn’t a single 20-year period in modern history where the returns were negative. In fact, the returns were very good.

Here is a link to a Special Report that will provide some background on how to determine if you need an advisor and if so, what to look for in one. You should find it very helpful:

A Special Report: Financial Self-Defense

Let me know if I can be of further help.

So Much for 3% Guarantee on an Equity-Indexed Annuity

2008-04-16T09:01:00.000-05:00

Q: Our financial advisor advised and sold my wife, who was 64 at the time, two equity-indexed annuity contracts. The markets, as you know, were jumpy, and we had lost a considerable amount in the last major downslide, so these EIA's looked attractive...

However, the long term of the contracts concerned us. The financial advisor said that we wouldn't be holding it that long, and would be taking out 10%, penalty free, each year and investing it in other areas. In addition, in his description of the product, he indicated that regardless of the market, we would be guaranteed a 3% gain each year.

Well, the first year our index (S&P 500) did not perform well and we did not gain anything from the index. When we took a look at our investment after the anniversary date, we saw that there was no increase of 3 percent as we had thought. A few words were spoken with this financial advisor and he said we misunderstood and that the 3% was to the insurance part of the contract. This we did not understand at all.

I should explain that at the time of purchase, we thought we understood the financial advisor as having a plan to get us out of the EIA contracts without penalty, however, after some further discussion, we now understand that what he had in mind is not possible. Quite frankly, I cannot tell you what he had in mind to start with.

We are now learning and reading more about how this was not a wise investment. Your article on equity-indexed annuities addresses that well, as has some other financial advisor friends of mine.

Based on all this input, I have started an inquiry to the insurance company carrying the EIA to see if there is some way to terminate these contracts without penalty. The argument being that the financial advisor probably shouldn't have sold this product to a retiree, or potentially had misrepresented it.

In addition, I have made an inquiry to our state insurance department to see if they are currently taking any action to see that these EIA's are being sold properly, and to see if there is any recourse at this time to terminate our contracts without penalties.

I guess my question to you is, is there any recourse that you are aware of that we could use to terminate these contracts? I'm not ready to accuse the financial advisor of fraud, but there is a question in our minds as to just how clear he was describing these contracts. Probably not a solid basis to do anything legally, but I am just wondering if others have been able to get out of them without hurting themselves financially.

A: There are a few things you need to understand. You were taken advantage of. Whether the advisor knew what he was doing or not, that doesn't change the fact that you were taken advantage of.

Secondly, it is the advisors responsibility to understand what he is selling. He obviously didn't.

You should probably also seek legal recourse. What EIAs are you in?

What state do you live in? I may know an attorney that I can refer you to.

How Can My Aunt Avoid Capital Gains on Her House?

2008-04-15T21:59:00.000-05:00

Q: My 76 year old Aunt lives in Maryland near me. Her husband died and her house is ready to be sold. What can she do to avoid paying large capital gains tax on the sale of the house? She does not want to buy something else and is living in a senior citizen apartment.

A: She has a $250k capital gain deduction on the sale of her primary residence. If the gain is more than that, I would talk to the accountant doing her husband's final tax return to see if there is a way to use his $250k credit.

Did You Miss the Dateline Special on Equity-Indexed Annuities?

2008-04-14T08:33:00.000-05:00

In case you missed it, here's the link to watch "Tricks of the Trade: A Dateline hidden camera investigation sees what insurance agents say -- and what they don't -- when they think they are alone with a senior."

I've been writing articles about the dangers of annuities for years now. Dateline caught on tape some of the tricks these salesmen use to get their hands on your money. You don't want to miss seeing this special report.

Dateline on Equity-Indexed Annuities

2008-04-12T16:09:00.001-05:00

Dateline will be airing a hidden-camera investigation segment this Sunday that focuses on how Seniors across the nation are being taken advantage of by unscrupulous insurance agents selling a product called an Equity-Indexed or Fixed Index annuity.

I have been writing a weekly financial advice column for over 4 years and have consistently warned investors about the hidden dangers of these products. I have been contacted by so many investors across the nation that I wrote two, in-depth Special Reports that focus solely on helping the investor understand how these products actually work so they can make an informed decision before buying one. I've been contacted by attorneys nationwide as a result of those reports and asked to serve as an expert witness.

You can find my in-depth Special Reports (provided to investors free of charge) at these URLs:

www.guardingyourwealth.com/SpecialReports/Allianz.htm

www.guardingyourwealth.com/SpecialReports/GeneralEIA.htm

Always At Your Service,

Jeffrey D. Voudrie, CFP
President
Legacy Planning Group, Inc.
423-913-2950
www.guardingyourwealth.com

Thanks for the Article on Reverse Mortgages

2008-03-13T13:42:00.002-05:00

I recently ran across your website while helping my wife's grandmother make a decision related to a reverse mortgage. It was very helpful, and I wanted to drop you a quick note that the info you publish is appreciated. Unfortunately, in her case a reverse mortgage is probably the best choice (even though the fees charged are absurd and I don't understand how the gov't allows it). I still have to figure out a way to keep her family's greedy paws out of her money. But, that is a seperate issue.

I am a financial planner with 8 years in the business, though over the past two years the majority of my time was devoted to business consulting. I'm finishing the CFP this month (March) and getting back to helping people make good financial decisions. Wish me luck.

Pros and Cons of a Reverse Mortgage

2008-03-10T11:35:00.001-05:00

Good, common sense article about the pros and cons of a Reverse Mortgage. I’ve been a RM loan officer for 12 yrs, and until 2-3 years ago, the lenders doing them were mostly reputable, but now, all the fast talking loan officers and their employers are flocking to the business, bringing with them the same slick, deceptive and misleading marketing that got them in trouble while trolling in the regular mortgage market.

The borrowers should be wary, seek advice from relatives and get another Loan Officer to discuss the products with them.

Good Job and thanks.

Paid Up Insurance Value?

2008-03-09T16:49:00.000-05:00

I enjoyed your very helpful columns about Universal Life insurance, Jeff--thank you. I've had one of these policies ($200K Face value) for quite a few years. I knowingly opted to stay involved because health considerations may have made other life insurance unavailable. I also carry a similar amount of term insurance with increasing premiums, our family is grown, and our retirement is fairly well provided for. I'd appreciate any suggestions you're willing to offer.

I'm now 60 years old, and would like to lose the $901 per quarter expense. I'm told that the current cost of insurance is $141.53 per month. The cash value is $29,712, $24K is available for withdrawal, and the loan value is about $23K (7.4% interest rate). I'm having a disclosure mailed to me; but, if I understand correctly, the policy does not have a "paid up insurance" value. Does that make sense?

The insurer is Life Investors Insurance Company of America.

Capital Gains on Farmland

2008-03-08T16:29:00.000-05:00

Q: A 93 year old widow is planning to sell part of her farm land.
The land she is selling is not part of her primary residence,
but a separate parcel of land. It was purchased by her family
years and years ago and she has had it in her family her entire
life. If she sells this property, will she have to pay the 8% capital
gains tax?

She plans to sell the property for $150K.

A: She will owe capital gains tax based on the difference between what she sells it for and her cost basis. The capital gains rate will depend on her income level but can be up to 15%.

Pitfalls of Reverse Mortgages

2008-03-07T18:18:00.000-05:00

A year ago I got my real estate license with the intention of selling Reverse Mortgages. I am a retired "senior" myself and I had researched the product and decided it was a good sensible option for the right client. Since then I have talked to a lot of seniors and listened to their plights and... problems. I can't get over the financial difficulties that many of these folks have gotten themselves into.

Most potential clients are widows in their mid 70's. A common statement I hear is "My husband used to handle all this". Some simply have never learned to live on a reduced income. Others are feeling the effects of inflation (higher than the government admits) and may also have shocking monthly prescription expenses.

Way too many have taken out Home Equity loans instead of Reverse Mortgages. Now they are stuck with monthly payments. One had been given a home equity line of credit with a whopping $250,000 limit. She had spent over $100,000 by the time she called me. That banker should be horse whipped. Where did he think this woman was going to get the money to make the payments? She went to the bank because she needed money, not more debt.

I have had to tell a number of seniors that they do not qualify for a Reverse Mortgage because they now owe too much on their equity loans. I took a call from a woman who did have a Reverse Mortgage but who had gone through $200,000 in just two years. She spent most of it helping her middle age "child" pay bills and rent. She hoped to re-finance!

I took a call from a man who initially sounded lucid and competent. He wanted to know how much he was eligible for. I ran the numbers and we were talking roughly $200,000. But as we talked more I realized that he had no interest in receiving monthly payments or taking a line of credit. He just wanted that cash. I do not recommend that seniors take cash. I usually recommend a line of credit....that is if they seem competent or have a trusted advisor. Finally I got him to give me the phone number of a grown daughter. Her reaction...."Oh no, not again". She had to get an attorney to get him out of his last Reverse Mortgage. She was trying to take control of his finances and get him into supervised care before he lost everything to some swindler.

In the last few weeks I have seen the refugees from the "Forward" or regular mortgage side pouring into the Reverse Mortgage Business. These people don't know a darn thing about the Reverse Mortgage program and they sure don't give a hoot about senior citizens. But they are spending money on mailings and advertising. I work in a small, ethical loan office where almost all of our business comes form referrals. We can't compete with national companies spending huge amounts of money on advertising. I may find something else to keep me busy, this is getting too crazy.

In Support of Life Insurance and Equity Harvesting

2008-03-05T17:08:00.002-05:00

Jeff,

No one is more cautious about telling clients the pros and cons of life insurance and about equity harvesting.

Your statements are far too finite in your article while the average reader won't understand that you do not understand the subject matter, I recommend you better educate yourself both about the proper use of life insurance and equity harvesting.

That way you won't have articles out there with misinformation or ones that are simply wrong.

You are also overlooking the living benefits of some of the new policies (free LTC benefits).

I find your following comments unprofessional and can state with confidence that they are made out of ignorance. I spent months tearing apart the math of books like Missed Fortune 101 and Stop Sitting on Your Assets. While their math is defective in a similar manner to your comments, if you really do real live and honest math with Equity Harvesting, the concept can work. It also might not, but telling people it's smoke and mirrors is totally irresponsible, misleading and inaccurate.

I was so put off by the books that I created two cautionary web-sites www.www-stopsittingonyourassets.com and www.www-missedfortune101.com.

I was so put off by the misinformation out there I wrote my own book telling advisors and readers the truth about this topic. I see you didn't get a chance to read my new book otherwise you would not make comments like the one below.

"One of the most egregious sales tactic used to promote universal policies as an investment is that you should take the equity out of your home and ‘invest’ it in a universal life insurance policy. The argument is that your home equity is an asset that should be used, not left dormant. The tax benefits are also touted—-the transfer is tax-free, the growth is tax-free and the distribution is tax-free! That’s triple compounding, they say."

"Do not fall for this trap. Frankly, those recommending it should lose their licenses. The arguments used to support this scheme are all smoke and mirrors. The tax benefits are bogus, you lose control of your money and the agent earns a big fat pay day."

If you want to do a cautionary article dealing with crooks in the financial/insurance/mortgage field, take on the mortgage acceleration plans that are running wild.

You can get a little education on it by going to www.heaplan.com.

Refreshing Opinion

2008-03-04T17:43:00.000-05:00

I would like to commend you on your article concerning reverse mortgages.

It was refreshing to know that there are individuals out there such as yourself who can give excellent advise to others without seeking any form of payment. Keep up the good work. I know you will be blessed for your honesty.

Reverse Mortgage Stories from the Trenches

2008-03-01T10:20:00.000-05:00

Wolves in Bushes

2008-03-01T10:18:00.000-05:00

I am sure there are the wolves in the bushes in every industry. Thanks for putting a fair warning out to the most respected and under appreciated market, our seniors.

The largest safety factor that protects the seniors that you failed to mention is that before anyone can endure any of what you called high closing costs of obtaining a Reverse Mortgage, they must complete counseling with an approved HUD counselor. This counseling... mandatory from a HUD counselor assures the client and the FHA that the client has all the facts needed to make a wise business decision. No counsel with certificate, No Reverse Mortgage!!!

The main point I want to make to you is that as you compose an article to protect the seniors don’t make the ones that already have a Reverse Mortgage feel that they have made a big mistake. If you could travel with me over the past 6 years originating Reverse Mortgages for seniors and see how it has changed their lives and given them a piece of mind for their next day of “their Golden Years”, I feel you would have directed this article with a different approach.

I do not want to give you the impression that your info is wrong; it’s just that it didn’t have all the facts.

Thanks for hearing me out.

You Are Right On

2008-03-01T10:17:00.000-05:00

I have over 44 years experience doing taxes as a CPA and you are "right on" on the reverse mortgages. Everyone who has taken one in my practices has ended up wishing they hadn't. If you kept just one away from these traps, you have had a very successful day. Keep up the good work.

Fees on Reverse Mortgages

2008-03-01T10:10:00.002-05:00

I read your article "Pulling Back the Curtain on Why Reverse Mortgages are So Heavily Marketed Today" and agreed with much of what you pointed out. A couple that is netting only $38,000 (implying a property value of less than $85,000) should rarely if ever do a reverse mortgage.

However, when I consider the seniors who are netting... $100,000 or more and are using that money to stop making mortgage payments forever and significantly increase their quality of life, I believe they are benefiting significantly from this unique product.

That being said, the point I want to discuss is your statement, “It also helps that the fees on reverse mortgages are amazingly high.” The fees are high. However, I think it’s important to differentiate between the fees that a lender earns and the fees that go to the FHA and others.

On a typical $200,000 loan, the costs break down like this:

- 2% MIP ($4,000)

- 1.5% Origination fee ($3,000)

- Title, appraisal, etc. ($2,000)

That means of the $9,000 in fees, the lender is making $3,000.

There is a lot of pressure coming from AARP and other to reduce the fees on reverse mortgages by capping the origination fee at 1.5% versus the current 2% maximum. The reality of the market is that competitive pressures have already driven the norm from 2% origination fees down to 1.5% and in some cases as low as 1.25%. At these levels, lenders are making less on a reverse mortgage than they can make on forward mortgages (where they can make points on the back and mask how much they are truly making).

Which brings me full circle to my two arguments: First, the AARP and other observers should focus on reducing the MIP from 2% to 1.5% rather than the origination fee because the free markets have already accomplished their goal on lender fees. Second, when analyzing the reverse mortgage, use an average case: a 71 year old widow living in a $186,000 home with a $34,000 mortgage.

I appreciate your taking the time to write about this product and look forward to reading more of your work in the future.

Broad Brush

2008-03-01T10:07:00.000-05:00

Q: It seems you are painting all of us insurance agents with a “broad brush”. I am just starting into the annuity business as a seasoned agent of 25 years. I also worked with Allstate Financial Service and had a series 6. I would never advise... anyone to put all of their assets in one place. If you are not licensed as an insurance agent you can’t sell them and if you are then you will realize there is great place for these products that meet the need of many clients. Your commission nor mine should ever be the first objective but the last. Keeping the client’s, goals, objectives, time horizons, and personal needs in view of any recommendations should be our guiding motive. Your article makes it look like all of us “life insurance agents” are a bunch of heartless monsters. I found it quite offensive. Did an insurance agent “steal your client”? I don’t want to hurt any senior and I am sure you don’t either. So what do you suggest that I do differently with the public as far as annuities go, fixed or EIA’s? I mean that honestly. I am 58 years of age and have been in the business for 25 years.

By the same token Jeff with the market as volatile as it is I find it criminal to have a retiree have most his or her wealth exposed in the market. I am sure you have a balanced approach to anything you propose to your clients. At the same time you want to make a living too. There is a definite place for EIA’s for clients who have time and want to have some growth but not all the risk. The key is that a client needs full disclosure of what an annuity is and what it is not. You can’t legislate ethics and much of this has to do with good ethics as well as financial planning skills. I have lost more money with “your kind” than I have ever lost to an insurance agent but that would not be fair to blame all CFP’s.

I hope you will be fairer to insurance brokers and agents in your future articles. I certainly have friends just like you that are doing a great job and I would not want to drive them out of the business or cast them as “evil doers” looking only to churn and twist one’s wealth. Unfortunately it does exist in all financial professions but the public needs to know there are good agents and financial planners out there ready to give them good honest and ethical service.

A: I appreciate your comments and, if you’ve read any of my other articles, you will find that I have as many complaints with the traditional advisor.

Still, I do not like EIA’s at all. Rarely have I seen them work out as projected and it’s the client who takes all the risk if things don’t work out.

Thanks for Your Article

2008-03-01T10:04:00.000-05:00

Article on Medicaid

2008-02-26T20:27:00.001-05:00

Q: I have just read your article. The material covered is wonderful. Does
this material apply to all states. I live in Virginia and didn't know
if the current legislation was for any gifts made in three years or five
years. Your article indicates five years. Many thanks for answering my
question.

A: As far as I know, the Medicaid 'look-back' period is determined by
federal law, not state.

It was changed from 3 to 5 years in 2006.