ProVise Bullets

  • With the passage of the American Taxpayer Relief Act of 2012, a lot of people felt that things were set as it related to estate taxes. Apparently everyone believed that except the President, who has proposed several changes to estate tax law in his fiscal 2014 budget. Many techniques that have been used in the past would either be eliminated or severely curtailed. These include the use of a Grantor Retained Annuity Trust which would have to have a minimum life of ten years. This increases the odds that the grantor would die during the time period. Thus, all of the assets placed into the Trust would revert to the decedent’s estate. These Trusts are typically funded by assets that are expected to appreciate significantly over the term of the Trust, thus moving low valued property out of the estate, but potentially a much higher value to the beneficiaries of the Trust. There is also some question about step-up in basis. Currently, at a decedent’s death, the asset is valued to the heir at either the date of death value or the value six months after death, at the choice of the estate. Sometimes for estate tax purposes, assets are discounted even though they may have a higher “real” value. This is especially true in business ownership, family partnerships, etc. The President has proposed that the estate tax value and the income tax value be the same. Further, he has looked at Dynasty Trusts and wants to severely limit their usage. While nothing has passed yet, it is further indication that the President is determined to go after the uber wealthy for additional revenue.
  • It’s hardly time to party like it’s 2004, 2005, or 2006, but there is a lot to be excited about in the ever increasing recovery of home prices. Not only have prices risen for 12 consecutive months, but February prices year-over-year increased 10.2% across the country. Some of the biggest gains came from the hardest hit states with Nevada, Arizona, and California being the top three. Only three states - Alabama, Delaware, and Illinoi - did not show price increases on a year-over-year basis. The supply of homes is low as potential homeowners seek to gobble up real estate which is rebounding and they have been able to do so given the low mortgage rates that are still available. Further contributing to the low inventory is the fact that many investors, including large hedge funds have swooped into many markets, gobbling up homes, fixing them up just a little, and then renting them. Eventually, prices had to turn around and the sustained growth is a very good sign. Having said that, values are still down over 25% nationwide since the top of the real estate frenzy back in the spring of 2006. (Source: CoreLogic)
  • Over the past few years many people have found it difficult to live on the income they are earning, if they are earning any income at all. In spite of the fact that most Americans say they are not adequately prepared for retirement, many have been dipping into their 401(k) Plans in the form of hardship withdrawals or loans. In 2012, one out of three employees took one of these two distributions, which is up from 25% in 2011. Loans need to be repaid within a five year period of time and distributions require not only paying the income tax, but in some cases, a penalty as well. Perhaps the largest penalty, however, is the fact that people have lost out on the stock market rally of the last four years. Additionally, these loans/distributions were requested by younger and lower income employees. There was also a gender difference in that 34% of women said they had requested a loan/distribution, while only 23% of men indicated the same need.

  • Not all real estate has been depressed. Over the past several years, farmland, especially in the Mid-West, has been exploding in price. You may have even heard Warren Buffet claim that he would like to own even more farmland than he already does. Some might even say given the fact that there have been double digit increases in some areas over the last five or six years, that a bubble has developed. But, of course, you never know how big the bubble is (if there is one at all) until it bursts. As a group, today’s farmers are pretty sophisticated. We only hope they don’t do the same thing homeowners did years ago and finance land at extremely high prices and then see the prices drop from underneath them. Several years ago we commented in the Bullets about the value of farmland and how we expected it to appreciate, although candidly, we did not think it would appreciate as quickly or as much as it has. As the world population grows, the demand for food continues to increase. There is only so much land that is useful to grow crops, although interestingly with the change in weather patterns, land that once may have been very good might not be as good in the future and conversely, land that wasn’t very good to grow crops could now become very useful. This could cause an interesting change in the balance of the power throughout the world.

  • The implications of the Supreme Court potentially overturning the 1996 Defense of Marriage Act (DOMA) obviously has significant social implications. Currently, nine states allow for same sex couples to legally marry along with the District of Columbia, but state recognition is a lot different than federal recognition when it comes to married couples. When doing financial planning for same sex couples, it requires extremely careful planning. The impetus for one of the cases heard by the Supreme Court, which is expected to be ruled on in June, had to do with a lesbian couple who were legally married under state law. But when the first partner passed away and left a lot of money to the second partner, she found herself with a hefty estate tax bill. Between legally recognized married couples at the federal level, of course, there would have been no estate tax at the first death. But all of this goes well beyond estate taxes. A married couple has a choice of filing separately or jointly. Such a privilege does not exist for same sex couples. They are not entitled to each other’s Social Security benefits, they must own property generally as tenants in common, they often don’t have laws that protect them for Power of Attorney, Healthcare Surrogate, emergency medical conditions, etc. Should DOMA be overturned (and there seemed to be a lot of sentiment on the Supreme Court to do so), it will require all same sex couples to rethink their financial and estate planning.

  • Given the debacle of the financial crisis and its effect on home ownership and the surge in apartment buildings being built, one might reasonably assume that home ownership has declined. According to the Department of Housing and Urban Development, at the end of 1991, 59.8 million families owned a home and 33.4 million were renting a home or an apartment. Twenty years later, at the end of 2011, there were 76.1 million families that owned a home, for an increase of 27%, and 38.8 million families that were renting, for an increase of 16%. Three out of four American households that represented this increase over the last 20 years moved into a home as opposed to becoming renters. This seems a little counter intuitive to all of the headlines we have been reading, but the facts are the facts. With home building beginning to gain some steam, we can clearly put into perspective the American dream of owning a home still being very important.
  • The 2.5% GDP increase for the first quarter was slightly below what economists were expecting. But, given that this included a significant tax increase in early January because of the reinstatement of the full tax for Social Security, not to mention the new tax bill, and with angst over the sequestration tipping in March 1st, there are plenty of reasons for businesses and consumers to cut back. Businesses did, but consumers went on a binge. If you see the glass as half empty you are worried about the economy contracting, especially given that durable goods orders declined by 0.7% in the last month of the first quarter. On the other hand, if you see the glass as half full, then you are not excited about 2.5% growth except that it is much better than the fourth quarter of last year, but you still see it as growth. We find ourselves in the latter camp, expecting slow growth as businesses continue to remain unsure, but we see growth nonetheless. While we got off to a very good start in the market for the year, having continued to set even higher highs in April than we did in March, it could be a long summer for bulls until confidence likely kicks back in later this year. The market won’t go up forever and at some point, it will consolidate the gains of the past six months. This is to be expected in the short run and is healthy in the long run. On the plus side, this slow growth means lower inflation which means prices won’t be jumping dramatically any time soon. In fact, commodity prices have fallen 15% to 20% below their highs and arguably are in a correction phase. While gold prices steal headlines, copper is down 17% and steel, nickel, zinc, and aluminum have also declined, just not as dramatically. With oil trading between $90 and $95 per barrel, you can expect gas prices to hover between $3.55 and $3.75 per gallon through most of the summer. In short, we may not be in a good place economically, but we are far from being in a bad one.
  • The housing market continued to build on the strength of the past year with home prices continuing to climb year-over-year, albeit at a slightly lower growth than in the previous few months. This is to be expected, but what does the future hold? As long as interest rates continue to remain low, it will encourage home ownership. We anticipate that 30 year loans will likely remain under 4% until later this year and it’s hard to justify interest rates much higher than 4.5% to 5% over the next 18 months. Given that the average household invests about 12% of its income into a mortgage (traditionally it’s about 20% of income), we see this as a very positive sign.

As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for over 26 years.


© 4/30/13 ProVise Management Group, LLC

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