@TdoesCollege - Totally agree. I deal with a lot of private fiduciaries- there are more that I wouldn’t refer clients to than ones I would.
2 Likes
thought the attached article is worth a read:
[quote]" build a portfolio of low-cost index funds or ETFs. It could be a 2-speed portfolio like the original Couch Potato. It could be a 3-speed portfolio that includes international stocks. It might even be an all-in-one portfolio of index funds, such as a Target Retirement fund.
Just keep costs low and stay the course.
…
Low-cost simplicity trumps sophistication."[/quote]
2 Likes
Wow. Lots of issues here.
@tumagmom, if you are self-employed, you may be able to hire your kids for work to enable them to put money into Roth IRAs. There were (and probably still are) some tax-advantaged ways to pay for some of college. If this is interesting, I might be able to connect you with someone who does that.
Two other thoughts:
- Go with low-cost funds for the 529 Plan. I think we used a state that had TIAA as a fund manager.
- Use a fee-only financial planner who does not sell products. They may price in different ways. Hourly or annually (with some estimate based on the size of your assets).
- Have them do a financial plan. We found that to be a very useful exercise.
- You may be able to roll the non-deductible contributions into a Roth IRA. I’m not an expert on this but others are.
Children as executors. Works well if they are capable. I have been because others probably aren’t capable.
Both ShawWife’s family and mine have not fought and I don’t think would fight. In my family’s case, I observed that my brother was doing a significant slug of work taking care of my mother and suggested to the other sibs that my mother rewrite her will to give him a little extra. I also suggested over a few years that my mother put the money for my brother in trust as he has not been a responsible decision-maker from a financial standpoint (a great guy but with an unerring capacity to make poor financial decisions and he retired after 20 or 25 years as a public school teacher). The sibs agreed on giving up some of their share of what will be a small inheritance) and she agreed, reluctantly, to put my brother’s share in trust. In ShawWife’s family, each of the four kids would compromise rather than have fighting in the family, but there are unreasonable spouses. I tried to unscrew a gift the MIL is giving to avoid built-in conflicts that will arise, but was only partially successful in doing so, in part because I thought she should handle the issue in a very different, conflict-free way.
Trusts. As people said, really depends upon the trustee. My mother established a dynasty trust for me with very little money, but set up a company inside the trust that does certain kinds of work. That has generated a fair bit of capital inside the trust. It bought my share of my main company so profits now flow into the trust and not to the my estate. Our trustee is a personal friend – a lapsed lawyer who inherited / married well and does philanthropy and would see no personal interest in our little amounts of money. I just established a dynasty trust for my son, that is purchasing his shares in his startup. I asked the same person to be trustee for my son’s trust. The trust documents suggest the purposes of distributions but leave investments as a wide-open area.
1 Like
I’m interested in learning more about dynasty trusts and how you can set up a company inside the trust. Can you point me in the direction of some reputable materials?
Thanks!
@hmom16, here are some general materials. As a caveat, this is arcane stuff and you need an attorney who specializes in this area.
Here are four relevant general articles. I pulled them off the web:
Dynasty Trust: Definition, Purposes, How It Works, and Tax Rules.
Intentionally Defective Grantor Trusts (IDGT) in Estate Planning
The Basics of BDITs | Commonwealth Trust Company
You can be if only your progeny will be beneficiaries but cannot be the grantor if you are also are going to among be the beneficiaries. For you to be a beneficiary, someone else has to donate the initial sum and set up the trust. Nonetheless, you can be the investment advisor to the trust and set up one or more LLCs (treated for tax purposes like a partnership) that are owned by the trust. An LLC can make investments or set up to do business, if you as the investment advisor believe it is a good business.
I have never taken a salary or any payment for the work the company inside the trust does as my intent is to get funds into the trust, not take funds out, but I think you could draw a salary from a company that is owned by a dynasty trust if you were working for the company. When that company makes a profit, the profit increases the assets of the trust. If the trust is beneficiary defective, you would pay the income tax and the profits would accumulate in the trust.
From a tax standpoint, in this kind of structure, you do not avoid any income tax but all of the assets accumulated in the trust are exempt from estate tax. Incidentally, a trust set up by someone else probably affords you and your progeny some degree of asset protection as long as any transactions you engage in with the trust are done at arms length.
There are costs involved. Lawyers to set up the trust. There are probably tax returns to be filed each year, but this can be minimized by designating the trust and the LLCs as disregarded entities if you can.
I hope this is helpful and not too cryptic.
Thanks, this is very helpful!
Perhaps this belongs on another investing thread (is there one?) but asking here.
H and I are about 8 years away from retirement (more for me). We are in fairly good shape financially - no loans. Own our house and cars outright. Have decent money in the market, in our 401K accounts and other brokerage accounts.
We’ve been debating about buying a condo as an investment property/rental. Anyone else own rental property as a different asset for retirement? Any specific gotchas? We’ve been thinking of either getting a rental property close to us OR buying a retirement place somewhere warm. We could potentially do both…
DW and I have rental properties, and the income will make up the largest component of our retirement income.
There’s a lot of discussion in the part 1 thread by me and others about the pros and cons.
The short answer is that there can be many gotchas, if not outright landmines. Being a landlord is not for the faint of heart.
I’ll see if I can find some of my old posts when I get back on my computer, the phone interface is useless for searching.
2 Likes
We have some rental properties but they were not actually purchased for retirement savings. as @notrichenough says, they are a fair bit of work. We are selling one of them because ShawWife can see it will need some serious work in the next year or two and she doesn’t have the bandwidth to do that kind of work.
One of my friends bought a mutli-family apartment building (maybe six units). He may then use a property manager (he lives half the year somewhere else). But the property forms a slug of his cash flow for retirement.
We own 2 condos that are rented out. One is for my daughter to have attained residency at school the other is in hopes of us to one day use it. The rental income is great and the cash they throw off is great. The negatives are when the second one isn’t always rented and has a high HOA. The HOA is really the annoyance because if we do live in it one day we will still have to pay that even if we have a nothing mortgage. You can’t really control the HOA or put a cap on it so just be prepared.
You can always buy a house but then have to worry if you have two houses that someone has to watch one while you’re not using it. Our property near where my daughter goes to school has low HOA and easy to rent so that’s also an option but that’s not a building that has any amenities so that’s probably why it’s cheap.
Oh best thing we ever did was have property managers to deal with any headache and do all the vetting. It’s worth the fees we pay them to deal with it all.
2 Likes
We thought of this. And sometimes I wished we had done it. But my spouse always said if it’s a rental remember to think of it as having another part time job. This was before airbnb, but I still think it applies. If you can buy it and just use it without renting that’s very different than renting it.
Can be a good thing if you buy well.
Caveats: My SIL in NJ planned to use the four rentals she purchased for retirement for years. By the time she retired, taxes were so high in NJ that they wipe out most of the rent. So she has two choices sell them or make little to nothing. She has kept them ( I have no idea why).
If you do buy an investment property, you should consider using an LLC for liability protection (protects your other assets, you still want to have sufficient insurance on the property). I would be worried about lawsuits from renters if they slip and fall on ice outside or something like that.
3 Likes
Unless you are handy and like doing repairs I do not recommend buying rentals for retirement income. It is not a low stress investment.
5 Likes
Good points about rental property work/stress. In retirement, surprisingly even with a lot more time we don’t have much enthusiasm for tasks and projects.
I can’t find my older posts, so here are some random musings:
-
How hands-on are you going to be? Are you going to manage it yourselves? Find your own tenants? Do your own repairs? Can you afford/are you willing to give up 10-15% of the gross to hire a manager?
-
Cash or mortgage? Especially for condos, this makes a big difference. Many condo developments are difficult to finance if they won’t be owner-occupied.
-
Do you have a thick skin and a spine, or are you a sucker for a sob story? If you are not willing to send the “notice to quit” after the rent is 3 days late, and be willing to evict, landlording may not be for you.
-
Are you familiar with Fair Housing laws, lead paint laws, and the specific laws covering rentals in the state where your rentals will be? They vary a lot from state to state.
-
What is your system for analyzing whether a particular property is a good investment financially?
-
Do you have the skills to evaluate a potential property’s condition before you pay to bring in the inspector? Particularly with respect to deferred maintenance.
-
Can you afford to carry it if it’s empty for months at a time or the tenant stops paying rent?
-
Are you familiar with the tax laws around rentals? Even if you use an accountant, it helps to understand schedule E, and especially form 8582.
-
What legal structure will you use? Someone suggested an LLC… This is not a decision to be made lightly as there are legal and tax ramifications for whatever structure you choose. These can be tricky to understand (for example, while an LLC can provide some asset protection, if you manage the property yourself you will be sued anyway so the LLC is pointless. A big umbrella policy may suit you better).
I did find my post on how we screen tenants. Perhaps it will be useful:
6 Likes
All - thanks for your responses. Will read these out to H later this weekend.
@notrichenough - thanks for the details! Very useful list indeed. We have a friend who owns a few rental condos and have been discussing these points with him. We will likely not have more than 1 condo to deal with - but we’ll have to see how this works out. Great points about the LLC or umbrella insurance. That’s something I’ll have to look into.
1 Like
We have rentals, it is our business. It’s a lot of work and as others have mentioned there are a lot of factors to consider aside from just whether you think they will make money. In our experience you will make more money on a small apartment building over single family homes. The appreciation of the asset we have found to be much greater on apartments. For a condo make sure the building allows you to rent out the unit.
Something to also consider is is depreciation. Rentals can be depreciated on your federal taxes which can be helpful in reducing your taxable income. The con of that if you sell the property and don’t exchange it into another rental you will owe tax on not just your capital gain but also on the depreciation.
3 Likes
Some good points here and one people should definitely consider is that when you take out a mortgage on an investment property, the rates are higher than on your first home. So, if you can pay cash, do that, if you can’t then depending on how you plan to hold the condo or how it affects your tax return, you may want to take the loan out on your primary home instead. I recently refinanced one of my condos and considered taking out the mortgage on my primary home which has no mortgage instead. It would have been a lower rate, however, I would have lost some deductibility of the interest because with the TCJA we now only itemize every other year, whereas on the Sch E we can deduct all of this.
If you own it in an LLC the best state for asset protection is Delaware. Just remember that you then have to get a registered agent and there are annual registered agent costs, annual filing costs for the state your LLC is in, you should be preparing annual consents (technically an attorney should be doing it every year), and the LLC should be preparing a 1065 return every year where the income generally flows through to you anyway. So, ultimately there are a lot of extra costs. You should also have it owned in your Living Trust if you don’t do an LLC or to avoid an LLC and you want asset protection, if your state allows you can own it in TBE.
1 Like
IME in the past investment property loan rates typically run about half a point higher than loans for owner occupied, which is not so bad. Haven’t looked lately.
The banks don’t like ownership to be held by a non person, so it might be difficult to finance if you try to put it in an LLC or a trust right off the bat.
I agree with many of the comments on owning/managing properties.
DH is very handy but not interested in owning properties. Owning properties can be limiting on personal travel - like owning a business - you can hire others, but ultimately you often need a level of involvement that many people just don’t think about.
1 Like