Paul Ferraresi

Most colleges use the FAFSA Form as the only item for assigning need-based financial aid. About 300 colleges (private schools) use a formula called the “institutional methodology” which also requires the CSS/Financial Aid Profile application. The CSS Profile asks for more detailed data about a family’s income, assets, and resources not required on the FAFSA form. This additional information includes your home equity and your retirement accounts.

(For years, in this blog we have advocated the extraction of the maximum equity from your home and withdrawal from your qualified plan. Take these funds and place them in a tax free investment vehicle that is not a countable asset for college funding, Medicare or Social Security. Contact us for more information.)

Colleges that use the FAFSA will determine financial needs based on your expected family contribution. The formula looks like this: Cost of Attendance minus Expected Family Contribution equals Financial Need.

Do not be tricked into putting a lot of assets into a child’s name. If you do, colleges will demand:
• The child use 35% of their assets for college before any aid is given to the family. If the asset is held in the parent’s name, then only 5.6% of that asset must be used before aid is given.
• If the child does not go to college, they can spend that asset as they please. Remember: You gifted the asset to them. Let’s see…would the child choose a new red sports car, or, would the child use the money for college? DUH!

Many private schools use the institutional method which counts home equity as an asset. If you have, say, $300,000 of home equity, it will be assessed at 5.6%, which means a difference of $17,000 in expected family contribution you will pay before getting any aid.

Keep in mind, many private schools cost in excess of $53,000 per year (without taking into consideration personal expenses of the child; e.g., football game tickets, new clothes, special events, etc.). Add in your retirement plan assets as being assessed in the formula, and parents will have a huge amount of Expected Family Contribution.

Public schools are making it so students have to go five or six years to complete their degree which pushes up these costs, also.

The best time to start saving for college is before the newborn leaves the hospital to go home with you.

During my 40 years of practice, I see people under-estimating what they will need in retirement. Aside from the vast text book education I have acquired over the years in this area, I also have had first-hand experience with thousands of my clients who have retired.

I hear people say, “Paul, I feel that we will need only about 75% of our current income to retire.” The actual national average is 91-94% with many spending 103-105% of their final year’s pay. For some reason people leave out a factor for income taxes (which are set to rise in a little over a year) and inflation. That is why they think they only use 75%.

Here is the real item they have left out – health care costs. An average married couple with children pays approximately $300-400 per month for health care. The “street” cost for a Blue Cross/Blue Shield policy is around $1400 per month. That means, your company is making up the difference. (Say Thank You!) Group health insurance has been set up on a socialistic system. That is, the young and healthy workers are paying for the older, less healthy individuals in your company.

If you want “good” health care when you retire, you probably will not go with Medicare. By the way, watch for the bankrupt Medicare system to raise rates and cut benefits shortly in order to survive. (Ah yes, another government program that does not work.) At age 65, a married couple with a private health plan can expect to pay $2000 to $2500 per month with a $2500 deductible. That is $24,000-30,000 per year for the insurance plus the deductible and out-of-pocket costs for medications. Did you add that into your budget for retirement? I think not! So, a couple now earning $100k per year, guesses they will only need $75k. Gross up to pay for taxes and they are up to $95k to $100k. Then add in the new health care costs, more travel and gifts for grandchildren. It is not unreasonable for them to need over $100k.

Most people probably will take Medicare. You know – where the government says it will take care of you. (One of my favorite quotes is: Be careful of those who want to take care of you…for your caretaker will soon become your jailer!) The quality and quantity of service is lacking, to say the least.

Another thing to add to your retirement budget will be long-term care coverage. If you have not started the purchase of this coverage, well, it gets real expensive starting at age 55-60. Oh, you say, you will pay for it on your own instead of buying the insurance. Costs today for care in a nursing home or at-home care averages $6,000-10,000 per month ($72,000-120,000 per year). Remember, a married couple can expect one of the two people to need nursing home services for at least five years. (That is $360,000 to $600,000.) Today’s costs can wipe out your finances. Where will it come from as people are living longer? These costs are going up at a rate of 15-20% per year.

Stop putting your head in the sand and develop a plan for you and maybe your parents, also. Unfortunately, most Americans have been brainwashed to not take responsibility for themselves. Sit down with a professional advisor, face the truth, and get to work on providing a comfortable future for yourselves.

Discipline or regret.

YOUR STATE TAXES

The Tax Foundation does an annual survey of all 50 states and ranks them according to the degree of tax burdens placed on people within that state.

The northeastern states have the highest burdens. According to the 2009 reports, Connecticut has the worst burden per capita; then New Jersey, New York, Massachusetts, Maryland, and California.

States with the least burden in 2010 were South Dakota, then Alaska, Wyoming, Nevada and Florida.

The “facts and figures” guidebook is available online at www.taxfoundation.org\publications\show\2181.html.

Remember, these taxes are over and above the Federal fees and taxes.

Of the early astronauts who went to the moon, all had psychological problems upon their return. They drank too much or somehow got into trouble. The main reason was: where do you go, now that you have been to the moon? Later in the space program NASA made sure all astronauts had plenty of projects to keep them busy after their return from the moon.

It’s the same for you and me and our goals: once you complete them, make another list. My father lived to be 83 years old. You can’t imagine the goals he had at 83: get his driver’s license renewed. He got it renewed for four years.

• How far into the future should you plan? As far as you can.
• How many books should you read? As many as you can.
• How many friends should you make? As many as you can.
• How much should you earn? As much as you can.
• What should you try to be? All you possibly can.

The purpose of this exercise is to stretch you, get you to think, get you to wonder, ponder…. I wonder what would be possible if I could get everything I wanted. What would it be like?

Goals for Personal Accomplishment
Once I reached eight years old, the fires were lit for me and they have never gone out. Since I was eight years old, no one ever said to me, “When are you going to get going? When are you going to get off the couch? When are you going to get off the dime?” I only hear, “When are you going to slow down? You can’t do that many things. You’ll have a heart attack and die.”

It’s easy to get lazy in designing the day, the month, the year, or your life. It’s easy to cross your fingers and hope it all works out. The way to keep this up and not get lazy is to teach it to others; e.g., your family.

The Why Is Important
Pick out the top four goals you want to complete by the end of this year. Then, write a short paragraph:

“Why These Four Goals Are Important to Me.”

When the Why gets big, powerful, and strong…

The How Seems to be So Much Easier
Without a strong enough Why, the How seems too difficult to accomplish. How do you manage your time? If you had strong and powerful goals you would figure out how to manage your time if it was worth it. If it wasn’t worth it, why bother struggling with the art of managing your time if it really doesn’t matter?

We are now approaching the final quarter of this year. How are you doing on the goals you set nine months ago? Take this short quiz to determine your priorities and finish the year strong – even if it means completing only one of your goals.

1. You win $100 million in the lottery. What would you do with the money? What would you change in your life? What would you do differently?
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2. If you knew you had only five years left to live, what would you change in your life?
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3. If you found you had only 24 hours left to live, what would you regret not having done; regret not having had; or regret not having been in your life?
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THE ESTATE TAX IS BACK

New laws have significantly changed the estate tax which is back after a one-year repeal in 2010. Under the new 2011 law, the first $5 million of an estate is tax-exempt, and amounts in excess of that limit are subject to a maximum 35% tax. The 2011 law, which is scheduled to expire at the end of 2012, also changed the rules governing gift and generation-skipping transfer taxes.

Does the new legislation affect estates that were processed during 2010, when there was no estate tax?
Executors of estates of individuals who died last year can elect either the 2010 law or the new 2011 law. The 2010 law has no estate tax, but estate assets are subject to “carryover basis”: Beneficiaries must pay capital gains tax on any appreciation in excess of $1.3 million when inherited assets are sold. Under the 2011 law, beneficiaries are not subject to carryover basis. However, the estate will pay up to 35% estate tax on the amounts inherited in the estate above $5 million.

Executors of estates worth less than $5 million generally should choose the 2011 law. But higher-value estates might be better served by the 2010 rules, because the tax on appreciation might be lower than the estate tax.

Under the new law, a surviving spouse inherits any unused portion of the deceased partner’s $5 million exemption, making up to $10 million of the couple’s estate tax-exempt. How might this new provision, known as “portability,” affect couples’ estate plans?
A couple with a large estate previously had to create a trust on the death of the first to die to take full advantage of each spouse’s estate-tax exemption. The portability provision eliminates the need for trusts for some couples; i.e., the surviving spouse can simply add the unused portion of the deceased’s exemption to his or her own, provided the law is still valid at the time of the surviving partner’s death, but only if a federal estate-tax return is filed when the first spouse dies. Like the rest of the legislation package, this provision is set to expire at the end of 2012, so it remains to be seen whether the portability clause will become permanent.

How does the new law change gift and generation-skipping taxes?
There are three components to the transfer-tax system. (1) A gift tax for transfers during life; (2) an estate tax for transfers after death; and (3) a generation-skipping transfer tax for gifts to individuals who are two or more generations younger than the donor, such as grandchildren or great-nieces/nephews. In previous years, the exemptions varied for the three components, which made gift planning complex. Under the new law, all three components have a tax-exemption limit of $5 million, with a 35% maximum tax rate for transfers in excess of that amount.

How might people proceed with their estate planning in light of these changes?
It’s impossible to predict whether the law will expire in 2013 as scheduled or will be made permanent. I generally encourage clients to review their estate plans every three to five years, but with the laws constantly changing, people need to pay even closer attention, and update wills and other estate documents any time there is a change in legislation.

The proposal for 2013 is to reduce the exemption amount back down to $1 million.

Visit with your Financial Advisor and Estate Attorney to decide on the appropriate strategy for you.