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March 2006 |
Capital Retirement Strategies, Inc.
Specializing in retirement plans
and personal investment management
In This Issue
Happy Spring! While the weather is getting nicer here in New England, we still know that it's not out of the realm of possibility to get hit with a spring snowstorm- even in April. By the same token, many investors feel a sense of relief that the bear market of 2000-2002 is clearly in the rearview mirror, but still worry about the potential for a dip in stock prices. While I can predict neither the weather nor the future of stock prices, I know we can endure the possibility of each by simply being prepared. The single greatest factor in determining the success or failure of an investment portfolio is asset allocation. Because various investment vehicles perform differently during different economic cycles, it makes sense not to put all of your eggs in one basket. When was the last time you took a look at your asset allocation? If you're not sure just what you have invested in stocks, bonds, real estate or cash, consider scheduling an investment review today. Real estate has been hot for several years now, and our first article discusses a strategy for selling highly appreciated real estate without paying capital gains taxes. If you know someone who owns investment property, this story may be of interest to them. Our guest contribution this month is from Anastasia Psaltopoulos, a local attorney specializing in divorce, but most notably collaborative divorce and mediation. As dissolutions of marriage become more commonplace, couples are realizing that the days of those nasty divorces are a thing of the past. Working together to find reasonable and equitable settlements seems to be the trend now. Ms. Psaltopoulos sheds some light on some different and more effective ways that divorces are now being handled. Closing out this issue is an article on rising CD and money market rates. Don't forget to check out Nickels and Dimes- please email me if you have an announcement or honor that you would like featured in a future Nickels and Dimes piece. If you read something you like, I hope you’ll consider forwarding my newsletter to someone who may also find it of value. Thanks for reading! Best regards,
What in the World is a 1031 Exchange? Over the last several years, real estate values in New England have skyrocketed and, while this is great news to homeowners and investors alike, it also presents a new set of potential problems. Although capital gains taxes are now at historically low levels, they can still take a big bite out of some of your real estate profits. For most people selling a primary residence, this is not an issue. Thanks to the Taxpayer Relief Act of 1997, a homeowner can exclude up to $250,000 of profit ($500,000 if married) as long as he lived in the home for two of the past five years. Of course, if you realize more than a $500,000 gain when selling your home, you may be subject to paying capital gains taxes. For investment real estate, there is no such exclusion, and the entire profit is taxed as a capital gain. For investors who have owned land, vacation properties, office buildings or multifamily houses, they are faced with a difficult dilemma. Should they hold on to their highly appreciated asset or should they sell it and pay Uncle Sam up to 20% of their profit? A Like-Kind ExchangeThe 1031 Exchange gets its name from a section of the U.S. tax code, not unlike the 401(k) plan or Section 529 Plans. Under IRS Code Section 1031: “No taxable gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment purposes if such property is exchanged solely for property of like-kind which is to be held for productive use in a trade or business or for investment purposes.” In other words, if the proceeds of your investment property sale are reinvested, or exchanged, into another investment property, then you will not be subject to paying capital gains taxes. The “like-kind” refers to the type of asset, not to its grade or quality. In general, investment real estate proceeds must be invested in other investment real estate, but it need not be exactly the same type of property. If you sell a two-family house, for example, you don’t have to reinvest in another two-family house. You could invest the proceeds in land, commercial office space or another type of rental property. The main exception is that the proceeds may not be invested in a personal residence. The RulesWhile a 1031 exchange need not be a complicated transaction, there are a number of stringent regulations, which must be adhered to. It is highly recommended to consult with a CPA or real estate attorney prior to considering such a transaction. A few of the requirements include: - No Constructive Receipt: The client should not take constructive receipt of any of the monies resulting from the sale. A Qualified Intermediary is required as a part of the exchange, and holds the funds until the new property is purchased. Specific language indicating this should be written into the Purchase and Sale Agreement. - Qualified Intermediary: This person or company facilitates the exchange by receiving the property to be sold by the client and providing the purchased property in exchange. The qualified intermediary must be totally independent, and cannot be the client's CPA, attorney, realtor, business associate or family member. - Time Limits: Once the initial sale is closed, the client has 45 days to identify potential replacement properties. These must be submitted in writing to the Qualified Intermediary. The client then has an additional 135 days to close on at least one of the properties and complete the 1031 exchange. Suitable Replacement PropertiesThere are generally two types of real estate investments that clients may consider reinvesting in to complete their 1031 exchange. Actively Managed Property: This type of property would include multi-family houses, condos and office buildings, among others. Advantages to this type of investment would include direct control and complete authority over when to sell. The main disadvantage is that more active participation in the management and maintenance of the property is required. For busy clients or those approaching retirement, they may no longer want to deal with the potential hassles of being a landlord. Passive Real Estate Investments: Tenant in Common properties are becoming more popular for 1031 exchanges as baby boomers want to take advantage of the tax benefits of doing an exchange, but don’t want to manage their real estate holdings directly. TIC’s as they’re commonly known, offer access to institutional quality properties that most investors can only dream of investing in. These may include multi-family apartment complexes or office buildings worth millions of dollars. Because these properties are professionally managed, the investor doesn’t have to do anything. Like smaller rental properties, TIC’s offer a predictable stream of income paid monthly. The main disadvantage to this type of investment is the lack of control and liquidity. Because you own a property with dozens of other investors, you don’t have the right to sell whenever you want to. Who Should Consider a 1031 Exchange?Anyone who owns investment real estate and is considering selling should take a look at the possibility of doing a 1031 exchange. Most often, prospects for this type of transaction are people who have owned a property for many years and don’t want to be a landlord anymore. Other candidates may include anyone who is contemplating the sale of investment real estate but don’t want to pay capital gains taxes. Before you decide to do a 1031 exchange, please consult with your CPA, tax attorney or financial advisor. Like all investments, tenant in common and other real estate investments carry considerable risks, which should be carefully evaluated.
Divorce- Avoiding the Adversarial Process By Anastasia S. Psaltopoulos, Esq. The end of a marriage can be tragic enough and the process of divorcing through the courts often only adds to the pain. Spouses may come to see each other as adversaries and the divorce as a battleground. It is not unusual for one spouse, or both, to experience feelings of confusion, anger, loss and conflict. Under such circumstances it may be difficult to see an end to a divorce much less imagine a hopeful future afterwards. However, it doesn’t have to be this way. A growing number of couples along with their lawyers have been seeking more constructive alternatives: mediation and collaborative law. The Traditional Litigated Divorce Most divorces through the Courts take between 12 and 18 months to resolve, depending on the complexity of the case and the Court’s docket. The divorce process begins when one spouse retains an attorney and files a complaint for divorce against the other. The average retainer ranges anywhere from $2,500 to $10,000 and up. As most attorneys charge between $150 and $300 per hour, a retainer of $2,500 can be used up in less than one week with little or no results to show. The parties often come to resent their attorneys for both the high cost of the process and the seemingly interminable hearings and court dates. The Courts are extremely busy and extremely limited in the time any one judge can spend examining the facts in a case and listening to oral arguments. It is not unusual to have to wait 2, 3 or even 4 hours before being heard by the Judge and even then, the average hearing is only 10 minutes long. One day in Court on a simple Motion can cost several thousand dollars for little or no result. Another consideration to keep in mind is that Court proceedings are public. Arguments are made in open Court with spectators and lawyers filling the Courtroom. Attorneys often use the “shock factor” to try to intimidate or humiliate the opponent and may resort to tactics such as interviewing friends, professional colleagues and family members, scrutinizing personal activities of the opposing spouse and criticizing parental fitness. Finally, at the heart of the once happy marriage, there may be children who will inevitably become involved in the process. The children often become the witnesses to the feud and are put in the middle of it, leaving them with feelings of confusion or animosity. In most litigated divorces where custody is an issue, the Court will appoint a Guardian Ad Litem (GAL) to determine which spouse is better suited to care for the children on a daily basis. The GAL is an added expense for the parties to share and will make a “recommendation” as to custody based on only a few brief interviews with the parties and the children. Depending on the GAL, the results can be fair or skewed in favor of one party. Most Courts simply follow the GAL’s recommendation. Spouses who choose the traditional litigated divorce complain that they lose all control over what becomes of their future and are at the mercy of the judge to hopefully side with them over the issues that matter the most, including the children. Mediation A healthier alternative to the litigated divorce is mediation. Mediation provides a confidential, non-adversarial process where divorcing spouses can negotiate their own settlement with the aid of an impartial third party mediator. The goal is to create a fair and equitable settlement through negotiation. The advantages of mediation are many and varied. First and foremost, mediation saves time and money. Since both spouses are working together at the same time using only one professional, the costs are dramatically reduced. Second, mediation also allows the parties to remain in control of the process and to design a timetable that suits their needs rather than having to comply with Court dates and unnecessary Court appearances. This process is unique in that it allows the parties to speak on their own behalf, listen to their counterpart’s position and then formulate a tailor-made agreement that creatively meets the family’s needs. Mediated divorces have a far higher compliance rate than adversarial divorces because the couple takes ownership of the terms of the agreement they have reached. Collaborative Divorce Similar to mediation, collaborative divorce provides the parties with a confidential, friendly alternative to the costly, timely and often dissatisfying Court process. Each party to a divorce will retain a collaborative attorney to act as their legal expert, advocate and counselor throughout the four way negotiation process. Each signs an agreement to resolve the case without Court intervention. The agreement signifies each party’s promise to make full and honest disclosures, take reasoned positions in disputes and proffer proposals that will meet the primary needs of both parties by way of informal meetings. Collaborative law also offers the divorcing couple the opportunity to work with other professionals such as therapists, financial planners and coaches to help the process move smoothly and to offer both spouses the support they may need in the divorce process. Whether or not there are children of the marriage, collaborative law is conducive to the idea that spouses can remain on civil terms following the finality of the divorce. The negotiation process is dependent upon the parties’ commitment to resolve the issues in a cooperative manner, which is often advantageous to the well being of each member of the family both prior to and following the divorce. Collaborative law is premised on the theory that its unique approach to divorce will yield a fair and equitable result by allowing the parties to retain the control of their future while allowing the spouses to save both time and money in the process by negotiating directly with their spouse and being informed of their rights and obligations. Selecting the Right Divorce Lawyer Now that you know what options are available, how do you choose a divorce attorney? It is most important that you feel comfortable with your attorney. You will spend a lot of time at your lawyer’s office and you need to feel that your concerns are heard, understood and addressed effectively. Interviewing attorneys is always a good idea. Most attorneys offer free initial consultations during which you can ask the attorney if he or she will personally represent you in Court or if they will send in associates. If an associate will be used, what is the rate for that associate and will you have the opportunity to meet that person prior? Many attorneys run busy practices and can’t represent all of their clients in Court. If your case doesn’t seem important to the attorney, and if it will be handed to someone else, you may want to reconsider hiring that firm. Going through a divorce is very stressful. Working with a professional who understands your concerns and is available to meet and speak with you whenever necessary is important. Make sure that you feel comfortable with your attorney. Finally, be wary of an attorney who tells you only what you want to hear – divorce is always a compromise, and you will have to give up some things you hold dear. Anastasia S. Psaltopoulos, Esq. is a graduate of the Universite Catholique de Louvain in Belgium and received her J.D. from Suffolk University Law School. Her practice areas include civil litigation, family law and real estate. Ms. Psaltopoulos has previously worked for large international companies in Europe including Mercedes-Benz and Peugeot Talbot. She can be reached at (978) 649-5533 or asp@asp-law.com.
CD and Money Market Rates on the Rise For the first time in several years, interest rates on bank deposit accounts are luring investors back to cash. While rates on savings accounts at most "brick and morter" banks continue to be low, many Americans are finding that money market accounts and certificates of deposit are becoming increasingly competitive, especially among some online banks. EverBank, named by forbes.com as a "Best of the Web" winner 5 years in a row, now offers a money market account yielding 3.55%. The APY on 3- and 6-month CDs are 4.54% and 4.75% respectively. For more information, call my office or go to www.EverBankpro.com.
- Congratulations to Rob and Kristin Brosofsky of Medford who had a baby girl, Samantha Hunter, on March 5th. She looks like an angel. Good luck! - Susan Bent , a client from Somerville, is running the 2006 Boston Marathon in support of Children's Hospital and her young patient partner, Catalina Lora. Last July, Catalina was diagnosed with leukemia. After four rounds of chemotherapy, she and her family still spend most of their time at Children's Hospital in Boston. If you'd like to help sponsor Susan's effort on behalf of Catalina, go to www.childrenshospital.org/bostonmarathon and click "Sponsor a Runner." From there, enter either Susan's ID number- BS0037- or her last name BENT. Good luck Susan and Catalina! - In January, I was awarded the Chartered Retirement Plans Specialist designation (CRPS) through the College for Financial Planning. I believe this additional training and expertise will enhance the value that I bring to clients as we implement individual and business retirement plans. If you know a business, large or small, that would like to re-evaluate its retirement plan, I hope you'll keep me in mind. - Congratulations to Todd and Heather Raymond of Medway, who recently celebrated the 1st birthday of their daughter Camryn! Seems like just yesterday that Camryn was born. If you've recently had something great happen in your life or in your career, I'd love to recognize you for it! Send an email to dave@capretirement.com and I'll try to get it in an upcoming issue of Capital Concepts.
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