Consider Your Reasons

If you hesitate to sell because the house might eventually fetch a higher price, ask yourself some tough questions: Is this really your best growth investment right now? If you had the cash equivalent of your equity on hand today, would you buy this home as a rental or invest in something else?

Maybe you see a stream of rent checks bolstering your retirement income. Again, run the numbers. Analyze the market both for rental rates and for home sale prices and consider whether renting is truly your best route to generating revenue.

Suppose you’re relocating but might decide to move back home. If renting is a good option, there’s only a three-year window during which the sale of the house might still qualify for a capital gains exclusion. Discuss this with your tax advisor.

Or perhaps you want to keep your home for use by your children or grandchildren. Make sure that your offspring actually want to live there; a home that’s been ideal for you may not appeal to them. If you plan to charge them below-market rent before they inherit, keep in mind that this may limit your tax deductions.

Gather Information

If you decide to proceed with renting your home, you’ll need to balance the rent you set against your property tax, maintenance, repairs, homeowners insurance and other costs, so pull together those figures. Also check your homeowner’s policy for sufficient liability coverage, in addition to covering the structure and any contents belonging to you.

You’ll also want to think about the tax ramifications of income property. Rental income is taxable, but the deductible expenses include real estate taxes, management and maintenance expenses, travel to look after the property, legal fees, mortgage interest, insurance premiums and certain depreciation. These tax breaks may make renting even more attractive, or may remind you of expenses you hadn’t thought of.

Get Some Help

For help getting started, consider using a real estate or property management company as your rental agent. They can show your home, screen prospective renters, run reference and credit checks and arrange for a security deposit. And unless you love mowing lawns and fixing faucets, you may want your agent to handle other areas like minor repairs and landscaping.

In any case, be sure to consult a tax advisor before renting your home to help you understand the rules that apply to rental property and the records you’ll be required to keep. As long as it’s done carefully and with thorough preparation, renting your home might well be a wise course for you.

For the Lender

Before you get out your checkbook, assess your own financial situation. If the loan would strain your budget now or in the future, then it’s best to decline, because there’s no guarantee that your relative will be able to pay you back. If you decide against the loan, speak up immediately so they can explore other options. If you decide in favor, make sure the borrower shares a detailed business plan, for everyone’s protection.

For The Borrower

Present your business plan to a lending institution first. You’ll get an impartial evaluation and possibly be offered a loan. But if you have to approach your family, draw up a written agreement specifying the interest rate and repayment schedule. Provide as many details as possible so your relative can make an informed decision. Remember that any new business, even yours, carries risk. So don’t accept money from someone who can’t afford to lose it.

For Both Parties

Even within the family, treat the loan as a business transaction. Have a formal loan agreement drawn up that spells out the interest rate and repayment terms, and follow the agreement’s rules about late payments and other fees. Following standard business practices will help separate your business relationship from your personal ties.

Avoid Tax Complications

The IRS considers money transferred within a family a gift, not a loan, unless proven otherwise. So keep proper documentation showing that repayment is expected, and be scrupulous in your tax reporting. Among other factors, the IRS may require evidence that the borrower had a legitimate business purpose, intended to repay the debt, had the financial ability to repay and actually made repayment.

For Your Family’s Sake

A family loan calls for as much caution as any other important financial transaction, if not more. Be sure to consider all the factors and structure the loan to hold up to IRS scrutiny. Remember, business deals gone sour can affect family dynamics for many years, so weigh the consequences carefully before you borrow or lend.

It may be possible for you to change your beneficiary designation. However, there may be legal restrictions to consider. You also should take into account the impact changing your beneficiary designation will have on your overall financial and estate planning. Here’s what to consider when choosing your plan beneficiary.

First Comes Marriage

If you recently married, you may want to name your spouse as beneficiary so that your spouse would have access to your savings if you die. In fact, many retirement plans require that you name your spouse as the primary beneficiary. If you decide you don’t want your spouse to be your primary beneficiary, your spouse will have to sign a written consent form waiving his or her rights to your plan assets.

Then Come Children

It’s natural to want to provide for your children, so you may want to choose them to receive your plan assets. If they’re already adults, choosing your kids is fairly simple. If they’re still minors when you die, however, it may be more difficult. Most retirement plans won’t transfer plan assets directly to a minor. Instead, a court will get involved and appoint a trustee or guardian to receive the money on your children’s behalf. This legal process could take some time, during which your plan assets won’t be available to provide financial support to your children. Plus, when there is a court-appointed financial guardian, there are commonly investment restrictions.

You can avoid all these complications by naming a trust as the primary beneficiary of your plan assets and your minor children as the primary beneficiaries of the trust. Then you can select the trustee who will carry out your instructions. The trustee could be a family member, a friend, or a financial institution. To qualify as your designated plan beneficiary, your trust must meet strict IRS guidelines. Seek the guidance of a financial advisor and attorney before establishing a trust.

Other Options

If you’re unmarried and don’t have children, you probably have a number of other people you could choose as your beneficiary. You may want to consider your parents, siblings, nieces, nephews, or even close friends. If you get married and/or have children later on, you can then change your beneficiary designation.

Remember to Review

You should review who you’ve chosen as beneficiary of your plan account periodically. Changes in your life may affect who you want to receive your retirement plan assets. Getting married, having children, and getting a divorce are life events that should trigger a beneficiary review.

Keep in mind that writing or changing a will generally won’t affect who receives your retirement plan assets. For example, let’s assume that in your will you specify that one person is to inherit all your assets. If that person isn’t also named as the beneficiary of your retirement plan account, he or she generally won’t receive the money in your plan. Instead, it typically will automatically pass to the person you’ve designated as your plan beneficiary. So, remember to review your plan beneficiary designation periodically so that the person you want receives your plan assets if something happens to you.

Home Equity Conversion Mortgages (HECMs)

The oldest and most popular type of reverse mortgage, federally-insured HECMs guarantee that borrowers who meet requirements will receive their promised loan advances even if home values decline or lenders go out of business.

To be eligible for an HECM, borrowers must:

• Be 62 or older, with at least one using the property as principal residence
• Receive counseling from a HUD-approved agency
• Have not defaulted on a federal loan

The property itself must:

• Be a single-family home, part of a 2- to 4-unit dwelling, part of a HUD-approved development, or a manufactured (not mobile) home built after June 1976
• Meet minimum HUD maintenance standards
• Be free from other liens unless subordinated to the HECM

Note that liens and HUD-required repairs can be paid from HECM proceeds.

The principal limit of an HECM depends on the:

• Age of the youngest borrower, with older borrowers receiving higher limits
• Home value
• FHA loan limit, currently $625,500 for a single-family home
• Interest rates, with a lower rate enabling a higher principal

Drawbacks And Benefits

Reverse mortgages can have high closing costs and reduce the homeowner’s estate. and the loan can fall due if the property is not maintained to FHA standards or if taxes and insurance go unpaid. But for many homeowning seniors, these factors are outweighed by the benefits: Access to tax-free funds, flexibility in payout options and peace of mind afforded by protection from housing market fluctuations.

HECM funds may be used for any purpose, whether it’s supplementing a fixed income, extending the life of a retirement portfolio or enjoying world travel. You can take the payout as a lump sum, a growing line of credit or monthly cash advances for either a set number of years or the duration of residency. (The payout option can be switched for a fee.) An HECM may also be structured as a reverse annuity mortgage — but be aware that this is a relatively expensive choice that might jeopardize eligibility for Supplemental Security Income and/or Medicaid.

A reverse mortgage can also help protect you against fluctuation in housing prices. If the value of your home drops below the amount owed, you (or your heirs) won’t be responsible for the difference when the loan comes due. On the other hand, if the proceeds from the sale of the property are greater than what’s needed to repay the HECM, the remaining funds are remitted to the borrower or the borrower’s estate.

A Complicated Comparison

Comparing the types, costs and payout plans of reverse mortgages can be complicated. HUD-approved mortgage counselors can help, but you should also consult a financial professional to review your personal situation.

Expect Stress

Sudden wealth can be stressful. Receiving an inheritance can be difficult during a time of grief. You may also struggle with guilt if the money feels unearned or comes from an uncongenial source. A windfall may leave you feeling isolated or fearful about being badgered by others for loans or gifts. Whatever the cause of the stress, planning is crucial.

Understand The Assets

First determine the type and worth of your new assets, whether bank or retirement accounts, stocks or bonds, insurance benefits, real estate, etc. Assets such as retirement accounts may have significant tax consequences for withdrawing funds, while others may create tax consequences when sold.

Take Your Time

If possible, it’s wise to temporarily park your windfall in a low-risk but accessible investment while you discuss strategies with your financial and tax professionals. An inherited business or family farm demands more immediate attention, of course, but even there it’s best not to make rash decisions.

Any significant change to your financial situation calls for a comprehensive review of your financial plan, starting with a new net worth statement and a review of financial goals. Then your advisors can help you determine the best way to handle your windfall.

Set New Goals

With more money to work with, you may want to add new financial objectives such as charitable giving and estate planning. Ranking the importance of near- and long-term goals can help you proceed wisely and avoid impulsive spending. A luxury car might sound appealing, but put it on your list alongside your retirement or your child’s education and then see how it sounds. Keep in mind that you may never again have such a good opportunity to save for your future.

Factor In Taxes

Uncle Sam might want a share of your windfall, so consult your tax advisor about federal or state taxes that may be due and whether you need to make an estimated tax payment. Then set aside enough cash to cover that amount. You may also want to adjust your estate plan to minimize the tax liability of passing wealth to your family or other beneficiaries.

Treat Yourself

At this point you may want to earmark a small portion of your inheritance for a special treat. Even then, be mindful about setting a reasonable amount and sticking to it. Prudent planning can help you achieve your strategic financial goals with enough cash left over to treat yourself.

Any windfall, however welcome, raises questions that should be carefully explored. Consult a financial professional to help you consider these questions and develop answers that work best for you.

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Paper Statements Halted, Then Restored for Some
Since 1999, the Social Security Administration (SSA) mailed paper statements to all workers over age 25 about three months before their birthday. The 4-page mailings provided an estimate of retirement, disability and family survivorship benefits, and also listed the worker’s entire earnings record and taxes paid. It was a simple and effective method but also an expensive one, and in 2011 paper mailings were discontinued to cut costs.

In February of 2012, SSA resumed mailing paper statements to workers over the age of 60. Later this year, it will resume “Welcome to Social Security” mailings to workers in the year they turn 25. These will include information about the program and directions about how to sign up for online statements.

Online Statements Available to All
Meanwhile, anyone over 18 can set up an online “My Social Security” account. On the SSA website you’ll be asked for your personal information and the answers to security questions. If the information matches what’s already on file with the SSA, you then create a user name and password. At that point you can access your online Social Security statement, which includes:
• Estimates of retirement and disability benefits
• Estimates of benefits your family may get when you receive Social Security or die
• A list of your lifetime earnings according to Social Security Administration records
• The estimated Social Security and Medicare taxes you have paid
• Information about qualifying and signing up for Medicare
• Issues to consider for those age 55 and older who are thinking of retiring
• The opportunity to apply online for retirement and disability benefits
• A printable version of your Social Security statement

If you are not receiving a paper statement and have trouble accessing the online system, contact the Social Security Administration. It’s important to regularly check the accuracy of your earnings record.

If you’re nearing retirement, you should review your statement to get an estimate of your benefit amount. Review and discuss your options with a financial advisor to determine the best time to claim Social Security benefits in the context of your larger retirement plan.

Living Will
A living will is a legal document describing specific treatments that you want implemented or avoided. For instance, you can instruct medical personnel not to use artificial means or heroic measures to keep you alive if your condition is terminal. State laws vary, but it generally takes two physicians—the patient’s doctor and one other—to determine that the condition is terminal, that the patient is unable to make decisions, and that it is time to invoke the living will.

Even if you assume that your spouse or children know what you want, having your wishes in writing can spare them that difficult emotional decision. But be aware that a standard boilerplate living will might not be nuanced enough to predict every eventuality. Someone with terminal cancer might still wish to receive antibiotics for pneumonia, for example, or one person might want maximum pain relief medication, while another wishes to remain alert enough to communicate with family. One popular living will form is “Five Wishes” from the nonprofit Aging with Dignity, which is written quite simply but addresses issues that many others don’t.

Health Care Proxy
This essential document, also called a health care power of attorney, serves as a backup to the living will by designating a specific individual to make medical decisions for you. Health care providers must follow your proxy’s instructions as if they were your own, and the proxy has final say if family and doctors disagree. This document can be customized to include instructions such as consulting with certain family members or a particular physician—or even transferring you to another state if your state’s laws might contravene your wishes.

It’s wise to name a successor proxy in case your first choice is unable to serve when needed, but make it clear that the proxies will not serve jointly. And don’t confuse a health care power of attorney with the durable power of attorney that designates someone to make financial arrangements for you. Naming two different agents, one for finances and one for health care, is considered advisable.

Keep Them Current
Both of these advance directives should be regularly reviewed and updated, and family members should be told where they are filed, as well as being encouraged to prepare their own advance directives. While it’s not pleasant to imagine a serious accident or terminal illness, discussing and clarifying end-of-life wishes with loved ones can provide reassurance for everyone involved.

Have “The Talk”
This can be awkward, but you can be supportive and respectful by presenting the topic as one that you’re addressing for yourself: “We’re beginning to plan our retirement. What have you and Mom decided? What sort of role do you see us playing?” Make it clear that you want to be an effective advocate for them, and that your aim is to understand, not control. By being transparent about your own affairs and perhaps asking their opinion, you set the stage for a dialogue among peers. If possible, make it a family conference with all your siblings. That way everyone is clear about your parents’ goals and the resources available to achieve them.

Gather Information
After your conversation, begin collecting key information—assets and liabilities, banks and insurance providers, legal and financial professionals, physicians and medications. Your parents should have an up-to-date will, powers of attorney and medical directives, and you should know where they’re kept.

By understanding the big picture, you’ll be in a better position to provide assistance and spot potential problems.

Ask about sitting in on a meeting with your parents’ financial advisors to review investments and make sure there are adequate resources to support your parents’ lifestyle as they age. Meeting with your parents’ insurance advisors is also a good idea. You might help them research a Medigap policy for expenses not covered by Medicare, and even long-term care insurance.

Consider Housing and Care Options
Most of us live in “Peter Pan housing,” designed for people who are never going to age. If your parents’ home has narrow hallways, slippery bathrooms and steep stairs—or if that describes your home and one of them might come to live with you—then it’s time to start planning and saving for modifications. Of course, aging in place is not always feasible. Illness, disability, or the death of a spouse may dictate a different course, and it will be helpful to have information in advance about how to select and pay for care.

Keep in mind that elder care is not a black-and-white choice between total independence and a nursing home. An elderly parent might simply need assistance with banking, housekeeping, or transportation. Your parents’ needs will change over time, as well, so it’s important to continually evaluate the situation. Specialists called geriatric consultants can help with that evaluation and with arranging any necessary services.

Keep Talking
Once your preparations are set in motion, keep the lines of communication open with your parents so that you can lend a hand when the need arises. You owe it to their peace of mind, and your own.