Family Loans

Lending money to family is often intended to be a gift of love and to provide assistance, but it is also rife with perils, for both the lender and the borrower.  It goes without saying that lending money should only be considered when permitted by your financial plan. In other words, don’t give money away at the expense of your future cash flow.

If all goes well, the loan will be repaid in a timely manner and will be a win-win for the lender and the borrower. In our experience, this is not usually the case.

In fact, most family loans are forgiven and often turn into gifts. In some cases, family discord and financial stress derail the family relationship when the borrower is unable to repay, and the lender needs the funds for their financial well-being. At other times the loan repayment is not the issue, but other squabbles (like unequal lending to family members) arise which can cause defaults and family resentments.

Lending money to a family member in exchange for a promissory note must follow IRS rules. The IRS requirements are clear, the loan must charge a minimum interest rate, must document transactions, and require repayments. If it is instead a gift (no repayment expected), then it must be stated as such and recorded for gift tax purposes (and may require filing an IRS Gift Tax Form).

The recent highly publicized case of Bank of America independent director David Yost’s daughter’s divorce is an appropriate example. Yost appears to have made $8M in loans to the couple years earlier and on divorce demanded repayment from his soon to be ex-son-in-law. The ex- claimed they were not loans but gifts that Yost made to appear as loans to evade taxes. This landed both families in court with suits on both sides and the IRS watching from the sideline.

It is common for highly affluent families to make private loans with assets they do not need in their retirement. It is particularly beneficial when loans are used to purchase assets for the next generation without tax liability and to simultaneously reduce the size of the lender’s estate while avoiding future estate taxes (currently, this estate tax reduction strategy is relevant for families with estates greater than $12M).

My concern over family loans arise when the financial plan doesn’t comfortably cover the loan and yet the lender feels emotionally inclined to make the loan despite the projected shortfall in future cash flow. I find that lenders who are family members do not recognize that despite best intentions the possibility exists that the money will not be repaid, and money not market invested is missing out on gain that will be needed later in retirement. In addition, most are not aware that without proper documentation the IRS can label this transaction as a tax avoidance technique.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Student Government Loan Repayments to Restart in May

The Department of Education has announced that it will restart student loan payments that were frozen at the start of the pandemic. This was intended to allow for increased cash flow and savings during the pandemic. So far, it does NOT appear that the government will create new student loan forgiveness programs. If you were able to save over the last two years, then let’s review if paying down your student loans is the best use of your additional savings.

Action for those with a federal government student loan:

  1. Review the terms and balance of your loan.
  2. Make sure that you understand if it falls under any of the existing (and not yet honored) forgiveness programs.
  3. Log on and update your contact information.
  4. Determine your new payment amount and if you can consider paying it earlier. We recommend that you start paying it sooner than May if your cash flow allows so that you lower the loan before May, but this may not be ideal for all.Let us know and we can go over your specific situation.
  5. If the loan repayment amount doesn’t work within your current budget, then let’s work on a different solution before the May due date.
  6. Don’t count on blanket loan forgiveness – although it may arrive, it is not likely – the current government goal appears to be focused on fulfilling existing forgiveness programs not creating new ones.
  7. Check with us BEFORE you accept loan forgiveness offers – they may not be legit – anyone offering that they can easily forgive your student loan without details should be suspect.

Finally, when working online to obtain information on your student loans (or other financial transactions) please err on the side of caution and check with us and your CPA to ensure that you avoid scammers. They get more sophisticated each day.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Gamification of Trading

The suicide of a 20-year-old experimenting with trading on the Robinhood platform
has many calling for new regulations on trading. I think new regulations on the “Robo”
interfaces are required but not on trading. Robo platforms, like Robinhood, provide a
software interface that makes trading more like a game.

Brokerage firms have been on a serious race to engage directly with the young and the
inexperienced. Robinhood, E-Trade, TD Ameritrade, Charles Schwab, Interactive
Brokers, Fidelity, Merrill Lynch, and many others have all embraced commission-free
and zero-minimum balance trading on platforms that focus only on the upside
of trading.
These platforms are more reminiscent of an animated game than a
serious financial transaction. Even those who have managed to make a little money on
day trading often fail to understand that there are tax consequences. They usually
reach out for assistance when they receive from these brokerage firms an unexpected
1099 with a large tax liability.

It is clear that what we need is more clarity on what is a game and what has real life
consequences.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

The American Rescue Plan of 2021: Highlights

The details of the American Rescue Plan 2021 are still being processed BUT we know
that it doesn’t include RMD relief for 2021 nor increased minimum wage. It does
provide both 2020 and 2021 tax filing items. Below, I’ve outlined those that I found
most significant so far.

  1. “Stimulus Checks” For individuals: $1,400 per eligible individual for
    all dependents with stricter phaseout that start at $75K for individuals and at
    $150K for those married filing jointly (MFJ). File early if your 2019 tax filing
    does not qualify you for this stimulus.
  2. Expansion of Child Tax Credit: It provides an increased amount of child
    tax credit for those under $150K (MFJ) AND an increase to $400K (MFJ) in
    earnings for the base credits. In 2021 there should be an opportunity to
    receive more child tax credits for up to $400K.
  3. Extension of Unemployment Compensation: An additional weekly
    $300 Unemployment benefit was added, and coverage was extended until
    September 6th, 2021.
  4. 2020 Tax-free Unemployment Insurance income: For those receiving
    Unemployment Insurance in 2020, up to $10,200 of those earnings will be
    tax-free.
  5. Increased Premium Credit Assistance: Healthcare premium assistance
    extended from 2020 through 2021 with higher earnings.
  6. Tax Credit for Employers to cover COBRA for 3 months: Any
    employee involuntarily laid off will have free full COBRA coverage for 3
    months by the employer who will receive credits for paying their COBRA.
  7. Tax-free student loan forgiveness for the future – if a student loan is
    forgiven by 2025, it will be tax-free.

It will take time to distill what will be relevant for 2021 taxes particularly since we are
all still trying to understand and work through CARES 2020 tax rules and implications
for 2020. For now, it makes sense to slow down the 2020 tax filing and
ensure that your CPA is aware of all of the CARES 2020 and TARP 2021
rules before filing – luckily, we all now have until May 17th.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Preparing Your Family Finances and Our Role

How do we prepare for the loss of someone who plays a lead role in your family’s financial life? This can be a partner, a spouse, a parent, or even yourself. Aikapa’s role during such a crisis focuses on ensuring that the family will have the available cash flow until the transfer of the estate is completed AND on providing the information that the Estate attorney and CPA require to transition the estate efficiently. Below, I’ve outlined how we can prepare for such a loss.
1. Short-Term Cash Flow: Make certain that emergency accounts have enough cash to support family expenses for 6 months and that the account is available to those left behind. That means that the family has access to the login information and that the account is titled properly (T.O.D., Joint or Trust are the usual titles).
2. Consolidate Financial and Legal Records:  It is useful if the family has access to financial and legal records.
a. We can easily generate financial information needed for accounts that we directly manage.
b. It would be useful for the family to also have original financial records for accounts or finances not under our purview.
c. Similarly, we would benefit from information on former and current employer benefits and contact information.
d. Finally, the estate documents should also be easily available by the family or we should have a copy filed with us for reference.
3. Verify that you have the Appropriate Account Titling:  The accounts that take more effort to transfer are those titled under the individual’s name unless they have a wrapper to make them non-probate assets. We will use a T.O.D. (Transfer On Death) wrapper that bypasses Probate Court if your Estate plan doesn’t indicate otherwise.
a. We can easily adjust the title for those accounts that we directly manage. We regularly review these against your wishes and your Estate plan. 
b. Accounts held at other institutions AND under an individual’s name will need your management and update (check with us if unsure). We will consult with your Estate plan and make recommendations, but it will be up to you to ensure these are implemented. Example of accounts that we find are often missed include checking accounts, savings accounts, employer stock accounts, options, 529 and inherited accounts held at other institutions.
c. Other assets, such as real estate, need to be titled correctly as specified in your Estate plan. We can guide you, but you must implement these yourself.
4. Complete and Update Beneficiary: We sometimes find that although everyone is well intentioned, beneficiary designations are missed. Though we find this most often with employer accounts, we do see it also with other accounts.
a. We can easily review and update beneficiaries on accounts under our management and we do so regularly.
b. Accounts at your employer require that you check and make any needed changes yourself. Ideally you will also keep a copy of your beneficiary selection with your financial records.
c. Your home or other real estate may also need a beneficiary designation, but we follow your Estate plan since different states use different rules.
d. Accounts held at other institutions will also need to be updated with beneficiaries.
5. Availability of All Logins and Passwords. It is essential for the family to have access to login and passwords. This includes your computer, phone and online passwords. If you would prefer not to share this information then let us know WHERE the information is located, and we’ll share the location with family when and if needed.
As you would expect, we each respond in our own way to the death of someone close to us. Some focus on getting things done while others find themselves unable to function. The range of reactions spans the full spectrum of emotions. This is the way it should be and ideally, we strive to let them take the time to grieve without anxiety over finances. If we know all is in order, we can delay most of the initial tasks and allow the family the peace they need to deal with the loss while we create what will be needed by the Estate attorney. Once we know that the family has cash to support spending for 3-6 months, we work on generating a list of assets that are part of the decedent’s estate. We generate this initial information from our records (based on the financial plan and visual asset map). We then work with the family to update this information, but it is only after the family obtains death certificates that we can reach out and obtain exact information on items on this asset list. We need to ensure that we have the correct information on the title, beneficiary on record, total account balance and custodian for each asset. The Estate attorney will be able to begin their work only after they are provided with death certificates, estate documents, and our detailed list of assets. They will create an action plan, outline the process, estimate the costs and provide a potential timeline to settle the estate. The Estate attorney is the one responsible for legal filings and letting us know when the assets are ready for transfer. We are responsible for the actual transfer and settling of accounts. Dependent on the time of the year and with the guidance from the Estate attorney, we may want to delay the involvement of the CPA or bring them on immediately.

Once this process begins, it is imperative that we keep the lines of communication open throughout the process as the Estate settles and assets transition. There are time constraints associated with certain filings and activities related to settling the estate which makes it doubly important to work together. But it all begins with having your documents available, titled correctly, and beneficiaries clearly stated. We will focus on reviewing your estate documents during 2021 meetings.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Cyber-crime, Phishing, Robocalls, and Wanting to do Good

Almost every day there is an article in the news about financial fraud. Much of it impacts seniors, like the telephone scam now doing the rounds that has fraudsters posing as Social Security representatives. However, we are all at risk, especially if we believe we are too young, too smart and too vigilant to fall for a scam. Sadly, scam artists are very sophisticated, intelligent, and focused so that they’ve become experts at separating people from their money. Only last month, “Shark Tank” magnate, Barbara Corcoran, was tricked out of nearly $400,000 through an email phishing scam in which fraudsters convincingly posed as her assistant.

A lot of financial fraud targets seniors or those in high pressure situations because cognitive agility decreases as we age or when we are stressed. Furthermore, seniors who live alone are particularly vulnerable.

Here are several things you can do to protect yourself and loved ones from financial fraud:

  1. Simplify your financial life. One of the best things you can do to reduce the chances you’ll be taken advantage of is to reduce the number of accounts you have and the number of financial institutions you work with. Fraudsters are experts at catching people off guard, posing as others and making their prying questions sound both reasonable and plausible. Make it a habit not to respond to phone calls regarding finances unless you know the person at the other end and never trust emails involving finances without first verifying the source.
  2. Limit access to and block large transactions. The first step in preventing fraud is to limit the money that can be easily accessed by not keeping large sums in checking accounts. Keep large accounts with a separate institution so that it takes a day or two to make a transfer. Next, if your bank allows it, set alerts for large transactions or block transactions over a certain size. Always use a credit card for online purchases since they give you the ability to reject a charge, while your debit card will automatically pay from your account.
  3. Always use maximum security on email accounts that you use for financial communications. We’ve seen most cyber fraud through yahoo.com and gmail.com accounts prior to the additional security currently available.
  4. For large transfers, particularly during hectic times, involve a trusted financial partner and NEVER accept changes to the receiving account and contact over email (or a call from someone you don’t know). It is better to halt the process entirely or at least confirm with a known financial entity than to change course midstream during a cash transfer. Most of the successful fraudulent transfers have been during escrow for a new house purchase or sale. The methods used are creative and ever improving.
  5. Families should plan their spending ahead and NOT respond to charitable requests on the fly. It is not unusual for seniors to receive many robocalls and mail requests from real charitable organizations because they know that seniors want to do good. It is not unusual for seniors to spend more on charitable donations made ad hoc than was planned. Make a point never to donate based on a phone call or last-minute request at a checkout unless that is part of your charitable plan for the year. I recommend families sit together and come up with an annual plan for charitable donations. When charitable opportunities present themselves defer them for review at your next family charitable giving gathering.
  6. For seniors or those facing high stress situations, you may want a backup notification sent to your spouse, financial caretaker, or a trusted person for high value transfers. If your bank does not provide for such alerts, then make it a standard practice never to make high value transfers without extensive planning and verification.
  7. For seniors, it’s important to have a potential financial surrogate in place long in advance of cognitive decline. Identify a trusted family member or friend or trusted professional to be your financial caretaker and start conversations long before you feel you need to turn over your finances. Consider providing view-only access to a trusted person so that they can help you monitor your account activity and be notified of large transactions and suspicious activity. It is a good idea to involve them with your tax preparation and filings as well.
  8. Due to the number of data breaches in recent years (that have exposed thousands of people’s Social Security numbers and other sensitive data), it has become increasingly possible for fraudsters to open accounts in another person’s name. On a regular basis, personally monitor your credit history with all three major credit agencies for new activity that you didn’t initiate.
  9. I’m personally uncomfortable with ongoing Credit Freezes unless you can monitor and implement them yourself at minimal cost and without involving a third party. Using a credit monitoring service is not recommended since you are involving an unregulated third party and, in any case, will only alert you after you’ve been victimized. The recommended approach when this happens is to freeze your credit at all 3 major credit agencies. Keep in mind that though this is often recommended by cybersecurity experts it can become a major hassle for you. Freezing your credit can be an issue for you if a company needs to legitimately verify a transaction with your credit history (this is the case for some insurance and bank transactions). Unfortunately, freezing your credit is sometimes the only way to prevent attempts to open a new account in your name, and maybe the preferred or only option for seniors.

Financial fraud is rampant. However, with a bit of preparation, a support system, and communication, you can significantly reduce the odds that it happens to you and your love ones.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Business Owners: Hiring family

One of the most common reasons individuals become business owners is to have more control over their time and financial decisions—to create and be able to drive their own vision in an environment that they choose, and hopefully enjoy.

Those decisions include, among others, what types of solutions the business will offer, how clients will be serviced, which vendors the business will use, and who the business will hire and fire.

Moreover, the IRS’s website states, “One of the advantages of operating your own business is hiring family members.” The IRS is very clear that businesses can and should hire family members. They know that at times family members are the glue that keeps small businesses functioning and often provides owners with the time needed to lead and grow their companies. Small businesses are an essential part of the US economy. The most common family members hired by small companies are spouses since the success of a small business owner is often entwined with the support they receive from their life partner. This is so common that even 401K plans for single-owned businesses include spouses. Though more common, hiring family members can go beyond the spouse and includes anyone that is related, a sibling, a parent AND even a child. [see more details on the IRS perspective on hiring family https://www.irs.gov/businesses/small-businesses-self-employed/family-help].

When hiring family members (either as employees or as 1099 consultants) a business owner must adhere to the same rules as for nonfamily members. From a strictly operational point of view, one clear advantage of hiring family is that a family member can provide support or services that the owner, for whatever reason, is uncomfortable having performed by a nonfamily member. This may be particularly true when the business wishes to keep its financial reports “for family eyes only” or if the business relies on sensitive proprietary information or compliance rules that could be jeopardized by employee turnover. Similarly, a family member can provide cohesion and ensure the retention of corporate knowledge when employees leave the firm – this is invaluable to many small businesses. On the other hand, owners might hire a parent or a child solely to provide them with a taxable income while they engage in work that benefits the business owner’s vision.

The business owner does have the responsibility of deciding on a fair level of compensation for all employees. To avoid potential conflicts within the firm, compensation ought to be similar to that of any regular employee performing the same function. Another more flexible option, is to hire family members as 1099 consultants. Consultants have more flexibility on the tasks they can perform and the compensation they are awarded.

Hiring family can be a straightforward way to reward family members who contribute to the success of the business. Providing spouses, siblings, children and even parents with taxable earnings while serving in roles that provide benefit to the business owner and the running of the business.

For business owners in high tax brackets, hiring family (who are in lower tax brackets) can garner meaningful tax relief. If hiring children, it also provides for “good parenting” opportunities and leadership development. The key to hiring your child is to strictly abide by standards of bona fide age-appropriate work, ensure a reasonable wage, and follow federal and state regulations relating to labor standards. Getting a handle on all of this, can feel overwhelming but it is actually fairly straight forward.

When hiring a minor (family or not) the Fair Labor Standard Act (FLSA) must be followed which has restrictive language on the type of employment for those under the age of 14. FLSA actually states the specific jobs that are permitted which include delivering papers, casual babysitting, or modeling/acting. Starting at age 14 the regulations only limit the amount of time (not the type of job) but also that the work doesn’t expose the minor to dangerous environments such as radioactive areas and working in demolitions (among others).

Hiring family as employees (rather than consultants) is a constant balancing act that requires careful consideration but can deliver financial benefits. It may be prudent, at least initially, to place hired family under the direct supervision of a trusted nonfamily employee that will have full authority over mentoring. This works well for minors but not so well with adults. The potential for unhealthy rivalries and vying for attention amongst siblings and hired staff can sour what is often an exceptional opportunity. Open communication and clear accountability is the key to success when hiring family as employees. Everyone involved must have a clear picture of where they stand, eliminating time wasted on misunderstandings and second guessing one another’s motives and intentions.

The process is a bit easier and the rules a bit more advantageous if family members have their own business (1099 reporting business) and are hired as consultants to support the business owner. In addition, as a 1099 consultant, they have the flexibility to also work outside the family business. Often their total earnings will be taxable at much lower tax brackets than they would be if it was earned by the higher earning business owner. They will also qualify for tax-deferral and social security on their net business earnings.

We encourage you to consider hiring family members particularly if you are a business owner with high earnings and high tax liability. We strongly recommend hiring family members when we discover that family already provide unpaid assistance to the business owner and are in need of financial support or need to increase their social security income.
Let us know if you are considering including a family member (parents, spouse or children are the most common) in your business. We’ll provide a summary of the benefits to you, your family and your specific business.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Aging gracefully―a blueprint for your future

If you could peek into the future and the final 10-20 years of your life, what would that look like? Do you see yourself traveling, healthy, energetic and excited about experiencing new challenges? Or do you have visions of illness, body pains, lethargy, disengagement and a lonely life?

What if you could manage that trajectory to a more positive future with fewer deficits and more joy? Research is churning out reports on how we can slow down the negative parts of aging and enhance the joyful aspects of our lives.

Throughout my life, I’ve met many people on both sides of aging. It is clear that our attitude drives this journey. It can turn us into victims or champions over our lives. Often it begins with our attitude each day―do we resign ourselves to a self-defeating diagnosis and settle for dissatisfaction? Or do we take daily challenges as an opportunity to remain engaged and positive? Experts in aging are in agreement that we will be much happier as we age if we are comfortable in our chosen lifestyle (that is to say, we are in the habit of doing things that give meaning and value to us) and that we don’t let our “illness” or age-related challenges define our daily lives.

As technology continues its exponential growth, the key to managing and thriving in this ever-faster moving era is our ability to adapt and remain true to ourselves. I believe equally important is to allow ourselves time to unwind and gain perspective. Unfortunately, most of us would likely skip ‘self-time’ (time for meditation or reflection) in pursuit of getting more accomplished.

Though it doesn’t take a financial windfall to have a healthy retirement, it does help tremendously not to have financial worries. Financial plans and conscious financial choices will help minimize financial anxiety and create an opportunity for a healthy retirement. Beyond this opportunity, it is up to us to build lifestyles (and needed financial resources) that give us joy today and throughout our later lives.

Research on aging recommends that we include the following:

  1. Though we are all different and choose different lifestyles, we all benefit from activities that provide us with at least a minimal level of social interactions. It is social engagement, according to these experts, that can add years and quality to our lives. In addition, volunteering has been shown to reduce pain as well as increase endorphins. Even when homebound, it is essential to be active and motivated.
  2. It is no surprise that a graceful happy retired life must also include regular and vigorous mental engagement. Your financial plan should be your guide to attain your goals, but it will be your consistent financial behaviors that will keep you mentally engaged with your money later in life. We are all aware that as we age we have a higher risk of memory loss, dementia and even Alzheimer’s. We can’t control inherited diseases (50% of those over 85 are affected with a dementia-like Alzheimer’s disease but that also means, 50% are not!) but we can rise to the challenge and keep our brains mentally active.
  3. Improving your quality of life includes addressing your physical health and diet. It is recommended that we exercise regularly, including at least 45 minutes of aerobic activity. A diet with reduced portions and elimination of processed foods appears to also be connected with healthier happier lives.
  4. Though sometimes difficult, it is essential that we be able to ‘let go’ of hate, resentment and regret that reinforces negative emotions. Though it’s never easy, experts say that ideally you’ll forgive or ‘walk away’ to attain a healthier life. I find that smiling every day makes me happier and has the added bonus that it makes others smile too.
  5. Finally, stay true to your lifestyle and decision process throughout your life. If you are comfortable in your core values and habits then even the worst challenges will be manageable.

In short, a successful blueprint for a long and rewarding life entails the intentional effort to remain active, engaged and positive.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Ready for College? – timing & planning finances

All college applicants that need a loan, scholarship or a grant must complete a financial-aid application. The process isn’t solely for those who have low enough income to qualify for aid. If you would  like to be considered for the 2017 education financial process you will need to complete the “Free Application for Federal Student Aid” or FAFSA (www.fafsa.gov). The process begins again on October 1, 2016.

Ideally, you will work closely with someone that is immersed in this process and aware of the 2015 changes enacted by President Obama. These changes will sync the timing of funding with college decisions for the 2017-2018 academic year. Though this timing is for federal financial calculations, individual institutions agreed to match up with the process for the 2017 school year. Even so, always double check with the specific college that is under consideration.

The process will now be based on 2015 year-end taxes (even if extended) for the 2017-18 school-year. There will no longer be estimating and re-adjusting as in past years. Parents and working students are encouraged to file taxes by the summer and to defer income (as much as possible) during college funding years.

Controlling the recognition of income (for both parent and student) will make it easier for students to obtain loans that have reasonable terms of repayment. In some cases, it is not possible and other ways of paying for higher education will be needed. Year-end tax planning should have a high priority starting two years before the intended college start.

So how does the 529 College Savings Plan affect your ability to receive loans or aid from the FAFSA system?  If the 529 plan is owned by the parent or dependent student it is an asset in the application (FAFSA) process, BUT qualifying distributions are not counted as income (i.e., tax free). Though grandparent owned 529 are not counted as part of the FAFSA calculation, distributions to pay for a student’s education does count as child’s income (but it is tax-free). The best way to handle grandparents’ distributions from 529 plans for students is to hold back distributing from grandparents until the last two years of a student’s college education.  So, keep in mind, it is best to take 529 distributions (from parent and student owned 529s) during the first two years and grandparent funded 529 during the last two years.

Though 529 plans are useful if your child has more than three years to go before college, they are not really effective as a short-term strategy. If you’ve little money saved and your child is to attend college within 3 years you need to consider other strategies. Consider paying the tuition yourself directly – you are allowed without tax consequences (but also no tax benefit) to pay for  higher education tuition costs directly without triggering gift tax (gift tax is triggered if you gift more than $14K in 2016). These tax-free gifts will not count as a student asset or income for financial aid purposes. This strategy works well for grandparents who can pay directly for a grandchild’s tuition and/or provide annually a gift towards expenses not exceeding the limit that year (limit of $14K in 2016).

Another strategy often quoted is gifting of appreciated assets which can be a double-edged sword since it can cause a student’s income/assets to exceed the FAFSA limits and result in the loss of access to loans or aid awards. We recommend close and careful monitoring and it is best if these tactics are reserved for the last two years of college so that there is little to no impact on the FAFSA annual calculation.

Sometimes parents have purchased Uniform Gifts to Minors Act (UGMA)/ or Uniform Transfers to Minors Act (UTMA) assets since they can be used for pre and post college funding, BUT these accounts are considered part of a student’s assets in the FAFSA application and have a significant impact on the availability of loans or aid. We recommend transferring to a 529 account, BUT this is not always a good strategy since it triggers capital gains taxes. The best strategy is to spend the account two years prior to college. These accounts have a much looser definition of how they must be used. Any expense that benefits the child other than those that a parent is required to pay are permitted. Ways we’ve seen these accounts used include: summer camp, highschool tuition, an electronic device (laptop or Smartphone) and academic tutoring.

The most important take away is that you must plan for a college account distribution two years before your student will attend college. The new rules do simplify the application process but it also means that your tax planning needs to be ahead of the student’s decision on higher education.

Finally, (like any complex financial decision) college planning can frankly add a level of discomfort and conflict to the family. But, it can also provide an opportunity. The experience, if inclusive, can be part of a shared life experience, an educational moment, and an opportunity to fulfill your goals. It is a chance to learn how to make financial decisions and feel good about them.

Stay connected with your financial advisor and discuss how to best deploy your available resources to benefit both you and the student.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Money Battles and the pitfalls of financial infidelity

Let’s face it, making important financial decisions can be stressful at the best of times. When life partners fail to see eye-to-eye on finances it can lead to discord if they don’t have a way of working through their differences. It’s no secret, when compared to other types of marital disagreements, arguments over finance are the strongest predictors of divorce.  Financial decisions get even harder to make as we grow older—the habits of the past increasingly difficult to break. Add a touch of procrastination to the mix and you’ve got the potential for real trouble. It’s no wonder then, how easily decisions affecting retirement can turn into a battle over money, when so much is at stake. The best way to avoid unpleasant (and generally unnecessary) confrontations over money is to have a process in place. Let me explain . . .

Ideally, couples will create a money decision-making process early enough in their relationship that it becomes almost second nature—ensuring financial discussions are honest, frank, frequent and cordial. Both partners must be kept up-to-date on the family’s financial dealings and how those dealings align with understood and accepted goals. From our experience, monthly or at least quarterly meetings to discuss/review finances are invaluable.

This isn’t to say, every penny must be accounted for. Each partner must feel that they have reasonable autonomy and freedom to act within an allotted budget, BUT both must be clear that there are boundaries. Some couples set a specific dollar amount above which they must check with their partner and/or reach out to their financial advisor when especially tough financial decisions arise. For example, couples are well advised to discuss in detail funding a child’s college education, their retirement budget, or when to cease working.

Fights over money can be avoided if both partners have a handle on household finances, and moreover, feel their voice is included in all financial decisions.

If one partner pays all the bills and takes care of all the investments, the other partner over the long-term will begin to feel they are not a full participant in the relationship (or at least, they ought to feel that way). To counter this possibility, some choose to exchange roles for part of the year. Others have a regular monthly meeting to be sure that both are indeed aware of the family’s finances. AT A MINIMUM, all couples should go over how to access the family’s financial information (bank accounts, retirement plans, insurance, and investment accounts, etc.) AT LEAST ONCE PER YEAR.

When one partner takes on the financial responsibility for the family the inequity can (unintendedly or not) lead to “financial infidelity.” Financial infidelity occurs when one partner hides their spending on things they feel strongly about despite a clear agreement to the contrary by the couple. As an example, one partner might secretly fund their child’s business venture. I’m aware of one case where this actually happened. The situation was not revealed until the death of the offending life partner. The surviving partner’s betrayal was made all the worse by the fact that their retirement assets were depleted without his/her knowledge. The child that benefited from the covert funding, moreover, was not in a position to repay the surviving parent.

To avoid or at least reduce the likelihood of conflict over money, here are a few helpful guidelines:

  1. Communicate on expenses early, frankly, openly and honestly
  2. Meet regularly to review finances
  3. Update goals and ensure all parties are on the same page

When speaking of goals, articulate them out loud (i.e., verbally or in writing) and be sure to include your goals for both the present and the future.

The decision-making process itself should be reviewed as part of your conversation. For example, how do you determine your life-style budget, your savings goals, and what happens when you encounter expenses that fall outside of your budget for some reason?

As large financial decisions approach (such as retirement funding), the reality will undoubtedly generate much needed discussion. This conversation can turn into conflict if one side of a partnership is not in touch with family finances and family goals. Those who opt to avoid financial conversations will invariably find themselves in “money battles” that can seriously erode trust and faith in the relationship.

Facing major financial decisions, such as when, how and where to retire, needn’t be a source of discomfort or conflict. Far from it. If there is a reasonable process in place, the experience can be part of a shared life experience, an opportunity for optimism and mutual support.

I should add, in closing, that being single and unattached, doesn’t make you less susceptible to the stress imposed by major financial decisions like those discussed above. In fact, the “internal conflict” may be worse without someone to bounce things off of. If you are on your own, the same guidelines apply, but your “partner” in this is your trusted financial advisor.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com