WILL END OF LIFE EXPENSES DEVOUR YOUR ESTATE?

For aging baby boomers, long-term care and home health care are huge concerns, and these concerns form the last part in a series of articles covering what I call the “six circles of wealth.” These six circles break down your personal finance and wealth creation efforts. The goal is to have all of the circles spin at the same time, creating synergy and powerful momentum for your money.

Very few of my clients have all the circles covered, which means your wealth will take longer to grow and be open to much more risk than is necessary. So far, I have covered the first four: income and cash flow, investments, guaranteed income and cash and liquidity. This article discusses the last two: long-term care and your estate.

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The only circle that can cannibalize the others is long-term care. It is also the circle that is most neglected, and most people’s plan for dealing with it is hope and prayer. Most people say “I won’t get that bad where I need a facility or a nurse to come in and help me” or “my family will help me with all of my needs” and even “if I get that bad, just pull the plug or shoot me and put me out of my misery.” Do any of these sound familiar?

Long-term care facilities average $7,200 a month, and according to Genworth Financial, costs are increasing more than 4 percent a year. How long could your nest egg last paying out more than $80,000 per year in today’s dollars? Many people might consider buying a long-term care insurance policy. The American Association of Long-Term Care Insurance says a policy for a 55-year-old costs $723 to $1,590 a year, depending upon benefits — and these figures are from 2009. As with most insurance, if you never need it, your family will not get your premiums back after you pass away.

Asset Reduction Via Estate Planning

One alternative is estate planning, which needs to be done with a quality legal firm that specializes in estate planning and elder law. There are ways to structure your estate that will lessen any blow that you might incur from the cost of long-term care. These usually involve getting rid of assets via gifts and trusts — years before you need long-term care — so when you have to sell off assets before Medicare kicks in its contribution for long-term care, you don’t have many assets left to sell.

This type of planning is controversial because it is seen as pushing the tab on the government even if you have the ability to pay for yourself. So unless you were smart enough to have a quality life insurance product that you bought many years ago, you could be leave nothing behind for your family. Since the traditional financial world tells us to buy term insurance and not whole life, most people will stop paying for expensive term policies as they age because the cost becomes prohibitive. Thus when they are faced with long-term care issues, they must cannibalize their estate or reduce the estate before they have need long-term care. My job isn’t to pass judgment but to pass along the information and let your conscience be your guide.

Asset-Based Long-Term Care

Another alternative is to allocate some of your funds into products that are built to help you with the cost of long-term care. Asset-based long-term care might be as simple as putting some of your money inside of a properly structured annuity. Let’s say you spend $150,000 on a long-term care annuity where you were credited with a 3-1 benefit ratio. Your $150,000 buys you $450,000 of long-term care protection if and when you need the coverage.

What if you never need the coverage and pass away at home in your bed? Then the $150,000 in that account will be part of your estate and given to your family, plus a small rate of growth. Maybe only 3 percent growth, but remember you are not doing this for growth. You have other circles of wealth that are concerned with growth and returns. This is a long-term care and estate planning strategy. You sleep well at night and maintain control of your cash, and if you never need the benefit, your family receives the money plus growth.

Whole Life Insurance

Many of our clients in their 40s, 50s and even into their 60s also set up a high-quality whole life insurance policy. This provides the estate guarantee they want for their kids and grand-kids so if they need to sell off assets to pay for care, they still leave behind their legacy for their family.

One of my favorite books is by Harvey Mackay is called “Dig Your Well Before You’re Thirsty.” These words are even truer when dealing with long term care and your legacy.

Check out The Perpetual Wealth System to learn more!

Foreclosure Investing

Currently, over 928,000 properties in the country are in some form of foreclosure, according to RealtyTrac, and there lie opportunities for the savvy investor.

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The fact that a property is a foreclosure doesn’t make it a good or bad deal. A foreclosure is just a legal process that transfers title from the owner back to the lender due to non-payment of the debt obligation. There are four main stages:

  1. The pre-foreclosure stage usually begins when the first payment is missed from the borrower to the lender. That official clock starts with the notice of default. During this stage, you would buy from the owner and not the bank.
  2. The foreclosure auction stage is also called the sheriff sale or trustee sale, depending on if you live in a mortgage state or a trust deed state. The process is usually four to six months along and the property goes tot he highest bidder at a public auction, usually for all cash.
  3. Many states have a redemption stage, where the borrower can pay off the balance on the mortgage (or an amount agreed to by the lender) and get the property back out of foreclosure. This stage requires you to buy from the owner and not the lender.
  4. The bank-owned stage is also known as “real-estate owned” or REO.  Nobody won the bid at the auction (usually nobody bid), so the property reverts back to the lender, which can sell it to a private owner; either as an owner occupant or an investor.

Each stage offers a chance to buy a bargain property—and a different strategy. Let’s assume you find an opportunity to buy a property that is worth $100,000 for $70,000. Here’s what you need to know:

  • There is always risk when you invest in anything, and the way to lessen the risk is to be educated. Many quality books and seminars are available. Unfortunately, there are also overpriced packages sold by some people who have never really done much foreclosure investing.
  • Verify the after-repaired value of the property. This is done with comparable sales from the multiple listing service, online services such as Zillow or a list of recent sold comparable sales from a broker or title company. One of my earliest mentors told me “until you know value, you know nothing.”
  • Have a good idea of the cost of your funds, closing costs, repair costs, maintenance, utilities and selling or leasing costs. If you don’t account for those, you are in for a poor investment decision.
  • Understand your exit strategy (a lease or sale) and rehabilitate accordingly. A home kept for rental should not be as heavily repaired as a flip house.
  • Understand that you will rehab for profit, not for a “flip this house” series.
  • Understand the timetable of your state foreclosure process.
  • Decide which stage of the foreclosure process you will focus on. Generally, to save time and leverage other people’s assets, that will be the real estate owned, or bank-owned stage. In this stage, you will almost always deal with the REO agent who is generally a real estate agent with a niche business in dealing with banks to sell their foreclosure inventory. Develop a great relationship with the REO agent because they can be a constant source of good deals for your investment portfolio.

There are also several important “Don’ts”

  • Don’t take any broker’s or seller’s word for the condition, comparable homes or clear title; get pro’s to help you. As Ronald Reagan famously said, “Trust, but verify.”
  • Don’t get emotionally attached to any real estate investment, even if it is a foreclosure. Investing successfully in real estate is about numbers and nothing more.
  • Don’t spend all your time on one prospect. Make several offers at once and word your agreements with an easy out clause if you get more than one accepted (or be prepared to buy more than one).
  • Don’t forget you must know more than the other professionals involved to be successful. I know how to finance a property dozens of ways, so many times I can see a deal where many others don’t because they only know one or two ways.

Real estate investing, and more specifically, foreclosure investing, is a unique opportunity to acquire hard assets for deep discounts picking up instant equity that has the chance to grow or you could choose to covert to cash as fast as possible.

Learn a valuable lesson from the last real estate crash and don’t over-leverage properties. If you get stuck in another market crash, you could be on the hook with over-leveraged properties sucking you dry. Cash is king, but right behind that in real estate is “equity position.”

With some good education, foreclosure investing might be a great add0on to your wealth building efforts. Not everyone is wired to be a real estate investor but if you thing you are, move forward with education and action.

*If you are interested in working with John or are a real estate investor; check out Perpetual Real Estate Machine.

**John has a special training for those interested in foreclosure investing. Check out his Foreclosure Course and take advantage of John’s many years of experience in real estate sales, investing, flipping and more…