Volume 12 Number 1

From The Corner Office By Mitchell Freedman, CPA/PFS

Economists, real estate professionals, the media pundits, and individuals had predicted a "soft landing" for residential real estate as a result of the long boom in prices and the effect of a slowing economy, coupled with two years of rising interest rates. It is now clear that the era of stunning valuation increases is over. At best it will be a soft landing, but it could be worse - with prices dropping precipitously - the proverbial hard landing. There is already data showing that sales are slowing dramatically with median prices for sales of dwellings in both the San Diego and Sacramento areas showing year over year declines. Additionally, one home builder after another is announcing disappointing sales, increasing home inventories, and prospective purchasers cancelling purchase agreements.

If you plan on holding your property for the long term you will most likely be immune to any material loss. However, if you want or need to sell your property in the short term you may be subjected to a loss, especially if you purchased your real estate recently - at or near the peak in prices.

The Fed finally skipped an opportunity to raise interest rates, but there is no guarantee that interest rates will not increase in the days and months to come. In fact, The Fed has expressed concerns about inflation and it is keen on restraining such pressures. Thus we could see a renewal of interest rate increases. Many people financed their purchases with low down payments, adjustable rate mortgages (ARMs), and other exotic financial arrangements and they may be forced to sell their homes for prices less than they purchased them for. The reason for this is that there are many recent purchasers who will find that their ARMs are adjusting to interest levels that make the payments unaffordable. These people will be forced to either significantly modify their personal spending or sell their homes. This could create a glut of resale homes on the market. So far sellers are hanging tough. However, they haven't as yet been forced to consider getting out at any cost.

If many are forced to sell this could result in a scenario of significantly reduced real estate prices - the hard landing. If you are a potential buyer you may finally find that your opportunity to get into real estate at a more affordable price is near or here. Real estate, like virtually any investment vehicle is, after all, cyclical. Thus there will be winners and losers.

Tips & Alerts Computers, Ipods, & Cell Phones, Oh My! By Janet Gardner

Many people think that all of this is covered under their homeowner's insurance policies but that isn't necessarily true. Most homeowner's policies have limitations on certain contents, especially if it's not located at the same property as the coverage. Also, homeowner's policies are generally pretty specific as to the perils they cover, not things like the customer's carelessness, which these student oriented policies will cover.

For someone in the right circumstances, student property insurance is something to consider. It's easy to obtain, the deductible is usually low, and the cost isn't terribly expensive. There are many companies specializing in this type of insurance. Check with your insurance agent to see what's available. Two companies offering coverage are National Student Services and College Student Insurance, Inc. (CSI). Both of these companies along with others can be located through the college your child attends or via the internet.

Tax Notes IRS Stymies Charitable Contributions By Tom Trent, EA

The Pension Protection Act of 2006 (the Act) is 900+ pages of new law that includes a lot more than pensions. Tacked- onto the Act are some very important changes to the rules for deductibility of charitable contributions. While most of the law is pro-taxpayer, there are a couple of new rules that we wanted to bring to your attention that aren't so nice.

Effective for donations made after August 17, 2006, anyone making a donation of clothing and/or household items can only take a deduction for items that are in "good used condition or better." Unfortunately, the Act never defines what constitutes "good condition." Furthermore, it goes on to say that the IRS may deny a deduction for any item that has "minimal value," like used socks or undergarments. There is however, an exception for the donation of single items that might not be in good or better condition if the item is worth more than $500 and you include a qualified appraisal with the donation.

The other big change is that, effective January 1, 2007, the IRS will no longer permit a deduction for the contribution of cash or other monetary gift unless you can show a bank record or a written receipt or other communication from the charity indicating the amount of the donation, the date the donation was made and the name of the charity. This new recordkeeping requirement gives taxpayers no leeway. You must have a bank record or a receipt to substantiate your deduction.

As you can see, the Act immediately impacts some of your decisions regarding charitable contributions. Please contact our office and we would be happy to explore this in greater detail.

Saving For Retirement... (The Easy Way?) By Tad Jakes

Articles are written every day in financial periodicals and websites on how to save for retirement. Most tell you that you must work hard, incorporate good planning, apply discipline and perhaps have a little luck. And, if you follow a well thought out plan, chances are you'll be comfortable in your golden years. However, there is another method out there that many people are banking on. It's a fast and easy road to a comfortable retirement, but also a dangerous bet if you're counting on it and nothing else. So, what is it? Inheritance!

It is an unfortunate fact of life that we are only here for a short period of time, but with the circle of life also comes the cycle of cash flow. Looking past the fact that inheritances come with the loss of a loved one, receiving a windfall of cash and other assets, if you get one, can do wonders for your retirement planning.

A large percentage of our population is not adequately prepared, or has even begun to prepare for the expenses they will face in retirement. Some don't have the discipline, others procrastinate, but there are others who can save but don't in hopes that someday they'll receive an inheritance and then their nest egg will be safely under their wing. For some it will work, but for others, when that windfall never comes, they will be left inadequately prepared for their later years.

Banking on an inheritance has received a lot of attention over the last number of years because of what is referred to as the "Inheritance Boom," referring to the assets of the aging parents of the Baby Boomers who are poised and ready to leave large sums to their heirs. Or are they?

Depending on which article you read or what economist you listen to, it is estimated that the Baby Boom generation will receive anywhere from $10.4 to $41 trillion in inheritances from their parents. Two Boston College economists predict it could even be as high as $136 trillion. Whatever number you believe, it is going to be the largest transfer of wealth our country has ever seen. But before you Baby Boomers stop contributing to your 401(k)s and start buying imported luxury cars and yachts, there are several things to consider.

First of all, it might seem logical that your parents will leave their money to you, but it is not a guarantee. It is estimated that trillions of dollars will be donated to charitable causes in the coming years from bequests. This can drastically reduce the amount that one might inherit. Consider that there might be other family members and friends as well. Estates might be divided among more people than you thought. Also, not all parents want to leave their children money. They might think, "My parents didn't leave me any money so why should I leave money to my children?" Not every parent wants to leave a financial legacy to their children.

Here is something else to consider. At this very moment your parents are spending your prospective inheritance! Every day that goes by your parents are using their retirement assets to pay for their living and long-term care costs. According to the Federal Reserve, by the time a retiree moves from their 60's to their 70's, the average household net worth drops by 10%. By the time they are in their 80's it has dropped by almost 25% from what it was in their 60's. With your parent's costs on the rise for living expenses, medical care and long term care, you may find that not only are you not getting an inheritance, but you might have to supplement their income.

Let's also not forget about estate taxes. Most estates are not subject to estate taxes. If the total value of the estate is less than $2 million in 2006, there will be no estate tax. However, if your parent's estate is subject to estate tax, the tax can be as high as 46% for amounts above the $2 million exemption for 2006, which can have a significant affect on the amount of inheritance.

The point here is that an inheritance, although handy, should never be counted on regardless of your parent's intentions or financial situation. The Federal Reserve states that only 20% of households report receiving an inheritance and many of those who did receive an inheritance didn't get much. Most receive less than $25,000 and only 1.6% received more than $100,000. In fact, most of the inheritance boom will only be felt by the very rich - those who don't even need it for a secure retirement. The average family will leave very little, if anything, while a small group of America's richest families will be passing along the largest portion of the "boom." So, if you're a Walton and heir to the Wal-Mart Empire, you can stop reading here.

So what's a Baby Boomer to do? Simply put - talk to your parents. Obviously there is a fine line that needs to be walked when communicating, as you do not want to seem greedy, but the topic can be approached in several ways. Ask your parents how they stand financially and if they might need assistance someday. If you need to supplement their income, support them, or have them move in with you, it is important for you to know as soon as possible so you can adequately prepare. Also, advise them that you're preparing your own financial and estate plan and that their estate plan could have an impact on how you structure yours. If approached correctly they won't feel that you're eager to get your hands on their money, but rather that you care about their wellbeing and are organized. That is the truth, right?

Regardless of what your parent's financial situation is, and what you think you might inherit, it's wise to save for your retirement on your own. Utilize company sponsored retirement plans, IRA's and personal savings to secure your future. If an inheritance never comes your way you'll still be prepared to handle the road ahead. If you save AND receive an inheritance, well, then your biggest problem will be trying to find ways to spend all that money. That's a good spot to be in.

Heard in the Hall

Mitch Freedman attended the National Football League Players Association (NFLPA) Conference for Financial Advisors on April 3 and 4, 2006. For the past three years he has been a Registered Player Financial Advisor with the NFLPA. On April 25, 2006 Mitch was one of the co-hosts of the California Summit on Financial Literacy at the Sacramento Convention Center. As Chair of the California Jump$tart Coalition he opened the event and spoke with the more than 500 attendees from the CPA profession, government, education, the not-for-profit sector, and concerned citizens. He was featured in a video produced by the AICPA about this ground-breaking event.

Mitch was asked by the AICPA to be on the Conference Planning Committee for the 2007 Personal Financial Planning Conference to be held in Las Vegas. In his role as a member of the planning committee Mitch attended a meeting in Jersey City on May 3, 2006. Mitch attended the CalCPA Personal Financial Planning Committee meeting in Napa on May 18 & 19, 2006. He also attended the AICPA Spring Meeting of Council in Salt Lake City on May 22 & 23, 2006. On May 31, 2006 Mitch presided over his last meeting as Chair of the California Jump$tart Coalition. Mitch attended a meeting of The All-Star Financial Group on June 23 & 24, 2006 in Chicago where he was elected to a two year term as treasurer of the organization.