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Why you need an Estate Plan
Everyone needs to plan and when you fail to plan; you will create a storm of questions and controversy your family may not be prepared to solve. When we hear the term estate plan, most times we think it is for the super-wealthy. But everyone, especially dentists, need to have an estate plan that resolves issues for your family, and your practice. Dentists have a fantastic capacity to generate wealth both in and outside of their practice. As a result, the issues that arise from a practices owner’s passing are made more complex by their role as breadwinner at home, and the chief source of cash flow for the practice. “If you fail to plan, you are planning to fail” ~ Benjamin Franklin By Kevin T. Taylor AIF® and Peter Locke CFP® After working for decades to make the grin on other people wider and whiter, they will be required to have a series of documents that will explain specifically how they want their hard work distributed. This is made increasingly complicated if the dentist has an ownership stake in the practice, has a child that may take over, and has employees that rely on them. In order to execute a proper estate plan you should consult professionals that understand both the nuances of your profession and the intricacies of asset management/transfer. A properly executed estate plan fulfills your healthcare directives, provides liquidity at death, property transfers and wishes, all while maximizing the net assets that pass to heirs or charity and minimizing costs and taxes. This is not simple and can have a huge effect on the legacy you leave behind. It ensures your financial matters are organized so when your loved ones deal with your grief they don’t have the added stress of trying to figure out your financial affairs. This should be done and reviewed annually for the following reasons: Your wishes stay granted As stated earlier, an estate plan contains instructions that you leave when you die or become incapacitated where you can no longer decide for yourself what needs to be done next. Whatever decision or wish you have will be included in this plan. You get to choose who gets this or that, and what portion goes to a particular person or charity. If your children are young, you will choose who takes care of them and with what financial support. Your wishes will be carried out the exact way you want them to be and all your instructions will be respected. Protect your family, business, and legacy After years of hard work, or worse a life cut short, you don’t want your family to go through the challenges of distributing your assets when you are no longer with them. An estate plan will have multiple choices and decisions that must be made in order to best execute on what you want to happen when you’re no longer able to make those decisions on your own. It can ensure your business and family have liquidity. If you have partners in your practice, it will provide them liquidity to buy your portion of the practice to enable your family to get the support they need when you’re no longer there. An estate plan will help your loved ones avoid expenses and legal hassles and helps protect your children’s future. It prevents your assets from going through the public process of probate which is not only expensive but cumbersome. With a proper plan, your family has money to live, without a plan or sufficient assets, your family could be left in a hard place. If you’re the sole owner of your business and you pass, your family could be left with a fraction of what you had built. Think about a scenario where you listed your practice as a sole proprietorship because when you started it you didn’t have clients or a family. Overtime, your net worth grows and your practice is generating a large amount of revenue. You start a family and have two young daughters. Then one morning, you’re involved in an accident on your drive into work and you pass away. Unfortunately, without a proper estate plan, your business could cease from existing or best case, your family or a legal representative is appointed by the courts after months of waiting and sells it to a third party for a fraction of what it was worth. Closely held business interests generally represent a considerable portion of the business owner’s net worth and generally aren’t liquid. This creates a need for liquidity within the estate and often for the surviving spouse. However, if you haven’t done an estate plan you probably don’t have adequate funds saved to provide the cash flow necessary to sustain your family’s current lifestyle let alone future needs. When an individual becomes incapacitated or is suffering from cognitive impairment, life doesn’t stop, neither do the bills or your practice. You and/or your kids may need a guardian to support you. Without planning, who will support you? How? Would it cause your family to fight? While this gets decided, no changes can be made on your behalf to your accounts or practice. Simply adding joint ownership doesn’t resolve your issues and it may even make matters worse depending on the circumstances. By planning for these events which are becoming very common, you can help support yourself, practice, and family with the right plan. Authority Granted Besides adding a joint owner to your accounts (which not all accounts are eligible for) who is responsible for what happens to you in the event of “I just never thought it would happen to me” disability or incapacitation. A Durable Power of Attorney can grant someone to act on your behalf when something happens but ends at death. The goal of a Durable Power of Attorney is to grant authority to act on your behalf to the extent legally possible, and with regard to all of your assets and accounts. A General Power of
October 15, 2020
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Is a U.S. Housing Market Crash Inevitable?
It is almost inevitable that housing correction is coming. Most of the upswing nationally in housing prices is caused by low borrowing rates. A mortgage payment is mostly made up of three different columns 1) Principle 2) Interest 3) Other required costs of homeownership like insurance and taxes. The bulk of the payment comes from the first two. Banks start the process by determining your “ability-to-repay” the debt. This comes to a given amount that they assume borrowers can repay, let’s say this number is $100 a month. This means you are approved if Principle, Interest, and Other Costs can come to less than $100 a month. So all of the “costs” combined need to stay below that mark, a zero-sum figure. Now as interest rates were low, the amount of the interest portion of the loan was low. Meaning more money could be freed up for the principal portion. And that principal portion is the rate at which the loan is being repaid. So if over a 360 payment loan $75 on average is getting paid in principle, the loan can retire $25,200 in debt. So the borrower can offer $25,200 for a home with faith from the bank that they will be able to repay. Thus, the buyer in the real estate auction can spend $25,200 max (and they will spend all of it). Now if that same borrower, who can afford $100 a month in mortgage payments has to borrow in an interest rate environment that is 10% more costly than before, a rate change of borrowing from 2% to 2.2% the borrower will need to borrow from the principal repayment part of the pie. That means that the average payment they can afford to make comes down, and they will only be able to offer $21,600 when making an offer on the house. This is 14% less, after a 10% move up in borrowing costs. This is where it will get interesting. The “rates” that you may have heard are rising, are the percentages at which banks borrow. That money has cost banks 0.25%, since 2020. It’s made spending during the pandemic easier and lowered the cost of capital risk for banks in order to keep the money flowing. So, a bank borrowing at .25% or close to it can lend a 30-year mortgage at really low rates. Hence the sub 3% and 2% mortgage rates we saw in the last 2 years and on the heels of the 2009-2016 recovery cycle. The by-product of this low-interest rate, high spending environment is inflation (the rising costs of goods and services). So if the cost to the bank to repay these loans increases, the cost for borrowers increases at a faster rate. So the rate of change is more than the 10% increase we discussed above. A borrower seeing their interest rate go from 2.2% to 4.4% (while still historically low) will see their capacity for repayment severely impacted. By just returning to normal lending rates the portion a borrower can repay is reduced. The borrower who could afford a $100 a month payment, now sees his buying power reduced to $9,000 over the course of the 360 mortgage payments in a 30-year mortgage. The borrower now has 41% of the buying capacity by doubling the borrowing rate, this change in the amount of borrowed capital buyers brought into the house buying equation, means that the bid sizes will invariably contract. Bringing the prices that a home clears the market down. Knock-on-effects: Inflation In the above scenario, the ignored part of the pie is the “Other.” This is mostly tax and insurance, but also includes power, water, HOA’s, and other required expenses for the ownership of a home. These costs are also climbing, and they too will erode the buying power of borrowers. This has been a largely understood space for some time, but as inflation continues to outpace wages, this will have a growing negative effect on the buyer’s ability to borrow. This is simply shifting payments from principle into insurance. What is missing from the “crash” in ‘08?: Leverage So just understanding that buyers are going to lose buying capacity in a given market doesn’t result in a crash, it just means that home prices will contract. What is still missing in this equation is selling pressures. The housing crisis wasn’t just the rising cost of home prices, it was also the deterioration of credit quality borrowers, and excess leverage. As the housing market of the early 2000s looks eerily similar in growth, an important distinction is made between the two when we look at the leverage ratio of borrowers. This is a result of the bad actors in the housing crisis leveraging one house with another, and another, and another. This allowed the rampant contagion of home selling. One default in the leverage on leverage structure meant that a single default meant 2 or more defaults as a result. The low credit quality and poor borrowing strategies (adjustable rate mortgages, and subprime lending) meant that all borrowing became interconnected. Now while the current system has become somewhat lax on the underwriting standards again, the use of adjustable mortgages and equity requirements for vacation and second homes remains largely intact. Limiting the contagion of contraction to single borrowers. What is missing from the “crash” in ‘08?: Employment Employment is well below 4% and that is encouraging. That means that there is plenty of demand for workers and that if a borrower is qualified when they are employed, the risk of losing that employment is at its lowest point ever. Broadly speaking this means that it’s worth keeping an eye on, but will limit the amount of forced selling that could trigger a true “crash”.
April 1, 2022
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