Equity benefits clients and pads advisors' coffers.

    While housing prices are bursting their seams just about everywhere these days, it's not just lucky or aggressive boomers who are getting rich. Seniors, who often owe little or nothing on their homes, are reaping the rewards of the hot real estate market, too.
    "I've seen four clients this year who sold their homes, bought their retirement homes and still had significant assets left over," says Alexandra Armstrong, president of Armstrong, Fleming & Moore Inc. in Washington, D.C. "They came to me and said, "So what should we do with the rest of the money?'"
    Armstrong thinks we are at the tip of what promises to be a long and interesting trend: Aging boomers, like their elders, have begun to sell their highly appreciated homes so they can downsize. The profits likely to flow through their hands are astounding. Boomers are slated to liquidate more than $3.4 trillion in real estate over the next ten years, according to Chip Roame, managing principal of Tiburon Strategic Advisors in Tiburon, Calif.
    Another upside for seniors? The assets they're adding to their own investment portfolios, and often advisors' coffers, as a result. "Everyone says, 'Don't miss IRA rollovers,' but this is another important bonanza I haven't heard many people talk about," says Armstrong.
    The equity built up in seniors' homes in many parts of the country is impressive. In the neighborhoods in and around Armstrong's firm, which sits squarely in a brownstone on Connecticut Avenue, mid-sized condos that sold for less than $250,000 a decade ago routinely sell for well over a million dollars today. Armstrong reports that her clients handily earned $500,000 to $750,000 from the sale of their homes. And since two of them had portfolios below her $1 million limit, their windfalls made them more valuable clients.
    "These were assets I really hadn't anticipated, but by the fourth client, I knew I was starting to see a trend," says Armstrong, who has been happy to help clients invest their assets based on their needs. She's also pleased that the assets, and the many more likely to follow this trend  in seniors' real estate sales, are likely to plump up the valuation of her advisory firm.
    Advisors around the country have similar tales to tell about senior clients and the sale of real estate. "It's so far beyond the expectation of what they thought they'd recognize on their home. The appreciation is really multifold," says Kim Kantor, president of Ciccarelli Advisory Services Inc. in Naples, Fla.
    One key to working successfully with seniors is to help them determine how to minimize their tax bill from the sale of highly appreciated property. She's helped clients do 1031 exchanges (which are tax free, provided they meet IRS requirements as like-kind exchanges). "I haven't used any of the prepackaged 1031 services yet, but I think it will be one of the fastest-growing areas around because folks have so much equity they need matchmaking services," Kantor says. "Up until now, clients have had to go out and find like properties to exchange themselves."
    Even if advisors aren't jumping up and down to do 1031 exchanges, clients are leading the charge in an effort to shelter their tremendous gains. For Kantor, that's meant partnering with a CPA, who she has do due diligence on "like exchanges."
    In one case, a client of Kantor's with a large family farm exchanged it for land closer to their two daughters, which the daughters now manage for income. As an added benefit "the daughters will get the full-step up in basis on the property," Kantor says.
    In sizzling real estate markets even something as simple as how property is titled becomes extremely critical when couples have highly appreciated real estate, the veteran planner adds. "Say a property is held jointly and is now worth $1 million, and clients paid $250,000 for it. When the husband dies, the step-up the wife could get could equal $600,000, on top of the $250,000 capital gains exemption she's entitled to, so $850,000 of the home equity is tax free."
    If the $1 million property was held solely in the husband's name, for instance, the wife would get the full step-up to $1 million with no tax liability the day the husband died, Kantor notes.
    How advisors are investing client proceeds-or setting some aside for cash management or estate-planning needsædepends very much on the client. "If clients are moving from a larger home to a condo in a continuing care retirement community, they'll usually be spending a good deal less on upkeep," says Armstrong. "They don't need gardeners or pool people or have to worry about utility bills any more. If they're moving into a newer facility, the monthly costs often do rise, so we make sure we budget for that. It really depends on what their need for taxable income is."
    Armstrong tries to avoid investing in bonds in a rising rate environment, so instead she ferrets out stocks or mutual funds with rising dividends. "We also use some REIT funds and we might put a little bit in high-yield securities and floating-rate bond funds, but it would be less than 15% of a portfolio," she says.
    It really just depends on the client and their situation, advisors agree. In some cases, creativity is a necessity. "We're seeing more and more retirees who need cash, but find it tied up in highly appreciated real estate," says Louis Llanes, president of Blythe Lane Investment Management in Englewood, Colo. "In some cases, like two we looked at with early retirees this month, we might even recommend that they take out a mortgage so they can take advantage of the low after-tax mortgage rates and mortgage deductions and avoid paying taxes right now. That's if the taxes are usurious."
    If gains are high enough from a sale, even after using the exemptions that individuals and married couples receive, its important to remember that the gain can trigger the dread alternative minimum tax (AMT). "Part of our value proposition is to help you make smart tax decisions, so we'll put in all your data and have a CPA do a mock tax return to show you what options will work and what each will cost you," Llanes adds.
    Then there is also the decision of where clients will live. Only one of Armstrong's four clients who sold into windfalls this year asked her for assistance in finding housing, but the advisor did wind up visiting two of the continuing care residence communities they moved into-one in North Carolina and one in Hawaii.
    "They're like country clubs, they're so pretty," Armstrong says. "The apartments were spacious and light, and people get a real sense of freedom. Almost universally I think folks are happier than they would be otherwise because of the socialization-they get a ready-made community of people."
    To help clients come up with a housing plan that complements their financial and investment plans, Armstrong refers them to eldercare consultant Adele Winters in Potomac, Md. For $120 an hour, Winters will help individuals and families navigate their way through the copious and intricate fee structures, amenities and idiosyncracies attached to retirement living contracts, to come up with a short, tight list of appropriate communities.
    As a longtime licensed nursing home administrator who has a master's degree in health services administration, Winters can be hired to work independently or to accompany seniors to communities. She'll also help people age in their private residences and ensure they have the level of caregiving that they need, if that's what they prefer.
    While Winters says there are a lot more choices in the continuing care community than ever before because of the entrance of national for-profit chains into the industry, choices are still uneven. "Some can be rather splendid, but my focus is not on ambience and the chandelier effect, it's on client needsætheir budget and the level of care and skilled nursing they'll get when they need it."
    If advisors think they know their way around equity mutual funds, someone like Winters is who you want to call if you're picking a retirement community. For instance, of 35 facilities in Montgomery County outside Washington, D.C., she says she only feels comfortable recommending ten of them, based on her own knowledge and their state inspections (which critique such subjects as client privacy, maintenance, hygiene and even bed sores).
    For clients with spouses who have early stages of dementia, it may be best to avoid being bedazzled by the glitter and glitz of some of the new facilities and ask where you can get the best (and if needed, most cost-effective) skilled nursing. In some facilities you may have to hire your own nurses, three shifts a day, which could easily cost an additional $6,000 a month. Since the costs of living in retirement communities, including nursing homes, can run the gamut from $2,500 to more than $7,500 a month in service fees, depending on the care level needed, it's probably best to consider a long-term game plan.
   To find an eldercare consultant (also called geriatric caregivers) in your area with whom you can work to assist clients, try the search engine on the National Association of Professional Geriatric Care Managers (www.caremanager.org).
    Kathleen Day, president of the Enrichment Group in Miami, recommends that clients rent in a community before they pay the steep and usually nonrefundable entrance fee which can range from $200,000 to more than $500,000. Her policy was fortuitous, considering that her own parents moved into a Miami continuing care community in May that they've decided they don't like. "I really think it's crucial that people not lock themselves in. I think clients should rent first and see if they like the environment," Day says.
    Her parents, both in their early eighties, currently pay $4,000 monthly, but they've saved the hundreds of thousands of dollars they would have otherwise spent to buy their unit. Now, when they feel like it, they can move to a community that fits them better. "I just think renting makes more sense if there is any doubt at all," says Day, who is also beginning to see seniors rake in real estate gains "hand over fist."