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."