“Managing My Assets”
Tactics for achieving your goals while working within your financial means.
Successfully managing your assets while dealing with a significant illness requires that you set goals and estimate the costs of achieving them.
If there is a shortfall, there are numerous asset management strategies to consider.
We suggest that you review all the alternatives below and evaluate which are best suited to your circumstances.
If you’re considering selling assets to raise cash, you will want to first think through these potential issues:
- What are the tax consequences? You will likely want to prioritize selling resources in order of least tax liability.
- What are the costs associated with selling the asset? For example you may need to pay broker fees.
- How much has the asset appreciated in value? Consult your financial advisor to determine the costs associated with assets that have increased in value. As you make your decision, you’ll want to consider the costs associated with keeping that asset as it grows further. Such costs would include insurance and maintenance and perhaps mortgage or other financing payments.
- Which assets will you continue to need? For example, you may need your car to drive to appointments.
- Which of your assets might you want to save for your family? You will want to consider your current and future needs as well as those of your family members.
Each person’s circumstances are unique and only you can decide how best to utilize your assets. The important thing to remember is that
you have choices. Furthermore, the decisions you make now may have a significant impact on your ability to meet your future goals.
If you decide to sell some of your assets, you can reach out to local real estate brokers, advertise in community newspapers, organize
a yard sale, or use an estate auction house (keep in mind that this may involve a substantial commission).
LEVERAGING YOUR REAL ESTATE
If you own real estate, you may have a number of ways to generate additional cash, including:
- Refinancing an existing mortgage
- A home equity loan or line-of-credit, or a second mortgage
- A reverse mortgage
- Selling or renting your property
The first three types of financing require that the borrower meet certain standards for income and/or equity in a home. Equity is the difference between the estimated market value of your home, or any asset, and the amount you still owe. You may turn this equity into cash in a number of ways, primarily through a home equity loan or line-of-credit, or a second mortgage. As you research these options, be sure to find out if there are commissions, fees, taxes or other costs. Your financial advisor can guide you through this process.
If you are living on a modest fixed income, you might have difficulty meeting income standards for refinancing, adding a second mortgage or most other home equity loans, even though you may have a great deal of equity in your residence. In this instance, a reverse mortgage may be a viable option.
With a reverse mortgage, you effectively “sell” your house to a lender by signing over the deed. Instead of making mortgage payments, the bank pays you a fixed monthly amount — hence the name reverse mortgage — and you continue to live in the house. One benefit of this type of financing is that you generally do not have to meet any standard of income.
While this form of financing may seem attractive, there are several matters to consider before taking such a step.
First, the lender is likely to conservatively appraise the market value of your home, so selling your residence on the open market may be a better option.
Second, you (or your heirs) will no longer own your home.
Third, whatever equity you have in the home, based on the lender’s appraisal of its value, is the basis for how much the lender will pay you monthly. When this money runs out, the lender owns your home and you will be required to move.
But for those facing a life-threatening illness, the ability to live in their own home for rest of their lives — and perhaps have sufficient money to pay for necessary care — may make a reverse mortgage an appealing option.
Selling your house on the open market is always a choice, and you will likely do better than with a refinancing or reverse mortgage option. Keep in mind that the proceeds from the sale will be reduced by fees and closing costs, and there may be tax consequences for you or your estate. If after the sale, you decide to lease your residence, rent payments are not tax deductible, unlike the interest portion of home mortgage payments. Think through these trade-offs carefully as you evaluate
ACCESSING RETIREMENT ASSETS
Retirement assets are another option to consider. These include pensions (defined benefit and 401(k)) and individual retirement accounts (IRAs).
If you liquidate these types of accounts before age of 591⁄2, in most cases you will immediately forfeit 10% of the amount to the Internal Revenue Service (IRS) in the form of penalties. In addition, you will probably be required to pay federal and state (where applicable) income taxes on the withdrawal.
A less expensive strategy to consider, if you are under 591⁄2, is to find out if you qualify for a loan secured by the cash value of your pension, IRA and 401(k). Such loans may involve fees and other costs, and will most likely require monthly payments.
While hardship withdrawal options (based on demonstrated need) do exist, the penalties for early withdrawal described above often still apply.
FILING FOR BANKRUPTCY
If you cannot meet your debts, bankruptcy is an option. However, declaring bankruptcy creates serious financial considerations that you should discuss with your financial advisor.
CONSUMER CREDIT COUNSELING SERVICES (CCCS)
Across the country, CCCS organizations help people solve personal money management issues. These organizations work with clients to evaluate the specifics of their situation, including their income and total amount owed, and help individuals set up a plan to stabilize their finances and secure their future.
CCCS organizations offer educational workshops on topics including long- and short-term financial goal setting, understanding and using credit, surviving a layoff or pay cut and preparing to buy a home.
For assistance locating an accredited CCCS counselor, visit the National Foundation for Credit Counseling (NFCC) at www.nfcc.org or call 800-388-2227.