My students ask me all the time what a trust is and “do I need one?” The answer is generally yes but with one caveat, “not yet”
What in the world is a trust? Think of a trust as a holding pen, a place where you put your assets before they are released to the
people or organizations that you designate to eventually receive them. A trust is a legal entity and so are you.
Because you and the trust are separate legal entities, anything you transfer from you to the trust becomes property of the trust.
The trust then holds the property for your benefit, or for the benefit of those whom you designate.

A trust consists of four components:

The grantor–who creates the trust.

The beneficiaries- who receive the benefits (income and/or principal) of the trust. The grantor can also be a beneficiary.

The assets- which are the properties transferred to the trust.

The trustee- who is the person or entity that manages the trust’s assets and distributes the property according to terms established by the grantor.
The grantor can also be the trustee, at least while the grantor is alive.

Trusts can be set up while you are alive (the legal term for this is intervivos), or they can be established upon your death by your Will
(known as testamentary). Revocable trusts can be changed or revoked by the grantor. Irrevocable trusts cannot be changed after they are created.

Most people do not consider the importance of this crucial estate planning tool.

Suze Orman is a rather prolific financial advisor who has done a good job analyzing the necessity of establishing
a trust. She created a questionnaire a few months ago that you can use to help you determine if you need a trust along with your coach.

According to Suze, if you answer Yes to any of the questions, then you should seriously consider establishing a trust.

Do you have a financial interest in a business?

Do you have beneficiaries under the age of 25?

Do you have children with special needs, meaning they will never be able to financially support themselves due to a physical or mental disability?
Are you in a second or third marriage?

Are you on bad terms with any of your heirs?

Are any family members physically ill?

Is any family member developmentally disabled?

Is any family member in need of creditor protection?

Is any family member bad at managing money?

Do you own real estate of any value in more than one state?

Is your estate worth close to $1,000,000?

of course their can be some more exceptions. Make sure you speak with your coach whether a trust is something you need at this time.

A new retirement study provides further evidence that a growing number of Americans are at risk of a diminished standard of living once they stop working.

The Center for Retirement Research shows 43% of working households were in danger in 2004 of having too little income to fund their retirement.

But the study probably understates the proportion of retirees at risk. Its projections assume that people retire at age 65, cash in on their home equity through a “reverse mortgage” and exchange their assets for a stream of income by buying an immediate annuity.

Yet many people retire before 65. The problem is that they are not ready. According to the center, several clients have already tapped out of their home equity through borrowings, and can’t necessarily buy immediate annuities or take out reverse mortgages. The research does not take in account the costs of health care and how these expenses will affect retirees’ standards of living. Another problem is that many retirees seem to have a mindset of entitlement. They have worked all their life and it becomes time to “splurge.” This is noticiable with costs related to extravegant travel and housing. What many people are discovering is that costs are just as much if not more after retirement. Individuals have simply failed to plan.

The percentage of “at risk” households has surged in the past two decades, from 31% in 1983, according to the center’s analysis, which was funded by Nationwide Mutual Insurance. Two factors that have raised the risks are the growing uncertainty of Social Security payouts and the increasing burden on employees to save for their own retirements.This information is part of a stream of recent sobering conclusions about workers’ abilities to finance their golden years. The studies come as the first of 79 million baby boomers — the generation born from 1946 to 1964 — are turning 60 this year.

The center’s analysis found that nearly half of today’s workers, at their current savings rate, will be unable to fund a comfortable retirement. People will need to work longer or save more, and to get out of debt which is the first priority.

Sometimes it may make sense to tap a home’s equity. But one should ever expect home equity and social security to foot the bill. Upon paying off debt, people simply need to dedicate themselves to saving more.

It is a good idea to assume that households will need 65% to 85% of their pre-retirement income replaced each year once they stop working, to maintain their pre-retirement standard of living. A household whose projected replacement rate fell below 10% of the target rate is considered “at risk.”

There are many things to consider when purchasing a new home. Too often individuals seem to rely on what a mortgage broker tells them what they can afford when buying a home. There are some serious considerations to think about regardless as to what you here from everyone else. The thing that I have noticed among many of my young clients is that they get into the largest house possible without consideration as to the over all costs that will be required to be paid. According to the American institute of Certified Public Accountants you should make up a pretend budget as to what your total home costs are going to be. This will allow you to know if you can actually afford the home you are looking to purchase. It is a good idea to save for a 20% down payment. This will give you better loan terms. You also want to make sure that your income is relatively stable. At Prosper, we recommend that you have at least $1,500 stashed away as a basic emergency fund. If your debts exceed 38% of your gross adjusted income, then you will need to reduce this so that your housing is below that figure, otherwise you will not be able to afford the house. You should also make sure that your income is relatively consistent. Fluctuating income is a sure sign that renting is best for you for the time being. You should also check your credit score and report at least once a year. Pull only from one reporting bureau at a time. You should also understand that purchasing a home is a long term commitment. It takes at least five years for you to recover any closing costs on the purchase. All these steps will help you purchase a home that you can afford and will not deplete your resources.

In looking at the most recent statistics among most Americans, one cannot feel frustrated about current trends. Many people are simply juggling their debt around with no thought of the consequences. Many people have decided to use their home as a bank, and when that has tapped out, they then decide to use credit cards. Then individuals have refinanced and started the process all over again.

Amidst the refinance boom, households are experiencing high levels of debt accumulation. According to a Demos analysis of the Federal Reserve’s Survey of Consumer Finances, average credit card debt among all families increased by 85 percent, from $2,768 to $5,129, between 1989 and 2004 (2004 dollars). During the same period, middle-income families—those earning between $50,000 and $99,999—had an average increase of 64 percent, to $4,667. Lower middle-income families—those earning between $25,000 and $49,999—had an average increase of 95 percent, to $ 4,831, by 2004. Among those over 65, the average credit card balance increased by 194 percent to $4,906.

Consider the cost of carrying any kind of bad debt. It is expensive all the way around including a mortgage. In most instances the home deduction is a pittance of a relief compared to the cost

Comparison of Mortgage and Credit Card Interest Payments:

Amount Annual Payment Number Total
Borrowed Interest Amount of years Interest paid
Monthly Rate
_______________________________________________________________________

Credit Cards $15,000 15.99% minimum 30 $16,597
payment =
2.5% or $10
whichever is
higher

Mortgage $15,000 5.7% $87 30 $16,341

Households cashed out $715 billion worth of home equity between 2001 and 2005. In
the three years between 2003 and 2005, owners extracted $150 million more in equity
from their homes than they did in the previous eight — a level three times higher than any other three-year period since Freddie Mac started tracking such data in 1993.

Households have used cash equity from their homes to cover living expenses and pay
down credit card debt, further eroding their homes’ cash value, which many families rely
on for economic security.

Between 1973 and 2004, homeowner’s equity actually fell—from 68.3 percent to 55
percent. In other words, Americans own less of their homes today than they did in the
1970s and early 1980s.

In 2006, the financial obligations ratio— the percentage of monthly income to the
amount needed to manage monthly debt payments —has surpassed 19 percent, a record
since data started being collected in 1980.

About $400 billion worth of adjustable-rate mortgages (ARMs), representing about 5
percent of all outstanding mortgage debt, are set to readjust this year for the first time.
Another $1 trillion in loans are set to readjust next year.

Adjustable-rate mortgages made up 31 percent of mortgages in 2005. Interest-only loans,
which were uncommon just two years ago, made up about 20 percent of loans.
In current conditions, a typical borrower with a $200,000 ARM could feasibly see their
interest rate climb from 4.5 percent to 6.5 percent, resulting in a 25 percent increase in
their monthly payment.

Rising foreclosures signal many homeowners are already buckling as interest rates rise
and home values soften, trends that will continue as more mortgages adjust. According to
RealtyTrac, foreclosures in the third quarter of 2006 were up 17 percent from the previous quarter, a 43 percent yearly increase from the third quarter of 2005.

It makes more sense than ever to avoid bad debt more than ever.

The Millionaire Next Door says that one of their rules to wealth-building was to buy a house worth two times your annual income or less. This is an exceptional idea that few people are following. It could be argued that with the decrease of long term rates that three times a persons salary is the most one would pay for a home using a 30 year mortgage.

Another method would be to determine the percentage of a person’s mortgage payment amounts to the monthly total after tax income.

Most people stretch themselves to the limit to buy a house, then have very little left over for wealth accumulation. The people that stayed within the Millionaire rule have a better chance of having extra money left over each month.

Many people are preoccupied with the idea of getting a tax deduction by paying interest. Two things to consider on this. One, the government is threatening to eliminate this deduction all together. Second the cost overtime is overwhelming.

We shouldn’t care a lot about taxes and the fact that mortgage interest is deductible. Yes, it’s a nice financial exercise to calculate the “real” cost of the house once tax deductions are factored in, but in real life, very few people do this. We should care more about no debt on our balance sheets. Paying off a mortgage on a home will allow you to increase your networth dramatically.

Bigger homes and bigger mortgages are a good indication of living beyond your means which tend to cause a person to increase costs.

Many people will suggest that the formula will not work in high real estate cost areas. The solution is simple: move to a lower cost area. If you have been managing your money correctly, you should have plenty of equity to possibly pay cash for a home in a lower cost area. How would this affect your debt repayment? Quite a bit I would imagine