The Truth About Debt Consolidation Programs

"Owe no one anything, except to love each other, for the one who loves another has fulfilled the law. " - Romans 13:8

"Do not be among those who give pledges, among those who become sureties for debts. If you have nothing with which to pay, why should he take your bed from under you?" - Proverbs 22:26-27

One of the biggest challenges individuals and families at every economic level have is living “within their means”. In the United States, more than 40% of families spend more than they earn. Credit card debt continues to be a major stumbling block for many individuals and families. Also, the number of personal bankruptcy filings has increased by more than 200% during the past ten years. [Keown, Arthur. (2004). Personal Finance. NJ: Prentice Hall]

It is amazing how families can go on in life, spending more than what they earn. Mathematically it does not add up. However, for a country that has shifted its focus from a producing/manufacturing country to a consumer country we needed to find a way to break the basic accounting formula of 1 + 1 = 2 and Assets - Liabilities = Equity. The solution, facilitate consumer credit and relax the requirements that were needed to qualify for such credit. Now even teens are provided with credit cards, the more the merrier! See by facilitating the access to credit cards, our impulses to purchases something are no longer controlled by the fact that there is no money in the bank account to cover such expenditure, now we just charge it and we worry about the payments later. You go back to jobs that many times people go just for the paychecks so they can go and pay their consumer debt. The process continues in a never ending circle. This way they keep us like hamsters running in the hamster wheel; The birth of a consumerist society.

During one of my readings on the subject of consumerism and debt slavery, I came across of a blog by Stiff Kitten written in May 2010 "Consumerism - enough is enough". I will share a short synopsis about it:

"There are true needs and false needs – but only false needs need to be manufactured and nurtured. Indeed, today’s consumerist society has more or less turned Maslow’s hierarchy on its head. According to Maslow, people should be satisfied when they reach the top of his pyramid-shaped hierarchy of needs, but in modern consumerist culture and society there can be no satisfaction of needs. Consumerist society never satisfies, indeed it is meant not to do so, as any form of satisfaction is an enemy of the consumerist, capitalist society – a society that requires the persistent buying of things we don’t need for its continued existence – what is usually referred to as “growth”."["Consumerism - enough is enough". Stiff Kitten's blog. May 9, 2010. Retrieved February 15, 2012.]

This buying trend is influenced by the saturation of advertising; new offerings from banks (loans and credit); the false perception of immediate gratification; and the false illusion of achieving a better life by buying more and bigger things that we do not need with money we do not have.

The U.S. has 5% of the world's population but uses 50% of the world's resources and creates 30% of the world's waste. The average American consumes 50% more than they did only 50 years ago and, according to author Annie Leonard, 99% of the items bought by consumers are no longer in use after only six months. This type of behaviour is financially and environmentally irresponsible and unsustainable, which is bound to cause havoc in our homes and society.

Now, what all of this has to do with debt consolidation programs. Everything as I will address shortly.

Debt consolidation programs do not address the root of the problem. It is just a band-aid on a blood gushing wound. Many families are lured into this programs as the "easy way out" of the problem and they will soon realise that it is not. True debt management and reduction requires work and discipline. Debt consolidation by itself does not reduce your debt nor addresses the problem, so even if you succeed and pay off your debt, unless you make a change in your behaviour regarding debt you will end up in the same problem shortly.

The solution for true debt reduction is taking responsibility and not by looking for the "easy way out". You need to be willing to work and sacrifice in order to fix the situations that you created with your own irresponsibility. If you are not willing, then you cannot be helped. You must address the behaviour that got you into the mess.

You May Miss a Great Opportunity if You Don't Act Now

Last week I wrote about wealth transfer strategies you should consider in 2012. I believe that many families, unless they take action soon they may miss a great opportunity. I do not think that families are understanding the tax legislation wave coming to us in 2013. Maybe the focus right now is the elections.

Just to give you a short summary of tax changes scheduled to kick in with the coming of the new year in 2013 (here I am only covering federal tax legislations, to which you need to add the tax increases of states and cities in your particular area):

- Capital gains tax is scheduled to rise to 23.8% from 15%

- Dividend tax is set to rise to 43.4% from 15%

- Estate and gift tax will rise to 55% from 35%

- Estate and gift tax exemptions are going from $5 million back to $1 million

Regardless of your current tax levels, it is important that you review your current tax situation and meet with your tax advisor to determine how the new tax legislations will impact you. Today I will share with you a much simpler strategy you can implement this month. IRA conversions to Roth IRA. This continues to be an overlooked strategy and I will share with you two good reasons why you should take a closer look at Traditional IRA conversions.

1. In the past, Roth IRAs were capped at $100,000, but that ceiling was lifted in January 2010.
2. You can make contributions past age 70 ½ .

If you are in a situation where you don’t expect your tax rates to go down at retirement, 2012 may be the perfect time to leave your traditional IRA, pay the taxes, and convert the assets into a Roth IRA. Here is why:

1. Assets are currently depressed in value.
2. Lower current tax rates compared to the expected increases in tax rates as shown above, now is a good time to take the conversion tax hit now.

Once you complete the conversion your assets will not only grow tax free but then allow for tax free withdrawals at a period of time when you will probably be paying a much higher tax rate. By doing this you are in essence converting your traditional IRA into a dynastic vehicle by paying the taxes now in a low-tax environment, thus passing the Roth IRA on to your heirs, where the assets can grow indefinitely at a tax-free rate during the heirs’ expected lifetime and be drawn down, as needed, without the heirs paying any taxes.

However, before you go and make any rash decisions you need to take into consideration at least your liquidity and your needs during retirement. The best thing to do is to visit with your tax advisor to crunch the numbers to see if it makes sense in your particular circumstances.

Wealth Transfer Strategies for 2012

The preservation of a financial legacy in a efficient manner has always had its level of complexity due to the uncertainty of future transfer-tax laws which may tempt many people to put their wealth-transfer planning on hold. This can end up being costly to many families that our the fear of the uncertainty wait and decide for no action. However, strategies to pass wealth to future generations and to fund your desired missions can be put in place at little or no tax cost to the grantor.

The tax theme for 2012 is filled with uncertainty. There are concerns about whether the Bush-era tax cuts will expire at the end of this year. One of the main areas of discussion for this year are the estate tax, the lifetime gift tax and the generation-skipping tax. Currently they are set at $5 million. However, unless there is a change to the law before the end of the year they will be reduced to $1 million. There are also concerns about increases in taxes on capital gains and dividends.

This year will be critical in the implementation of wealth transfer strategies while the current law is still in effect. When the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law, it  reunified the gift and estate tax exclusions, enabling individuals to transfer up to $5 million tax-free, which can be applied either to lifetime gifts or to amounts passing at death through an estate. The Act went even further by allowing for “portability” between spouses, so any unused exclusion amount may be transferred to a surviving spouse. Also, the Act increased the Generation Skipping Transfer (GST) tax exemption to $5 million. Finally, any transfers above the $5 million has a top tax rate of 35%, instead of the previous top rate of 55%. As you can see, this year offers a opportunity to transfer more wealth tax-free and pay a substantially lower rate for transfers above the transfer limits.

Keeping a current wealth management plan is critical to protecting wealth through changing tax environments. The following solutions offer particular advantages under the current law for individuals who are looking to tax-effectively transfer their wealth. Here are some tips for your consideration in 2012:

1. Make Lifetime Gifts - With the current higher transfer threshold available, more assets can be transferred tax-free. By transferring those assets now, any future appreciation of those assets will be removed from the estate as well. Here are a couple of ways to accomplish this:

* Utilize the annual gift tax exclusion - This is a simple way to transfer $13,000 to as many recipients ($26,000 for married couples) without reducing your $5 million threshold.
* Pay for others' medical and educational expenses - as long as the payments are made directly to the providers, this transfer of wealth does not count towards the $13,000 annual gift tax exclusion nor the $5 million lifetime transfer exclusion.

Note: Please remember that gifts are irrevocable. Gift decisions must be done after careful analysis and consideration: Are the beneficiaries ready to manage the gifted assets responsibly? Will there be other beneficiaries to consider in the future? Are the grantors comfortable living with their remaining assets? 

Because future tax law changes are always unpredictable, making gifting decisions solely for tax reasons without considering family issues can result in an undesired outcome, especially if future tax law is more favorable than expected.

2. Use a GRAT -  A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust that can allow individuals to transfer the appreciation of assets to heirs free of gift tax. GRATs are particularly attractive for individuals who have assets they believe will significantly appreciate and who would like to remove this appreciation from their estate.

The grantor transfers assets to the GRAT and, in turn, receives an annuity paid from the trust over a specified term. Generally GRATs are set up so that the annuity payments to the donor equal the amount of assets originally transferred into the GRAT, plus an assumed rate of return that is established by the IRS, known as the “hurdle rate” (this technique is called “zeroing out”). At the end of the GRAT’s term, any appreciation of trust assets that exceeds the IRS hurdle rate passes free of gift tax to the beneficiaries.

Note: The environment for GRATs is especially advantageous because the IRS hurdle rate is just 1.4% (IRC 7520 rate as of February 2012). Since any appreciation above the hurdle rate amount transfers tax-free to beneficiaries, the lower the hurdle rate, the higher the potential amount transferred to beneficiaries. 

3. Get to know more about Charitable Lead Annuity Trust (CLAT) - CLATs can be used to leverage your charitable contributions to shift wealth to family members in a tax-efficient manner. A CLAT can be funded either during the your life or upon death as a testamentary transfer. As a split-interest trust, a CLAT names two beneficiaries. The charitable lead beneficiary, receives a fixed annual annuity payment throughout the term of the trust. At the end of the trust term, the assets remaining in the CLAT are then distributed to one or more noncharitable remainder beneficiaries―typically the grantor’s children or family members.  


Note: CLATs generally are more efficient as long-term vehicles; they tend to work far better in low-interest-rate environments, and should be well diversified.
When considering a CLAT three fundamental questions should be addressed; What is the optimal trust term? ; How should the assets be allocated?; Are they advantageous only in low-interest-rate environments?

4. Consider a Dynasty Trust - Some states will allow you to establish a trust that exist in perpetuity, called Dynasty Trusts. The main attraction of these trusts is that assets placed in the Dynasty Trusts pass from one generation to the next free of estate tax. Also, if individuals elect to apply their gift and generation-skipping transfer (GST) tax exclusion, they will not be subject to gift tax when funding the Dynasty Trust.

The GST tax is a federal tax that was designed by Congress in 1986, to prevent people from being able to avoid paying estate taxes. Generally, as property is passed down from generation to generation, an estate tax is imposed on the value of the transfer. For many years, people were able to get around paying this estate tax by instead of transferring their property to the next generation, usually their children—they would “skip” this generation—and pass it to the following generation, usually their grandchildren.

As part of the Obama administrations Tax-Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the GST tax was taken away completely.  However, in 2011,  the GST tax returned at 35% to the Bush tax-cut levels; the GST exemption is inflation-indexed for 2012. However, as scheduled, the GST tax will rise again to pre-2001 levels in 2013: A 55% tax for any part of a transfer made that is valued at over $1,000,000.

Note: A Dynasty Trust is most effective if grantors have not already depleted their GST tax exemption. By allocating the GST exemption to the trust, the grantor can avoid the imposition of significant GST taxes on distributions to beneficiaries. Also, individuals who made gifts directly to grandchildren in 2010 to take advantage of the 0% GST tax rate must opt out of the automatic allocation of the GST tax exemption on their gift tax return. 

Like with all tax planning strategies, consult with your tax advisor about how to utilize the available vehicles to most efficiently transfer wealth to your desired destinations. With current tax laws set to expire on December 31, 2012, now is a good time to review your estate plan.

What are you busy about?

"It is not enough to ask why you are so busy. The question is, what are you so busy about?" - Henry David Thoreau

In today's society everyone seems to be "busy". Right now you may be busy and hoping this article isn't too long to read because you have too many things to do today. People today do not have time for even the basic needs to form a strong family, the core of a strong society. Most people do not have time for their financial planning nor estate planning. Maybe they are hoping that those issues will be taken care by themselves. Entrepreneurs are running around with great ideas but "too busy" to develop a business plan that could harness that idea and focus the energy to increase the chances for success.

Most people will share with you with pride and puffing up their chest about how busy they are. As if being busy is something to be proud of and the goal. Being busy and being productive are two totally different things. Being busy without a clear vision will lead to wasted of time. Unfortunately that is a plague that has infected most people in the United States. Most executives will have 53 items in their to-do list taking space on a piece of paper as to satisfy their ego that they are doing something or as a way to prove their co-works "I am busier than you". Tasks in your to do list that don’t add value to your life or work are going to lead to frustration and wasted time. Are those tasks that are keeping you busy providing you a deeper sense of fulfillment and are they aligned with your values? Do they provide you joy and peace of mind?

Today is a good day to take a moment and reflect on the tasks you are performing and in the midst of your busyness ask yourself "what are you busy about?". Is there a better way, more efficient and less stressful way to accomplish my daily tasks? Being busy is ok when you are focused, grounded and calm.

Here are five tips:

1. Define your core values
2. Avoid Over-Committing
3. Learn to Say NO
4. Outsource, Delegate and Automate
5. Take a "Mini-Vacation" from the busyness and noise

Martin Luther King said that he'd never have accomplished what he did if he didn't spend three hours a day in prayer. How much time are you taking for prayer and meditation? Take a moment today and reflect on what is truly important for you. Take a moment and prepare a plan on how to accomplish the goals that will provide you and your loved ones joy, fulfillment and peace of mind.

Understanding Mental Health

Mental health is as important as physical health. Still, millions of Americans suffer with various types of mental illness and mental health problems, such as social anxiety, obsessive compulsive disorder, addiction to drugs and alcohol, and personality disorders. Mental illness and psychological disorders have good treatment options with medications, psychotherapy, or other treatments.

Mental health concerns everyone. It affects our ability to cope with and manage change, life events and transitions such as bereavement or retirement. All human beings have mental health needs, no matter what the state of their psyche. This book is written specifically for those who want to have an introduction to mental health, mental illness and mental health problems. It is written in simple language from a person that is curious about the subject and wants to share with you his research.

My curiosity about what makes certain people successful, drove me into the road of mental health. I am not an expert in the subject of mental illness ad treatments, thus before any actions to self-treat or self-diagnose your mental health status you should consult with a qualified physician who can properly diagnose and treat any potential mental illnesses. What became clear to me is that there is more to good health than just a physically healthy body: a healthy person should also have a healthy mind. A person with a healthy mind should be able to think clearly, should be able to solve the various problems faced in life, should enjoy good relations with friends, colleagues at work and family, and should feel spiritually at ease and bring happiness to others in the community.

Why should you be concerned about mental illness?

As mentioned earlier, our mental health affect how we perceive many aspects of our lives. It is an integral part of our whole health. There are many reasons why you need to be concerned about
mental illnesses.:

• Because they affect us all. It is estimated that one in five of all adults will experience a mental health problem in their lifetime.
• Because they are a major public health burden. Studies from nearly every corner of the world show that as much as 40% of all adults attending general health care services are suffering from some kind of mental illness.
• Because they are very disabling. Even though the popular belief is that mental illnesses are less serious than physical illness, they do in fact produce severe disability. They can also cause death, as a result of suicide and accidents.

The World Health Report from the World Health Organization in 2001 found that four out of the ten most disabling conditions in the world were mental illnesses. Depression was the most disabling disorder, ahead of anemia,  malaria and all other health problems.

• Because mental health services are very inadequate. Specialists spend most of their time caring for people who suffer from “severe mental disorders” (‘psychoses’). These are quite rare, but are also the very diseases that the community associates with mental illness. Most people with the much commoner types of mental health problems, such as depression or alcohol problems, would not consult a mental health specialist.
• Because mental illness leads to stigma. Most people with a mental health problem would never admit to it. Those with a mental illness are often discriminated against by the community and even their own family.
• Because mental illness can be treated with simple, relatively inexpensive methods. This is the good news! It is true that many mental illnesses cannot be ‘cured’. However, many physical illnesses, such as cancers, diabetes, high blood pressure and rheumatoid arthritis, are also not curable. Yet, much can be done to improve the quality of life of those who suffer these conditions and the same applies to mental illness.

It is important to understand mental health so we can help ourselves and our loved ones. The stigma often associated with the many forms of mental illnesses is very real. For example, many people with bipolar disorder or other mental illnesses are afraid to share their condition with other people for fear of ridicule or judgment. The stigma is so real in fact many will avoid telling friends or family of their mental condition. Many people with bipolar disorder face stigma and discomfort from well-meaning friends and family members that don't really understand bipolar disorder. It is common for patients with bipolar disorder to feel misunderstood. Unfortunately even many health care providers carry with them a biased attitude toward bipolar patients. Many have a difficult time focusing on the real reason a person is in their office. Instead they focus on the mental health issue.

Here are some small steps patients and family members can take to help overcome the stigma associated with mental illness:

* Always accept your condition for what it is.
* Never attempt to hide your condition for fear that others will be un-accepting or misunderstand you.
* Educate friends and family. Direct them to a number of sites that help explain bipolar disorder and other mental illnesses. Great reference sites include the National Alliance on Mental Illness.
* Confidently explain that one if five people suffers from some form of mental illness or another.
* Remember that you are more an insider than you realize.
* One out of every five of your friends, acquaintances or associates likely suffers from some form of mental illness. -Use support groups to help bolster your self-confidence and promote your inner peace and well-being.

If you are interested in learning more about mental health, I have compiled an easy to read and understand e-book "Understanding Mental Health" were I cover types, causes, and treatments available.

===> Understanding Mental Health http://ow.ly/8tErj

Life Insurance is NOT an Investment

Life insurance is not an investment, the purpose of life insurance is to protect your loved ones in case of your premature death. The reason I am writing this short blog today is due the constant question which one is better Whole Life or Term Life? The best answer I can give is it depends. I do I have a problem with "gurus" who give their "infallible truth" about term insurance being the only way to buy insurance.

I understand that whole life is not the best option for everybody but neither is term life insurance. For example, if you purchased a ten year term, ten years ago and develop some medical condition and can no longer afford insurance then you wont be able to get a new policy. However, if you have a whole life policy then it doesn't matter as long as you continue paying your premiums. Life insurance is NOT a one size fits all solution. Ask any over 60 year old right now how the "Buy Term and Invest the Rest" strategy worked for them around 2008. Most of them right now sit with no insurance, since most of them are now uninsurable, and their investment portfolio are valued at a fraction of what it once was. In addition, they are not able to sell their home to cover the devaluation of their investment portfolio since the real estate market is still so low in the United States.

Both types of policies have advantages and disadvantages. There are never any absolutes in life and that is why it is important to discuss your specific situation with your personal financial services professional, who can in turn help you find the right product for your situation.

The problem is that most people listened and are easily impressed by “experts.” We drool for the "As seen in Oprah" type of "experts". Unfortunately in today's society we consider someone who who utters quick and "authoritative-sounding" responses to our questions as an expert. Most people consider a "know-it-all" as an expert. However, people forget that it is all marketing. It is about selling and it works. That is why we are willing to pay hundreds even thousands of dollars to attend the seminars organized by these "gurus". The question we all must be asking is, Is the "expert" giving advice that helps his listeners or advice that sells? If the "expert" gives advice that does not sell, no one listens.

We must come to a different understanding of what defines an expert. Many times the best expert is the one that is willing to say "I don't know". However, I don’t see too many of that type around nowadays.

Baby Boomers Taking A New Look At Retirement

A recent AllState-National poll found that Baby Boomers are pushing back their initial retirement plans from an average of 60 years to 66 years. In addition, the results of the poll showed that 68% of the Baby Boomers expect to work in some form after retirement. The concept of retirement age is no longer what used to be 10 years ago. According to a survey conducted by Wells Fargo & Co in August 2011, 76% of the middle class Americans surveyed considered that “it is more important to have a specific amount saved before retirement, regardless of age, while only 20% say it is more important to retire at a specific age, regardless of savings.”
Other results of the Wells Fargo survey:

1. 25% of middle class Americans say they will “need to work until at least age 80” to live comfortably in retirement.
   
2. 74% of middle class Americans expect to work in their retirement years, including 39% of all respondents who will need to work to make ends meet or maintain their lifestyles, while 35% say they will work because they want to, rather than out of financial need.
   
3. Among middle class Americans age 40 to 59, 54% say they will “need to work,” compared to 34% of those age 25 to 39. Accordingly, only 25% of those between the ages of 40 and 59 say they will work in retirement because they “want to,” versus 45% of Americans between the ages of 25 and 39.
   
4. Of the Americans who will work in retirement, 47% say they will do “similar work” to their pre-retired years, while 42% say they will work in a position that requires “less responsibility.”
   

These changes in behavior bring some interesting questions and potential implications in our society. Will baby boomers be physically and mentally able to work later in life? Be efficient and productive until ae 80? What will it mean to the young generation entering the workforce in the next 10 to 15 years from now? And, how does our system of retirement savings need to be reformed to help reduce the savings gap?”
This recession has taken a heavier toll on the middle class than past recessions. However, the “sandwiched generation” (those near-retiree sandwiched between the already retired and the young generation) will feel a heavier burden since their retirement savings and real estate values have both declined substantially in the last 7 years. This has caught many near-retirees by surprise and now will force them to stay in the work force longer than they anticipated.
There is still time to make corrections in your retirement plans if you are in that “sandwiched” situation. It will take immediate action and potentially making some strong and sacrificial changes over the next 5 to 7 years to make sure that you can enjoy a comfortable retirement.