September 1984
Vol 7 No 12

NOBODY LOVES YOU WHEN YOU'RE OLD AND GREY AND BROKE . . .

Of course you're not going to hear any talk like that BEFORE the election. But changes are taking place which make it more important than ever that you take steps to fund your own retirement years. I live in Florida which has the oldest average population of all the states. I'm constantly amazed at the numbers of people who appear to have been surprised that one day they^'d be elderly, no longer employed, and without sufficient means to support themselves adequately. Compared to the future facing most of us, there is a life of luxury.

The ^“elderly^“ comprise the one minority group that everyone will become a member of – if they're lucky. The object of the exercise then is to reach old age with style. lo enjoy it. To be productive. And to avoid being someone^'s dependent. How do we do this? To begin, let's dispose of the idea that someone else will pay for retirement! Social Security has been actually broke for years. It continues to fall behind even as the recovery and record deficit spending surges ahead. Millions of WWII veterans are now reaching retirement age. VA hospitals and facilities won't be able to cope with demands being placed upon them. State and local social programs are being curtailed. Americans are paying more taxes than ever before, yet we^'re running out of funds. That's not all.

Corporate America is getting a little flaky too. There^'s a loophole in ERISA regulations which permits companies to dump pension obligations by contributing assets. Hence, we^'re back to being dependent upon the tax payer in our children's generation for revenues to pay for our company pension. And in 1984 the big ploy is for the corporation to terminate its plan and to buy an annuity from an insurance company. This makes it legal for them to take the excess out of the plan and to spend it to expand or to reduce debt. Of course, most companies have millions in unfunded pension obligations which they^'ll be able to avoid by declaring bankruptcy. Billions of dollars are at stake. Your billions!

State employees – teachers, cops, civil service – are in as bad a shape as the others. And with the hard look that revenue sharing is getting along with that old standby AD VALOREM TAX, it will be harder than ever to raise needed funding. States have to deal with a crumbling infrastructure. Aging and inadequate sewer systems, collapsing road beds, pot holes. A real demographic donnybrook is shaping up between the elderly, the indigent poor, and the tax payer as to whose life style suffers the most. It's going to get vicious.

EQUITY CONVERSION TECHNIQUES CONTINUE TO HOLD PROMISE. .

Since 1979 I've been reporting on the RAM Program. This allows the elderly to fund their retirement years in part by borrowing on their own homes. Each month they get a check based upon the value of their home and prevailing interest rates. There are a variety of these plans. Some of them permit this income stream to continue as long as the residence continues to appreciate sufficiently to secure the loaned funds. What a boon to those who would have to be responsible for their parents welfare. When parents and their mature offspring must live together, neither is happy and the relationship deteriorates rapidly. The RAM program alleviates this considerably. Here^'s what you should be doing.

Use your creative juices to not only get your parents into a home of their own, but to get it paid off free and clear. They^'re going to be the first victims of failed promises. You'll be the next if you don't take some sort of defensive action. I hear of all sort of partnership arrangements between investors and entrepreneurs. What better

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arrangement than having your parents as investors who share in the acquisition of property for their own use. They can absorb the costs once you procure their home at wholesale. In many instances they'll be able to qualify for owner/occupant financing which you won^'t be able to get. Here^'s a little bit of strategy:

Sell them one of your houses which has a high equity. Take the loan proceeds and co-venture with them to acquire 4 or 5 other houses. Let's assume that your parents (or you) are in the mid 50^'s. They can expect to work 10 more years at their salaried job. If you had a property with $50,000 in equity, that would permit you to buy 5 houses in the price range just below the median: $50,000 to $70,000. If you^'ve been reading this letter very long, you know how to buy with seller carry back financing and zero interest terms. The fast pay down of mortgage debt would make these houses virtually free and clear by the time the ten years had rolled around. And the negative cash flow would be a form of forced saving. Of course, over that period rents would have started creating positive income.

Let^'s talk constant dollars. Suppose your net rents – without regard to any tax savings at all – averaged $450 per month net at the end of the time. 5 houses would be providing about $27,000 per year in purchasing power if they were free and clear. If that weren't enough, one of them could be selected as a residence and placed into the RAM scheme, Doesn't that solve a problem? Let's clean up some details. Remember, you're co-venturing with your parents.' Your part of the venture is providing for your own old age! Once your folks retire and no longer want the ^“stimulation^“ of management, buy back all the houses!

Structure payments which can easily be covered by net rents. Calculate a period which will provide any needed income for the rest of their lives. Fortunately, this has all been worked out for you by the US Treasury Department. It^'s called a PRIVATE ANNUITY! In so many words, you contract for a series of payments spread out over the remainder of your parent^'s lives. This is an unsecured contract! It carries a low interest rate. Your payments must continue for as long as your parents live, but not after, so there's nothing left in their estate at that time. And you can sell the property and keep the proceeds after 2 years. Thus this not only provides retirement income for life to your folks, but cash to you to continue with your own estate building program.

If you'd like to explore the RAM PROGRAM in more detail, contact Ken Scholen, Director of the NATIONAL CENTER FOR HOME EQUITY CONVERSION, 110 E. Main, Rm 1010, Madison, WI 53703, (608) 256-2111. Ask him about subscribing to Home Equity News or a California publication called RAMPAGES to keep abreast of continuing developments and local lenders. For structuring any sort of private annuity be sure to get sound tax advice and touch all the bases.

 

Family relationships offer the most practical and profitable strategies of all! We normally think of parent/child situations. We shouldn^'t ignore all three generations. The 55+ people have the one-time $125,000 exclusion upon sale of their homes. The 65+ grand parents have lower tax brackets and free and clear houses. The 25+ group have high energy levels and rising incomes. They^'ll also bear the heaviest tax loads in recorded history just to meet the interest costs on our current deficits. Demographically, we're entering a unique period too. People 85 and older are the fastest rising segment of our population! Women in that age bracket outnumber men by 50%. Numbers of “under 30s^“ are diminishing as a percentage of the population while those in the middle years are booming. 

HOW DO WE MAKE DEMOGRAPHICS WORK FOR US?

Suppose you were the middle generation in the above ^“ideal^“ family. You^'re in a tax bracket which could use some shelter. Your kids are just coming out of school and your parents have just retired. Here^'s one approach you might take. (1) Sell your house and lease it back. We^'ll speculate that you have exactly $125,000 in tax-free profit/cash from the sale. Your lease/back on a $150,000 home would be at about $850/month in most markets – that's why expensive houses make poor rentals. Now,, co-venture with your kids 😮 locate, negotiate for, and buy some positive cash flow rentals, using your cash to hammer out profitable prices and terms ^“going in^“. Let your retired parents attend to the day to day management. Their maturity will give them an advantage in dealing with people and the property management will provide them with just enough challenges to keep active and useful in terms of bottom line cash flow. They^'ll be earning management fees out of the rents to augment their incomes. These should be in the neighborhood of 12% since they^'ll also be responsible for all bookkeeping and disbursements of payments. As inflation drives rents upward their income will rise with it.

Meanwhile, back at the ranch, as the person in the highest tax bracket, you'll be enjoying the tax shelter with totally passive investment. You can attend to improving your earning power at your career job. You can also be on the lookout for seasoned discounted mortgage ^“paper^“ which you can invest your parents savings in to increase their monthly income. As your offspring gain expertise, they can be responsible for maintenance and collections for fees which appropriately balance out their cash needs with others in the family. Bear in mind that all the property being acquired together with the earnings of the investments will eventually be owned by successive generations.

FEDERAL 'ESTATE TAXATION CAN BE FEARSOME. .

Congress is already beginning to make moves to limit the amounts that can be left to the next generation. In 1984 the figure is $325,000. It was supposed to rise to $600,000 in 1987 but it's doubtful that it will ever get there. They've removed the $100,000 exemption for IRAs and qualified corporate pension plans after 1984. The maximum tax bite will be 55% of the taxable estate. It's becoming more and more critical that you implement estate strategies soon. As inflation hedged assets are driven skyward by deficit spending, the government will be taking more of the available estate proceeds.

But there^'s a loophole! Suppose the title holder never died? By act of Congress and the various state legislatures, immortality has been conferred upon corporations and trusts. Anytime that property fails to generate sufficient tax shelter to offset income, it could well be more productive as a corporate asset. Under some of the proposed new tax legislation, this could be true with all your property. But for now, look at it this way: a house which generates $6,000 a year in rents of which $2000 are net income taxable in your tax bracket causes a dilution in your tax shelter overall. By placing that property into a corporation – you merely record a deed from you to it – as a contribution of capital, that income now falls into corporate earnings. A fiscal year corporation might defer the tax impact into a subsequent year. And a corporate pension plan might accept the property as a pension plan contribution in lieu of a cash contribution. This would save your company needed cash and place the house beyond the reach of creditors as well as placing any income from sales or rents outside the purview of the tax collector.

That's a tactic. Now comes strategy. A family corporation might be formed in such a way that your parents might contribute savings to buy Preferred Stock which paid a stated % yield on a regular basis. A REMAINDER INTEREST in that stock could be given each year in the amount of $20,000 with a matching amount to your spouse if both parents did it. In the meantime, they^'d enjoy the income for life. When YOU'VE retired, you can do the same thing for your kids, ad infinitum. Your contribution would be to make the corporation successful through manipulation of its assets and investment. Your kids in turn might have STOCK OPTIONS on your common stock. These options could he given as gifts at the inception so that they'd have little value and hence, fall within the tax free gift limitations of the law. Of course, there would be little profit in these Options unless the corporation's assets made money. It isn't hard to see why your kids might take an avid interest in-helping you to increase corporate earnings and net worth. Your parents would have FROZEN their estate by accepting income /vs/ growth and leaving a remainder interest to you. You will have effected the same results with your Options to your kids and a subsequent remainder interest in the preferred stock. By keeping the growth outside your estate, you^'ll have accomplished a virtually painless transfer of assets while meeting mutual needs.

CHANGING DEMOGRAPHICS MEAN CHANGING MARKETS AND OPPORTUNITIES. .

Let^'s consider the obvious first. Whether you have a family or not, whether you want to invest in houses or not or form your own corporation you can still capitalize on changing demographics. Problems of caring for the elderly need to be solved in every country where improving health services are prolonging life. For the long term, I'm not too confident in life insurance annuities or pension plans. Their life expectancy tables are going off the wall. We^'re all going to last a lot longer than we thought we were.

You can buy stock in companies who specialize in geriatric medicine, services, prosthetics and appliances, nutrition, recreational programs etc. Nursing Homes offer a real long term growth opportunity. Beverly Enterprises was the second fastest growing company in Fortune^'s ranking of service companies. They're continuing to expand at a prodigious rate – in terms of profitability and facilities. There are springing up a whole new type of day-care center for the elderly too. These offer recreation and social contacts, nutritious meals, transportation, shopping trips at a daily charge of about $20. They are used most by wage earners who have elderly parents living in their homes.

In one full service facility I visited, each resident paid $1300 a month for a private room – about 300 square feet. It had a 6' X 6' front patio for socializing and a small flower garden. And there was an area about the same size at the rear for a small vegetable garden. A monitoring device connected to a central nurse^'s station for any emergencies, however medical services were not a part of the normal facilities. Two shopping trips were scheduled each week plus extra social events. Disabled people were not allowed to reside in the facility because of lack of staff to support them. This was more a retirement center than a nursing home. Meals were offered as a part of the program but were not compulsory. In terms of return on investment, this was extremely profitable.

When one considers the consistency of our aging population and the lack of any competition in the area of geriatric services, this has to be a major opportunity area. If you^'re going to invest in such facilities, be sure to check out state requirements. Don't let anyone confuse CHILD CARE facilities with a PRIVATE CLUB FOR ADULTS who have full use of their faculties. You'll find licensing requirements much different. Pick a location off the main streets with less traffic congestion and noise. You'll be able to find cheaper ground and parking space should be easier to build in. It might be a good idea to co-venture with a church to get funding and a steady supply of customers. It^'s something to think about in light of our changing demographic needs.

 

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