Some Financial Planning Tidbits

Question: I have a mortgage on a rental property I own and have been thinking of paying it off. However, a friend told me I’m better off keeping the mortgage.  He said that it protects me from creditors.  Is this true?

Answer: I don’t consider keeping a mortgage on real estate to be a normal asset protection strategy from within a financial planning framework.  Mortgages are useful as leverage to allow you to buy real estate with less cash than the purchase price but they cost you money. You are paying interest to the lender, and no matter how much of an income tax deduction you get from paying mortgage interest, you are still losing cash flow.  On the plus side of leverage, you are gaining 100% of any appreciation in value on the property while sheltering some of the income with depreciation. I think the generalization that a mortgage is a good way to protect your asset from creditors stems from the fact that a creditor may not be inclined to foreclose on a lien if there is little or no equity in the property. That’s because the creditor would have to pay off the outstanding mortgage, leaving him with little or nothing for his efforts.  There is an asset protection concept known as “equity stripping,” where a property owner takes a second mortgage or home equity line of credit to reduce the equity in real estate.  Equity stripping may be effective in some situations. If you are concerned about protecting your assets from creditors or lawsuits, your best bet is to seek sound legal advice from a knowledgeable attorney.

Question:  I have two inherited IRAs. Can I make charitable gift distributions from these inherited IRAs and enjoy the same tax benefits that I would get if the IRAs were traditional IRAs?

Answer: Yes, you can make Qualified Charitable Distributions (QCD) from inherited IRAs as well as from traditional IRAs as long as you are at least 70 ½ years old and follow the rules for QCDs. An individual can give QCDs to as many different qualified charities from as many IRA and inherited IRA accounts as he or she wants, as long as the total QCD amount for that individual does not exceed $100,000. The check must be made payable from your IRA custodian to the charity. If it is made payable to you, it doesn’t count as a QCD and you will have to report it as income on your tax return.  QCDs can include your required minimum distribution. Contributions to Charitable remainder trusts, charitable lead trusts, and private foundations do not qualify as QCDs.  The IRS does not allow QCDs from non-IRA retirement accounts, which include defined-benefit plans, 403(b)s, 401(k)s, and SEP-IRAs.QCDs have potential tax-saving advantages for many taxpayers.   For those taxpayers who itemize, current tax laws reduce the amount of your itemized deductions if your income exceeds certain thresholds.  And by using a QCD rather than simply donating after-tax money to charity, your modified adjusted gross income (MAGI) will be lower.  Lower MAGI could lower your taxable social security, lower your tax bracket, lower your state income tax, lower your capital gains tax, increase your deductions, and lower your Medicare Part B premiums.

 

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to ken@montereypw.com.