The explosive growth in real estate values of recent years definitely has been a good thing for home owners. Question is, has the rise been equally beneficialor detrimentalto advisors aiming to help those home owners with financial and retirement planning?

Have appreciated property values, as some fear, provided large enough nest eggs so as to make consideration of alternative investment vehicles unnecessary?

Real estate-savvy advisors contacted by National Underwriter say thats not the case. They note the property boom actually has boosted opportunities to market a range of products and strategies. Chief among these are mortgage solutions that help clients unlock home equity to invest in diversified portfolios that yield higher rates of return and vehicles that reduce otherwise hefty capital gains taxes on the sale or transfer of real estate.

Gibran Nicholas, president and founder of Nicholas & Co. Mortgage Planning Solutions, Ann Arbor, Mich., says his clientele, including advisors who attend his mortgage planning seminars, has expanded in tandem with the markets rise. His specialty: showing property owners how they can leverage adjustable rate mortgages, reverse mortgages, interest-only loans and other mortgage techniques to build wealth and pay for current expenses.

“Mortgage planning may be the single most promising service advisors can add to their full-service practice,” says Nicholas. “Home mortgages are the single largest debt and monthly expense of most clients. Helping them integrate that debt with their overall financial plan is a logical extension of the advisors services and key to implementing a successful financial plan.”

So, too, is helping clients navigate the sometimes emotional issues that attend real estate investments. Jim Niedzinski, a certified financial planner with Sagemark Consulting, Southfield, Mich., notes that many clients who plan to sell their homes at a profit ultimately find the experience of moving too painful. So, he spends time with prospects helping them to establish realistic expectations.

Those who can get over the psychological hurdles may find a range of tax-advantaged vehicles attractive. One example is 1031 exchange opportunities.

Section 1031 of the IRS code allows home owners to avoid paying capital gains taxes when selling a property. If the owner passes away, the propertys heirs receive a “step-up in basis” that fixes the propertys valueand, therefore, the capital gains tax to be paid at the time of saleon the date of the owners death.

Clients looking out for themselves and the next generation can leverage other tax-advantaged solutions. Mark Diederich, president of The Diederich Agency, a Novi, Mich.-based affiliate of Nationwide Mutual Insurance Co., says prospects are very receptive to a new product hes marketing: permanent life insurance featuring a long term care rider.

He recommends that clients place unused assets, including home equity cashed out via a reverse mortgage or refinancing loan, into the policy. Clients can use the death benefit for long term care, or, when they die, the policys face amount passes tax-free to the beneficiaries.

Increasingly popular, too, are various term-remainder and irrevocable trusts, such as the grantor-retained annuity trust (GRAT), charitable-remainder trust (CRT) and qualified personal residence trust (QPRT).

The last, frequently recommended by Niedzinski, is funded with the property owners (donors) ownership interest in a personal residence. The vehicle lets the donor exclude the full value of a residence from his or her estate and the residence will not be subject to estate tax.

Seth Pearson, president of Pearson Financial Services, Dennis, Mass., specializes in marketing what he calls the “dynasty trust,” also known as a legacy trust and generation-skipping tax trust or GSTT. The vehicle lets individuals gift up to $1.1 million in trust assets tax-free to their heirs.

“The children can have total access to the trust, if the parents want,” he says. “Yet, the money is protected from divorce, liability, bankruptcy and death taxes, forever, depending on the state where the trust is set up. [The trust] represents a great opportunity for us to work with the children.”

Advisors aiming to help clients integrate and manage real estate assets as part of a financial plan, observers agree, would do well to partner with a mortgage planner. In addition to providing referrals, mortgage specialists can alert advisors to investment and tax-favored techniques they may not be familiar with.

“Few people in this industry advise clients on mortgage-related strategies,” says Pearson. “Whether were talking about charitable-remainder trusts, private annuities, trust planning or accessing equity tax-free, the average advisor is not getting hands-on experience with these techniques.”

Adds Nicholas: “Its crucial that mortgage planners participate in real estate-related planning if the advisor doesnt have that expertise.
Advisors would be foolish to ignore that part of the clients portfolio.”


Reproduced from National Underwriter Edition, August 12, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.