Volume 13, Issue 1


Financial Aid FOR COLLEGE

If you or your children are considering college, you may be wondering how you will pay the challenging costs of education. For many families, tuition may be covered by a financial aid package. This often includes grants, scholarships, loans, or work-study placements. Aid is primarily based on the family's need. If it is determined that you are able to afford the cost of college, your quest for assistance is going to be difficult, but not impossible.

Forms must be filled out in order to ascertain if you qualify for aid. If you want to get an idea of your eligibility before applying for aid, try using the following formula:

The Five Percent Test

Take 5% of the value of your total family assets (including home equity and savings), and add this figure to your adjusted gross income (AGI) from last year's tax return. Divide that result by the anticipated annual college expense. If the result is six or less, you may qualify for financial aid. If the final number is higher, you may have a difficult time convincing financial aid officers of your need.

No matter what you pre-judge your chances to be, you should still go through the application process. Many different factors enter into the final outcome. Public and private institutions alike offer varying amounts of aid, and you may be pleasantly surprised.

If you do not receive aid from your chosen institution, there are some other alternatives. The federal government, state governments, banks, insurance companies, and religious, ethnic, civic, and fraternal organizations are a few of the alternative sources for funds. The number of federal aid programs alone should be encouraging. Here are some of the most popular programs:

Pell Grants

Pell Grants are generally awarded to undergraduates based on need and family income qualifications. The size of the grant depends on program funding. The maximum award for the 2005–2006 award year was $4,050.

Supplemental Educational Opportunity Grants

Supplemental Educational Opportunity Grants (SEOGs) are earmarked for undergraduates who are in greater need than Pell Grant applicants. The federal government supplies this money, but individual colleges carry out the distribution of the funds. The availability of these grants may be limited depending on how much funding is allocated to a particular school. Annual grants range from $100 to $4,000.

Federal Perkins Loans

Federal Perkins Loans are generally available for students with exceptional financial needs. Factors that determine qualification for a Perkins Loan include (1) when the application is submitted, (2) a student's financial need, and (3) the funding level for the particular school. An eligible undergraduate student can borrow up to $4,000 per undergraduate year of study, not to exceed a total of $20,000. An eligible graduate student can borrow up to $6,000 per graduate year of study, not to exceed a total of $40,000. If the borrower is more than a half-time student, repayment begins nine months after the recipient graduates or leaves school. (These nine months are called the "grace period." Students who are attending school less than half time may have a shorter grace period.) Payments can be spaced over a maximum of ten years after the grace period expires.

Federal Work-Study Programs

Federal Work-Study Programs essentially provide an award in exchange for work. The jobs may be on or off campus, but they are generally with a government agency or non-profit organization if off campus (under some circumstances, a school may have arrangements with a private for-profit company). When possible, the jobs are related to the student's major. The pay is generally modest, but it is at least minimum wage. However, hours and compensation cannot exceed the Federal Work-Study award.

Direct Stafford Loans

Direct Stafford Loans are part of a federally insured, subsidized loan program that permits eligible students to borrow at favorable interest rates. These loans are typically arranged through private lenders, and the program offers four flexible loan repayment options.

PLUS Loans

Parents are eligible for a PLUS Loan if they pass a credit check. The amount of the loan is generally limited to the actual "cost of attendance" minus any financial aid already received. Parents taking this loan must begin repayment 60 days after the final loan disbursement for the academic year. Interest on PLUS loans will depend on the disbursement date.

Some states base their programs not only on need, but also on academic performance. The recipients of state loans generally must be legal residents of the state and enrolled in a college or university within their state. In addition, some states have "reciprocity agreements" with other states.

No matter how slight you believe your chances of receiving aid are, apply. You may qualify for more aid than you think. For more information about federal aid programs, visit the U.S. Department of Education's website dedicated to student aid at www.studentaid.ed.gov. 20/20

Benefit Trade-Offs in PROPERTY TITLING

A fairly common occurrence among married couples is the holding of most, if not all, of their property as tenants by the entirety. Quite often, couples are unaware of the alternative methods of titling, as well as some of the trade-offs involved in selecting a particular form of holding property.

There are four primary ways to hold property:

  1. In Your Own Name. Anyone may choose to own property in his or her own name. Owning property outright gives the owner complete control over the property, but such property is generally included in the owner's gross estate for estate tax purposes and will usually have to pass through the probate process.
  2. As Tenants in Common. This method allows two or more parties to own property together, with each owner maintaining the right to sell his or her interest without the consent of the other co-owners. Generally, such ownership interests must be bequeathed through a will and do not pass automatically to the co-owners at death. Consequently, such property typically will be subject to probate.
  3. As Joint Tenants. Also called joint tenancy with right of survivorship, this form of ownership provides each "tenant" with an undivided interest in the entire property. An owner may not sell without the consent of the other co-owners. If one owner should die, the surviving owners automatically inherit the decedent’s interest (i.e., the property passes "by law" and does not go through probate). Caveat: A creditor may force the sale of such held property to satisfy the debts of only one owner. Negligence, for example, may create potential liability exposure beyond the limits of currently held insurance policies.
  4. As Tenants by the Entirety. This is a special form of joint tenancy solely for married couples with one significant difference: The property cannot be sold to satisfy the debts of one of the owners.

Benefit Trade-Offs

Each form of property ownership has specific implications, and when using one particular method, the benefits gained must be balanced against the benefits lost.

Consider Simon and Ellen Howard (a hypothetical scenario) who have two college-aged children, Andrea and Jason. Life has been good to the Howards, and they have built an estate worth $4 million, with all of their assets jointly held as tenants by the entirety. (For the sake of simplicity, we will not consider retirement plan assets, which cannot be held jointly.)

While on vacation, the Howards are involved in a tragic fire. Simon dies instantly; Ellen lives for four days and then dies. In this unfortunate set of circumstances, what are the estate tax implications for their jointly held $4 million estate?

At Simon's death, his interest in all jointly held property automatically passes to Ellen free of federal estate taxes by virtue of the unlimited marital deduction. For the four intervening days that Ellen is alive, she is the sole owner of the previously joint $4 million estate. At her death, $2,000,000 of the estate would be offset by her $2,000,000 applicable exclusion amount in 2007.* Because all property was jointly held, Simon's $2,000,000 exclusion amount was lost. Failure to plan for using Simon's exemption ultimately decreased the amount passing to Andrea and Jason.

Had the Howards "equalized" their estate (i.e., each owned $2,000,000 outright), each could have set up a bypass trust with $2,000,000. In this example of nearly "simultaneous" death, the assets in Simon's bypass trust would pass to the children free of estate taxes (the $2,000,000 exemption offsets the assets in the trust). Since Simon died first, Ellen's bypass trust effectively terminates. When Ellen dies four days later, the assets that were in her bypass trust would also pass to the children free of estate taxes by using her $2,000,000 exemption. With equalized estates, $4 million in 2007 passes to the children free of federal estate taxes.

Now the "trade-off" may be more apparent. By owning their property as tenants by the entirety, the Howards achieved creditor protection (remember, for a husband and wife who title assets this way, a sale cannot be forced to satisfy one spouse's debts), but they also exposed their joint estate to the possibility of higher estate taxes. On the other hand, had they chosen to minimize estate taxes (Ellen and Simon each making use of their $2,000,000 exemption), the property that each held outright (or as tenants in common) might have been exposed to claims by creditors.

Consult and Assess

We have used the Howards to demonstrate one of the dilemmas of property ownership: If you want maximum estate tax reduction, you must usually sacrifice maximum creditor protection, and vice versa. How important is creditor protection? It depends. Unfortunately, there are no easy answers in this area of estate planning. However, examining the trade-offs involved in using various forms of property ownership may be a good first step toward developing a strategy that most benefits your family. In addition, be sure to check with your attorney for applicable state laws concerning methods of property titling. 20/20

*This amount is scheduled to rise gradually to $3,500,000 by 2009. In 2010, the federal estate tax will be repealed for one year and then reinstated in 2011 at levels in effect prior to passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

Leading-Edge Strategies FOR RETIREMENT

Everyone has specific expectations and dreams about retirement, but will your current plan meet your ultimate objectives? Today, more than ever, planning for retirement is a necessity. Preparation and follow-through can help you avoid shortfalls in meeting your income needs and help assure you of a smooth, secure transition from the world of work to the world of retirement.

Keeping Pace with Change

Planning ahead means setting goals and deciding how they will be met within the framework of a changing financial picture. Without proper planning, many retirees may be forced to manage with a lowered standard of living due to a lack of assets. In the absence of a solid financial foundation, you may be faced with some hard choices over the course of your retirement years. A successful financial strategy, carried out faithfully, has the potential to eliminate economic hardships and ensure that your retirement years are comfortable and secure.

As retirement approaches, there are some key points you should take into consideration in order to best position yourself for an enjoyable retirement:

  1. Stabilize Your Asset Base. Certainly, younger individuals may be able to afford taking greater risk with more aggressive strategies. As you approach retirement, it may be prudent to gradually shift your retirement assets to more conservative income-producing vehicles. An asset preservation strategy may be especially challenging for those who begin retirement planning later in life. In such situations, it is particularly important that your vehicles not exceed or under-exceed your personal risk tolerance.
  2. Increased Longevity Means Longer Retirement. With Americans' increased lifespans, it's not uncommon for retirement to last 20 years or more. Therefore, your retirement assets will need to generate income streams for that length of time, as well as withstand the potential eroding effects of inflation and market volatility. According to "Staying Ahead of the Curve 2003: The AARP Working in Retirement Study," seven out of ten workers plan to either never retire or work in retirement. Financial considerations were claimed as the primary reason (AARP, 2003).
  3. Your Retirement—First Class or Economy Class? Some individuals are under the impression that they will be able to live the same type of lifestyle they enjoyed during their working years, and some will. However, it's important to keep things in perspective. Retirement planning may enable you to avoid having to downscale living arrangements or trim expenditures in order to ensure your retirement assets will be sufficient.

Regardless of how close you are to retirement, it is important to plan ahead to reach your goals. Factors such as how much you have already accumulated and how far you are from your financial objectives should play a key role in determining your course of action. 20/20

The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel.
The information contained in this newsletter is for general use and it is not intended to cover all aspects of a particular matter. While we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and financial advice. The publisher is not engaged in rendering legal, accounting or financial advice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any securities. This newsletter is published by Liberty Publishing, Inc., Beverly, MA, COPYRIGHT 2007.