School Daze: Limiting Liabilities of College Students

By Kathleen Tierney COOChubb Personal Insurance Thinkadvisor.com

They’re off to college! Millions of teenagers are headed back to college or on their way there for the first time to develop the skills needed to lead productive lives. They’re on their own and, in their eyes, grown-up adults. If only.

We’ve all been teenagers, and some did risky things and survived. Not everyone survived, however. I thought about this after reading a sobering article in The New Yorker as summer drew to a close. It discussed the neuroscience of the unfinished adolescent brain. The bottom line: We’re not fully wired in our teen years, making us do things our adult selves would blanch at.

For example, we all have heard the stories about students who live off campus and host a liquor-fueled party where walls are punched in or someone is injured on the premises or in an automobile accident afterwards. The resulting consequence is often a lawsuit. In addition, when the parents are of significant means, such cases may unduly target them, based on the plaintiff attorney’s perceptions of their greater wealth and inclination to settle. By the time a case is settled, the full policy limits of all involved parties may be exhausted in the settlement.

I brought up this point during a recent luncheon I enjoyed in the company of Ashleigh Trent, personal insurance advisor at Swingle Collins & Associates, a Dallas-based insurance agency serving a high-net-wealth clientele. As Ashleigh put it, “You’re basically opening up your assets and net worth to your 18 year-old and their habits, putting your money in their hands and hoping they don’t do anything stupid.”

Is this something any parent in his or her right mind should do? Ashleigh emphatically stated the obvious answer—a resounding NO. Teenagers may be bound to do some stupid things, but parents can still be proactive in helping their children understand the risks.

Liability Concerns

It is understandable that college students serving alcohol at their shared rented premises to a guest who is injured or causes an injury would be vulnerable to a lawsuit.

For example, in one incident, an 18-year old college student threw a keg party at his leased off-campus housing with his college friends. Many attending the party were also under 21. Two people passing by the party got into a physical altercation with some of the partygoers who were sitting outside. As a result, the two passersby sustained serious injuries, and they ultimately sued their party-going assaulters, the homeowner, and all of the students listed on the rental agreement who hosted the party.

A person also can be sued for the injury even if he or she had nothing to do with the purchase of alcohol or had no involvement in hosting or attending the social event. As long as his or her name is on the rental agreement, the student and his or her parents are potentially liable. As a parent, make sure you are comfortable with all of your child’s roommates, including their parents, before the lease is signed.

Liability claims also may result from today’s sharing economy. “There are these get-rich-quick schemes where a wealthy student is given a luxury car as a graduation gift, and decides when away from home to rent it out for money—more for the prestige than the cash,” Ashleigh said. “What they fail to realize is that they are now engaging in a business transaction, and their automobile insurance has an exclusion for using the vehicle for commercial purposes.”

If the renter gets into a devastating car accident, the insurance is no longer a financial buffer for the child. Rather, his or her parents will potentially be on the hook now for a multi-million dollar uninsured lawsuit.

A similar scenario is possible if a student subleases his or her apartment to someone who inadvertently burns down the building. Many (but not all) renter insurance policies exclude the use of an apartment for income-based business purposes. In this case, the property damage costs are likely to be borne by the parents’ insurance.

Tough Talk

Now is the time for financial advisors to discuss these and other risk scenarios with clients who are the parents of college-bound students. Before the ink is dry on an off-campus apartment lease, parents should be counseled on the need to coach their children about their responsibilities as a tenant, including the rules of hosting a party.

Chief among them—limit the number of guests and do not serve alcohol unless everyone is of legal age. Even then, parents should remind their young adult children to collect keys when someone has had too much to drink or to not be afraid of calling the police if a party gets out of hand.

It is equally advisable for parents to become personally involved in inspecting a rental property before their kids move in. Many rentals near college campuses are in relatively poor condition, with rotting floorboards, a missing handrail or a leaky faucet.

Once the rental agreement is signed, take photographs of the premises to demonstrate its condition in the event a landlord alleges property damage in a lawsuit or a party guest falling down the stairs because of the missing banister files a bodily injury lawsuit.

Prior to children heading off to college, it is especially prudent for parents to schedule a sit-down with their insurance agents or brokers. Aside from imparting a fuller understanding of the singular property damage and liability risks, agents and brokers also can explain the intricacies of different insurance policies and coverages.

For instance, while most homeowners and renters insurance policies no longer exclude liquor liability, many policies (but not all) exclude coverage for adults who knowingly provide alcohol to underage drinkers and drivers.

“Say the student is a 21 year-old college senior, and he invites several freshmen and sophomores to a party at which alcohol is served,” Ashleigh noted. “If the student is aware of the guests’ age and does nothing to prevent the supply of alcohol to them, this is strictly excluded from some policies.”

Parents need to do more than discuss with their college-age children the responsibilities they are now assuming. “They’re adolescents—they tend to hear only what they want to hear,” Ashleigh said, with a knowing grin. “My advice is for parents to take charge of the situation and buy separate personal liability insurance policies for their away-from-home children. This way if something goes wrong, the first line of defense would be the child’s policy.”

Another smart idea is to provide college-age kids with an umbrella liability policy that extends the limits of financial protection in their underlying homeowners, renters and automobile insurance policies. Most (but not all) such policies provide no more than $500,000 in financial limits. “The goal is to push off as much liability as possible onto the child’s policies, reducing the possibility that the parents will be called into a lawsuit,” Ashleigh said.

As backup, parents should consider increasing the financial limits of their own policies as well. When the kids have graduated and their brains reach fully wired status, the extra precautions can fade. Thankfully, we’re all young once.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Bequeathing 401(k)s, IRAs

by Jason Lina,  August 27, 2015 AdviceIQ.com

Think your estate plan is good to go right after you die, setting your heirs up for life? Depends: Many assets in your plan, such as your 401(k) and individual retirement accounts, must designate beneficiaries for any inheritance. Rules for specifying such heirs can be tricky and here are 11 common mistakes.

1. No one named. Perhaps your worst possible mistake is assuming that your other estate documents cover retirement account distribution and you name no beneficiaries for these assets. In such a case, a state probate court appoints beneficiaries – which might produce unintended distributions as well as unnecessary legal costs.

2. Your estate or last will and testament as beneficiary. Regardless of how well drafted your will, naming that document or your estate equates to not naming a beneficiary. When your retirement account goes through the estate, it also becomes subject to creditors’ claims.

3. Minors. Laws prohibit children younger than 18 or 21, depending on your state, from owning property of any kind in their own name. IRA and 401(k) custodians who oversee your accounts are similarly prohibited from dealing with minors.

Naming a minor creates two potential problems. First, the court must appoint a guardian to handle the retirement accounts until the child reaches legal age, again potentially with unintended distributions and unnecessary legal costs.

Second, the minor beneficiary obtains outright ownership of the retirement account when he or she reaches the age of majority. Though for small accounts this may be insignificant, if you accumulated a healthy six- or seven-figure nest egg in your plan, making these funds immediately available to a child at age 18 without constraints can spark a lot of problems for that that young person.

4. College age. A child who has reached the age of maturity can legally inherit an IRA. Yet the early 20s can likewise be dangerous time to receive a whopping inheritance. Those heirs typically blow an inheritance within 18 months – sometimes picking up a host of other serious behavior problems along the way – motivates many parents to use a trust to distribute large inheritances over time to young adults.

5. Former spouse. Let’s say you’re a woman who set up a retirement plan 25 years ago and named your then-husband beneficiary. Without a change, your quarter century of savings now goes to your ex-husband no matter what your new will says.

6. No contingent. Suppose a husband and wife name each other as primary beneficiary when opening a retirement account but never name contingent beneficiaries. If both spouses die simultaneously, the Uniform Simultaneous Death Act decrees that the beneficiary is the spouse who died first. Without a living primary or any contingent beneficiaries, this again becomes the equivalent of naming no beneficiaries.

7. Special needs individual. Leaving IRA assets to a special needs family member or friend who already receives needs-based government benefits might cause the individual to lose these benefits.

A better approach: Create a special needs trust (aka a supplemental needs trust) and name that trust as beneficiary. The trust assets can then supplement, rather than eliminate, government benefits.

8. Not naming a trust. A 2014 Supreme Court ruling found that inherited IRAs, unlike IRAs that you establish and fund on your own, are not protected from creditors in bankruptcy. A properly drafted trust as a beneficiary can work if you hold large IRA balances and you worry about protecting your inheritors’ new assets.

9. A generic trust. A look-through, or see-through, trust is named the beneficiary of a retirement account, which then go to the trust’s beneficiaries. A beneficiary trust that fails to qualify as a look-through trust meeting four criteria in the Internal Revenue Code creates several possible problems.

For example, trusts may fail to qualify as look-through if the oldest beneficiary of the trust is unidentifiable; boilerplate trust language provides power of appointment to the beneficiary to distribute assets to third parties, or the trust names a charity as one of the beneficiaries.

If not qualifying for look-through treatment, the trust faces the same distribution schedule as if you name no beneficiary.

10. A charity as beneficiary for a Roth account. When you contribute to a Roth account or convert assets in a traditional IRA or 401(k) to a Roth account, you essentially pay taxes on your income today to avoid taxes in the future. Leaving Roth assets to a 501(c)3 charity or nonprofit that pays no taxes gets you no future tax break.

The better solution in this case is to leave other assets to the intended charities or not convert or contribute to the Roth in the first place.

11. Elderly parents. If you have no children, you might be tempted to name your parents as primary beneficiaries and your siblings as contingents. The problem: The Internal Revenue Service bases required minimum distributions (RMDs) – mandating periodic withdrawals from a retirement plan – on the age of the initial beneficiary.

Naming your 90-year-old parent (or any elderly person) as primary beneficiary destroys most tax benefits of the retirement account because the IRS forces RMDs over less time: the older the beneficiary, the shorter the period.

Review your designations regularly and check with your financial planner or estate attorney to decide on any needed changes.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


3 Most Effective Retirement Strategies

By Scott Gamm  Mainstree.com  August 27, 2015

NEW YORK (MainStreet) – The whiplash seen in stocks over the last week means your retirement savings strategy needs a little extra care. If you’re still searching for a strategy or the markets meltdown makes you a wary of your current plan, here are three ways to bulletproof your retirement savings:

1. Dollar Cost Averaging

Dollar cost averaging is a classic technique. It simply involves contributing a fixed amount of money into a retirement account. When stocks rise, so does your wealth. But when stocks drop, your money is able to scoop up more shares for less. ”You get different bites at the market at different prices,” said Tom Mingone of New York-based Capital Management Group. You may not have a lump sum of money to throw into the markets, but you may have a few hundred dollars each month to invest. ”Plus, most people suffer from inertia, and with dollar cost averaging, your investments are on autopilot and before you know it, the money you’re investing becomes another bill that you’re used to paying,” Mingone added.

If you have a 401(k) account, chances are you’re already employing dollar cost averaging. ”Most have a 401(k) plan through an employer that invests on a consistent basis,” said Grant Engelbart, portfolio manager at CLS Investments based in Omaha, Neb. But Engelbart said fixed monthly amounts of money can also be contributed each month to a Roth or Traditional IRA, which you may also have in addition to a 401(k). “Sticking with that investment plan will ensure that you are both taking advantage of market selloffs and participating in strong, trending markets,” he added.

2. Target-Date Funds

Albeit generic, target-date funds account for one key part of any retirement investing plan: time. Target-date funds start out heavily exposed to stocks and as you near retirement, the balance shifts to bonds, which are considered safer and less volatile than equities. The thinking is, as you near retirement, you have less time to recoup potential losses in the stock market. But not all target-date funds are created equal. If you’re buying target-date funds on your own, make sure you know what the balance between stocks and bonds is, especially as you get older.

“Some target date funds have more exposure to equities than others – to hedge against inflation,” Mingone said. “So you could be in your 60s and have a pretty significant exposure to stocks, which might be concerning to some people.” He said it wouldn’t be out of the ordinary to have a 50% to 60% exposure to stocks while you’re in retirement. This is because people are living longer and calibrating your investments until age 65 (or whenever you stop working and enter retirement) may not be plausible if you live until 85 or 90. “We like when people invest during their retirement, so they ensure they don’t outlive their money,” Mingone added. A caveat with target date funds: interest rates. Interest rates have been at record low levels since the recession but are bound to rise again. Higher rates threaten bond values, as rates and prices move in opposite directions.

3. Keeping Up With Costs

A guarantee is a good thing – especially in retirement. Instead of relying on the interest generated from the principal of your investment portfolio, try to fund your monthly expenses from as much guaranteed income as possible. This could be from Social Security or a pension – sources that don’t drop in value should the stock market crash. But with fears social security is running on empty and pensions hard to come by these days, there is a way to keep your income afloat, even if stocks drop.

“If you own bonds that don’t default and dividend stocks that pay income, even if a stock loses 30% of its value, you’re still upset, but it won’t change how you’re living in that moment in time,” said Rick Salus, senior vice president and investment officer at St. Louis-based Wells Fargo Advisors. Companies like utility Southern Company and Kimberly Clark actually raised its dividends during the 2008 recession, a time of unprecedented volatility and uncertainty.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Why Clients Fail At Retirement

By Evan Simonoff  June 1, 2015 Financial Advisor.com

Financial advisors can spend decades working with clients to craft a retirement plan that, on the surface, appears bulletproof from the standpoint of investments, retirement income and asset-liability management only to see it fall apart in short order. The fact is it happens a lot more frequently than many advisors want to admit.

Reality is that advisors don’t control financial markets, or clients’ savings and spending habits, much less the interpersonal dynamics of individuals’ lives. So all advisors can do is help make clients aware of the numerous pitfalls they face when their life faces the radical transformation to a post-work era. Honest conversations about why clients fail in retirement aren’t always comfortable. But it is one that Greg Sullivan, CEO of Sullivan, Bruyette, Speros & Blayney, has with prospects even before they become clients.

If an advisor asks a client or prospect why they think most mass affluent Americans fail in retirement, Sullivan finds they’ll typically say it is investment performance. In 34 years as a financial advisor, he has seen many people flunk retirement, but investment performance has never been the cause. So what are the reasons well-off clients lose financial independence after entering their golden years? Sullivan likes to tell them “it’s the things you own or maintain responsibility for that are over 50 pounds that constantly need to be fed.”

Cats and dogs of reasonable size are fine. It’s the adult children and big animals that Sullivan cites as cash drains. His home state of Virginia is populated with horse farms. “Horses are worse than kids,” Sullivan quips.

The first topic Sullivan raises with prospects is divorce. That’s not a pleasant thing to tell a couple in their 40s or 50s whom you’ve met once and hope will pay you fees for decades to come.

Sullivan does it in a way that lets the prospect know he isn’t making any judgment about their marriage. “I just put it on the table,” he says. “If it happens, it will disrupt your financial independence and change your lifestyle.”

The reality is that divorce among Americans over 50 years old has been rising for several decades, doubling between 1990 and 2010. According to an article dubbed “The Gray Divorce Revolution” by Bowling Green University sociologists Susan Brown and I-Fen Lin, roughly one in four divorces in 2010 occurred among couples over 50.

One conclusion of their article was that one divorce tends to breed more divorces. Why? Because the rate of divorce is 2.5 times higher among remarried couples.

As life expectancies increase, the trend is likely to continue. The explanations vary. Children have grown up and are no longer around to mask dysfunctional relationships. Baby boomers in search of meaning tell themselves there has to be more to life than this. Over time, many people simply change and grow apart.

Sullivan’s clients typically have $3 million to $4 million in assets, placing them near the upper end of America’s mass affluent. That’s enough for a comfortable retirement in most people’s book, but when the assets are split along 50/50 lines and living expenses are increased, it’s no longer the cruise either spouse signed up for.

Like so many challenges that surface in retirement, divorce is often symptomatic of two people finding it difficult to make a major lifestyle transition together. “It can be his vision versus her vision,” says Mitch Anthony, author of The New Retirementality and a columnist for Financial Advisor.

Both couples and individuals need to find a balance between vocation and vacation, personal renewal and connecting with others. “Couples may agree on two of the four so they need to resolve the other two,” Anthony says.

Second Homes
For many affluent clients, a separate vacation home represents the fulfillment of the American dream. If it is close enough to their primary residence, it’s a getaway place to go on weekends. If it’s further away like Florida, it’s a future retirement home and winter escape haven.

But in clients’ eyes, it’s almost always a good investment. They rarely consider the problems likely to arise.

Most popular places for second homes tend to be located in nice areas, often near water or mountains. From Florida to Maine, these properties are particularly vulnerable to hurricanes and other natural disasters. In California, one can add brush fires to the list. After inevitable disasters occur, the scramble for home insurance becomes an expensive obstacle course.

For a client still working and earning between $150,000 and $400,000, buying a second home after they have paid off the mortgage on their primary residence doesn’t seem like that serious a stretch. Once upon a time, accountants would recommend it; now tax deductions on second homes no long exist.

Still, buying that dream vacation home is a situation many advisors typically confront when clients reach their peak earning years prior to retirement, notes Karen Salvatore, principal with Shine Investment Advisory Services in Lone Tree, Colo. “They don’t understand the impact of maintaining two homes when they have smaller cash flows [in retirement],” she says.

Once a client retires and their income drops to the $70,000 to $120,000 area, upkeep and maintenance on two homes—even if a mortgage on the first home is paid off—can quickly assume an outsized position in their spending. “In many cases, an all-cash [purchase of a second home] could be ideal, but that takes a great deal of capital relative to their resources and may not be an option,” Salvatore says.

And when a downturn in the real estate market occurs, second homes in vacation areas typically become even more illiquid than other real estate markets. “Renting can become a necessity,” Salvatore notes.

According to Sullivan, the problems can become magnified for more affluent clients who earn annual incomes in the high six-figures—for several reasons. First, they are likely to buy more expensive second homes. Moreover, while they are working and making $900,000 a year, they are far less likely to scrutinize their spending, so when the paycheck stops the falloff in income can be much more dramatic.

Adult Children With No Shame
Many advisors say this problem dwarfs all others. Some children never grow up to become independent, even when they are far into adulthood. Jonathan Pond, who runs an eponymous RIA firm in Watertown, Mass., has often considered penning a generic letter entitled “Have You No Shame?” to send to certain clients’ offspring.

More than a few of his clients are “getting sucked dry by children who couldn’t care less,” Pond says. “I’ve been seeing it for 40 years.”

Pond is not talking about a grandparent who picks up her grandchildren’s tuition for a semester or two when the child loses a job.  The problem, as he sees it, is that there can be a very thin line at first when “something to help a son or daughter through a rough patch” eventually “becomes an annuity.”

Part of the problem can be traced to the fact that the child probably was overindulged from the start. Pond says he has told clients to tell their children “to go on welfare” or the parents will end up in public housing.

One example Pond cites is that of a retired client whose assets were down to $1.5 million even though they were spending a modest $60,000 annually right in line with the 4% rule. He finally told the father to ask his son, a 60-year-old with a doctorate, to prepare an annual budget of what he needed. When the aging Ph.D. finished his assignment, his own budget came to $110,000 a year, almost double Dad’s.

Compounding the issue is the fact that parents can often be embarrassed about unsuccessful offspring and refuse to address the problem. Spending dynamics, especially with children, is an “emotional minefield,” says Mark Balasa, partner with Balasa Dinverno & Foltz in Itasca, Ill. When the client doesn’t have the money, it should be the “end of the discussion,” Balasa argues. If the client does have the money, then it becomes “all about choices.”

Intra-family issues frequently surface after a family patriarch, often an alpha male and a control freak, dies, and “dear sweet Mom” is left to manage family financial affairs with which she has little familiarity, according to Dan Moisand, a principal with Moisand Fitzgerald Tamayo in Melbourne, Fla. It’s commonplace for children to think, “Mom has more money than she’ll ever need,” when that may or may not be the case, Moisand says. If one sibling wants to start a business and make an investment, she is probably the first place he will turn.

In some cases, the grown up child’s action rises to the level of outright malice. Moisand says he has seen too many cases of adult children convincing a frail parent to take money out of an account on their behalf, and, if the parent is cognitively impaired, she may forget about it.

Starting A Business
Retaining some form of meaningful engagement and having a sense of purpose is critical to enjoying retirement. Many high-powered former business executives and professionals still need some semblance of a structure in their lives.

“Men, in particular, can go stir-crazy,” says Mitch Anthony. Earlier this year, Anthony found himself talking with a 75-year-old ex-CEO who had been retired less than a year and was re-entering the job market for reasons of mental health.

But today’s Darwinian labor market isn’t inclined to roll out the red carpet for folks in their 70s. That helps explain why both entrepreneurs and retired executives with substantial means who always had an entrepreneurial itch find the temptation to start a business irresistible.

If a client can get a new company up and running without a substantial capital commitment, most advisors will applaud them. But according to Salvatore, finding consulting work or engaging in some type of service work that doesn’t force them to dip into their capital is usually preferable.

Balasa recalls that in 2009 a number of clients viewed the devastated real estate market as an obvious opportunity to make a killing. Real estate requires capital and expertise. Many giant investors with deep pockets, invaluable connections and access to capital like Blackstone had the exact same idea and numerous advantages.

The post-recession experience of Balasa’s clients as real estate investors varied. Some lost serious amounts of money, while others treaded water or eked out marginal gains. But none earned what they would have if the funds had remained in their portfolios.

Health Care
Perhaps the biggest wild card is health care. Clients can look to their parents and analyze their genes to get an indication of problems they may face.

On this front, there is actually a lot of positive news. Breakthroughs in biotechnology and immunotherapy are slowly turning some fatal diseases into chronic conditions that can be managed.

But the costs of new treatments are going right through the roof at the same time as Medicare is likely to cover less than it once did. This year, Medicare Part B premiums are expected to rise 30% for beneficiaries earning more than $133,000. Going forward, less affluent folks over 65 years of age may find themselves forced to share the burden.

Of equal importance is not just a client’s longevity but her quality of life as well. Here again, it’s a bit of a crapshoot. Pond, who numbers many physicians at Massachusetts General Hospital in Boston among his clients, finds that clients who become ill in their 70s and 80s often have more strength and fight in their system. In contrast, those in their 90s are more likely to succumb fairly quickly—and less expensively.

Overspending Assets
Most clients with more than $1 million never imagined they would have that kind of money when they were young adults. All sorts of rules for retirement spending exist, from Bill Bengen’s 4% rule to the old saw that retirees need to replace 80% of their pre-retirement income to maintain a comfortable lifestyle.

For many individuals, these rules are unrealistic. “I don’t have a single client who spends less in retirement than before,” says Linda Lubitz Boone, who runs the Lubitz Financial Group in Miami. “There is more time to spend at the mall and people spend money in retirement to replace happiness.”

Advisors say it’s understandable for new retirees to live large in the first year or two after they leave the workforce.  Pond says he budgets excess funds for that first year when a client will want to take their dream vacation, remodel the house or do something else that is special. The problem is that the overspending habit is very hard to break. “Once you set a certain spending level in retirement, it is very hard to reduce it later,” Pond notes.

Sullivan has encountered this phenomenon even among clients with very substantial assets. When you think you are rich, and you are, it’s easy to outspend one’s assets.
Wealthy clients often are charitably inclined and, coming out of the brutal 2008-2009 recession, there were no shortages of charities needing help in most communities. There is no reason for any client not to engage in philanthropy, as long as they stay within their means.

“They get so much in the way of accolades that they get a rush from it,” Sullivan says. Fortunately for affluent clients, this is often an area where a spouse can step in. For the less affluent with limited resources, reverse mortgages are an option. And more leading financial advisors are recommending fixed annuities to clients with several million in assets so they receive steady predictable income and don’t have to worry about selling assets on a regular basis to cover expenses.

Swindled By Elder Fraud
Never before in history have there been so many people over 60 years old with so much money. The majority may not have enough money, but the surge in senior fraud is becoming a national epidemic.

A survey of 2,600 financial advisors conducted in August 2012 by the CFP Board of Standards estimated that the average senior victim of financial abuse lost an average of $140,500. Scamsters disguise “educational presentations” to offer sweepstakes, cash prizes, free meals where they often tout unsuitable investment products.

These vehicles range from high-yielding, “guaranteed” investments that fail to deliver to legitimate products that are simply inappropriate for the specific person. For example, there may be many legitimate reasons to buy a variable annuity, but not if the client is in his 90s.

Sadly, the CFP Board survey found that 20% of advisors surveyed said they knew seniors who had been exploited by a guardian or power of attorney. If that were not enough, 35% of advisors told the CFP Board that at least one of the incidents of senior abuse they encountered was the work of someone the victim knew. In Sullivan’s limited experience, it tends to be a family member in difficult financial straits.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®