Business Succession Planning

Business Succession Planning

When developing a succession plan for your

business, you must make many decisions. Should you sell your business or give it away? Should you structure your plan to go into effect during your lifetime or at your death? Should you transfer your ownership interest to family members, co-owners,

employees, or an outside party? The key is to pick the best plan for your circumstances and objectives, and to seek help from financial and legal advisors to carry out this plan.

A business plan can be your guide to growth

A Business Plan Can Be Your Guide to Growth

Whether you're a current business owner or a

budding entrepreneur burning with the next great

idea, one of the most important steps you can take on your road to success is creating a business plan. Why? A well-thought-out and well-written business plan captures your vision, illustrates it for others (including potential lenders and investors), and

creates the roadmap you and your management team need to guide you through the growth of your business. Consider the following points:

Are you suddenly on your own or forced to assume greater responsibility for your financial future? Unsure about whether you're on the right track with your savings and investments? Finding yourself with new responsibilities, such as the care of a child or an aging parent? Facing other life events, such as marriage, divorce, the sale of a family business, or a career change? Too busy to become a financial expert but needing to make sure your assets are being managed appropriately? Or maybe you simply feel your assets could be invested or protected better than they are now.

These are only some of the many circumstances that prompt people to contact someone who can help them address their financial questions and issues. This may be especially true for women, who live longer than men on average and therefore may face an even greater challenge in making their assets last over that longer life span. In fact, one study found that women often value advice from a professional in their financial decision-making even more than men do.*

Why work with a financial professional?

• A financial professional can apply his or her skills to your specific needs. Just as important, you have someone who can answer questions about things that you may find confusing or anxiety-provoking. When the financial markets go through one of their periodic downturns, having someone you can turn to may help you make sense of it all.
• If you don't feel confident about your knowledge of investing or specific financial products and services, having someone who monitors the financial markets every day can be helpful. After all, if you hire people to do things like cut your hair, work on your car, and tend to medical issues, it might just make sense to get some help when dealing with important financial issues.
• Even if you have the knowledge and ability to manage your own finances, the financial world grows more intricate every day as new products and services are introduced. Also, legislative changes can have a substantial impact on your investment and tax planning strategy. A professional can monitor such developments on an ongoing basis and assess how they might affect your portfolio.
• A financial professional may be able to help you see the big picture and make sure the various aspects of your financial life are integrated in a way that makes sense for you. That can be especially important if you own your own business or have complex tax issues.
• If you already have a financial plan, a financial professional can act as a sounding board, giving you a reality check to make sure your assumptions and expectations are realistic. For example, if you've been investing far more conservatively than is appropriate for your goals and circumstances, either out of fear of making a mistake or from not being aware of how risks can be managed, a financial professional can help you assess whether and how your portfolio might need adjusting to improve your chances of reaching those goals.

When should you consult a professional?

You don't have to wait until an event occurs before consulting a financial professional. Having someone help you develop an overall strategy for approaching your financial goals can be useful at any time. However, in some cases, a specific life event or perceived need can serve as a catalyst for seeking advice. Such events might include:

• Marriage, divorce, or the death of a spouse
• Having a baby or adopting a child
• Planning for a child's or grandchild's college education
• Buying or selling a family business
• Changing jobs or careers
• Planning your retirement
• Developing an estate plan
• Receiving an inheritance or financial windfall

Making the most of a professional's expertise

• You'll need to understand how a financial professional is compensated for his or her services. Some receive a fee based on an hourly rate (usually for specific advice or a financial plan), or on a percentage of your portfolio's assets and/or income. Some receive a commission from a third party for any products you may purchase. Still others may receive some combination of fees and commissions, while still others may simply receive a salary from their financial services employer. Don't be reluctant to ask about fees; any reputable financial professional shouldn't hesitate to explain how he or she is compensated.
• Even if you're a relative novice when it comes to finances, don't be afraid to ask questions if you don't understand what's being presented to you. You're not being rude; you're simply trying to prevent misunderstandings that could backfire later.
• Don't let yourself be pressured into making a financial decision you're not comfortable with or don't understand. This is your money, and you have the right to take whatever time you need. However, give yourself a deadline for your decision so you don't get caught in "analysis paralysis."
• If you think your financial life simply needs a checkup rather than a complete overhaul, you'll need to clarify the areas in which you're looking for assistance. That can help you decide what type of advice you're looking for from your financial professional, though you should also pay attention to any additional suggestions raised during your discussions. Your plans should take into consideration your financial goals, your time horizon for achieving each one, your current financial and emotional ability to tolerate risk, and any recent changes in your circumstances.
• Don't assume you have to be wealthy to make use of a financial professional. While some do focus on clients with assets above a certain level, others do not.
• Think about the scope of the services you'll need. Do you want comprehensive help in a variety of areas, or would you be better off assembling a team of specialists? Do you need an ongoing relationship, or can your needs be taken care of on a one-time basis? If you're a relative novice or having to deal with decisions you've never had to make before, someone with broad-based expertise might be a good place to start.
• Even if you feel you need detailed advice from several different specialists--for example, if you own your own business--consider whether you might benefit from having someone who can coordinate among them. A financial professional can sometimes be a gateway to other professionals who can help with specific aspects of your finances, such as accounting, tax and/or estate planning, insurance, and investments.
• If you want comprehensive management, you may be able to give a financial professional the independent authority to make trading decisions for your portfolio without checking with you first. In that case, you'll likely be asked to help develop and sign an investment policy statement that spells out the specifics of the firm's decision-making authority and the guidelines to be followed when making those decisions.

Getting Help from a Financial Professional Are you suddenly on your own or forced to assume greater responsibility for your financial future? Unsure about whether you're on the right track with your savings and investments? Finding yourself with new responsibilities, such as the care of a child or an aging parent? Facing other life events, such as marriage, divorce, the sale of a family business, or a career change? Too busy to become a financial expert but needing to make sure your assets are being managed appropriately? Or maybe you simply feel your assets could be invested or protected better than they are now. These are only some of the many circumstances that prompt people to contact someone who can help them address their financial questions and issues. This may be especially true for women, who live longer than men on average and therefore may face an even greater challenge in making their assets last over that longer life span. In fact, one study found that women often value advice from a professional in their financial decision-making even more than men do.* Why work with a financial professional? A financial professional can apply his or her skills to your specific needs. Just as important, you have someone who can answer questions about things that you may find confusing or anxiety-provoking. When the financial markets go through one of their periodic downturns, having someone you can turn to may help you make sense of it all. If you don't feel confident about your knowledge of investing or specific financial products and services, having someone who monitors the financial markets every day can be helpful. After all, if you hire people to do things like cut your hair, work on your car, and tend to medical issues, it might just make sense to get some help when dealing with important financial issues. Even if you have the knowledge and ability to manage your own finances, the financial world grows more intricate every day as new products and services are introduced. Also, legislative changes can have a substantial impact on your investment and tax planning strategy. A professional can monitor such developments on an ongoing basis and assess how they might affect your portfolio. A financial professional may be able to help you see the big picture and make sure the various aspects of your financial life are integrated in a way that makes sense for you. That can be especially important if you own your own business or have complex tax issues. If you already have a financial plan, a financial professional can act as a sounding board, giving you a reality check to make sure your assumptions and expectations are realistic. For example, if you've been investing far more conservatively than is appropriate for your goals and circumstances, either out of fear of making a mistake or from not being aware of how risks can be managed, a financial professional can help you assess whether and how your portfolio might need adjusting to improve your chances of reaching those goals. When should you consult a professional? You don't have to wait until an event occurs before consulting a financial professional. Having someone help you develop an overall strategy for approaching your financial goals can be useful at any time. However, in some cases, a specific life event or perceived need can serve as a catalyst for seeking advice. Such events might include: Marriage, divorce, or the death of a spouse Having a baby or adopting a child Planning for a child's or grandchild's college education Buying or selling a family business Changing jobs or careers Planning your retirement Developing an estate plan Receiving an inheritance or financial windfall Making the most of a professional's expertise You'll need to understand how a financial professional is compensated for his or her services. Some receive a fee based on an hourly rate (usually for specific advice or a financial plan), or on a percentage of your portfolio's assets and/or income. Some receive a commission from a third party for any products you may purchase. Still others may receive some combination of fees and commissions, while still others may simply receive a salary from their financial services employer. Don't be reluctant to ask about fees; any reputable financial professional shouldn't hesitate to explain how he or she is compensated. Even if you're a relative novice when it comes to finances, don't be afraid to ask questions if you don't understand what's being presented to you. You're not being rude; you're simply trying to prevent misunderstandings that could backfire later. Don't let yourself be pressured into making a financial decision you're not comfortable with or don't understand. This is your money, and you have the right to take whatever time you need. However, give yourself a deadline for your decision so you don't get caught in "analysis paralysis." If you think your financial life simply needs a checkup rather than a complete overhaul, you'll need to clarify the areas in which you're looking for assistance. That can help you decide what type of advice you're looking for from your financial professional, though you should also pay attention to any additional suggestions raised during your discussions. Your plans should take into consideration your financial goals, your time horizon for achieving each one, your current financial and emotional ability to tolerate risk, and any recent changes in your circumstances. Don't assume you have to be wealthy to make use of a financial professional. While some do focus on clients with assets above a certain level, others do not. Think about the scope of the services you'll need. Do you want comprehensive help in a variety of areas, or would you be better off assembling a team of specialists? Do you need an ongoing relationship, or can your needs be taken care of on a one-time basis? If you're a relative novice or having to deal with decisions you've never had to make before, someone with broad-based expertise might be a good place to start. Even if you feel you need detailed advice from several different specialists--for example, if you own your own business--consider whether you might benefit from having someone who can coordinate among them. A financial professional can sometimes be a gateway to other professionals who can help with specific aspects of your finances, such as accounting, tax and/or estate planning, insurance, and investments. If you want comprehensive management, you may be able to give a financial professional the independent authority to make trading decisions for your portfolio without checking with you first. In that case, you'll likely be asked to help develop and sign an investment policy statement that spells out the specifics of the firm's decision-making authority and the guidelines to be followed when making those decisions. If you feel that consulting an expert might be helpful, don't postpone making that call. The sooner you get your questions answered, the sooner you'll be able to pay more attention to the things--family, friends, career, hobbies--that an organized financial life could help you enjoy. *June 2014 study of affluent individuals conducted by Spectrem Group, a research/consulting firm focused on the affluent and retirement markets. IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Every Small Business Start Up Needs a Plan – Jasmyn Nakata

The Entrepreneurial Spirit Still Needs a Business Blueprint

The private sector generates the majority of jobs in America. Within the private sector, small business contributes significantly to job creation and is recognized as the economic engine that drives commerce in America. Thousands of business start ups occur every month, but many of them close their doors before their first year in business. Many times, the entrepreneurial spirit is willing, but the lack of a business plan weakens the potential for success.

Rarely do you find a business plan among passionate entrepreneurs. Many first-time business owners have the emotional energy needed to lift their burgeoning business off the ground. They generally display what can only be described as parental feelings toward their enterprise, very much like the affection shown a child. But like a new parent, their child didn’t come with a manual. Without a business plan, the odds are stacked against success and staying power.

One of the new approaches to business planning is defining its future sale, basically reversing engineering of the plan from that point back to its inception. It’s a unique methodology that drives current corporate goals, strategies and tactics to the ultimate target in the future. One differentiating characteristic of this plan is its frequent accountability assessments, basically an inherent surveillance system with hard benchmarks to measure goal achievement along the way. Without accountability and consequence, a plan has no teeth to it nor does it have built-in reward mechanisms to recognize personal performance and corporate success.

It’s like an architect who designs a blueprint to be used in the purchase order of the building materials and orchestrating the various stages of construction. It’s often in these early planning stages that the corporate entity is identified, i.e., C- Corp, S – Corp, LLC or Partnership. Selecting the right entity to incorporate your business may also have favorable tax advantages that should be investigated, not only at the corporate level, but also for the personal benefit of the owner(s).

Business planning, especially for the succession of the business, is a very complex discipline and will generally require the efforts of more than one professional. Selecting the right members of the team at the conception of the business can pay off big at its sale.

Syndicated financial columnist and talk show host Steve Savant interviews Jasmyn Nakata, co-business owner and entrepreneur on business planning strategies. Right on the Money is a weekly one-hour financial talk show for consumers.

Women and Money: Taking Control of Your Finances

As a woman, you have financial needs that are unique to your situation in life. Perhaps you would like to buy your first home. Maybe you need to start saving for your child's college education. Or you might be concerned about planning for retirement. Whatever your circumstances may be, it's important to have a clear understanding of your overall financial position.                                                                                                 

That means constructing and implementing a plan. With a financial plan in place, you'll be better able to focus on your financial goals and understand what it will take to reach them. The three main steps in creating and implementing an effective financial plan involve:

• Developing a clear picture of your current financial situation
• Setting and prioritizing financial goals and time frames
• Implementing appropriate saving and investment strategies

Developing a clear picture of your current financial situation

The first step to creating and implementing a financial plan is to develop a clear picture of your current financial situation. If you don't already have one, consider establishing a budget or a spending plan. Creating a budget requires you to:

• Identify your current monthly income and expenses
• Evaluate your spending habits
• Monitor your overall spending

To develop a budget, you'll need to identify your current monthly income and expenses. Start out by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support.

Next, add up all of your expenses. If it makes it easier, you can divide your expenses into two categories: fixed and discretionary. Fixed expenses include things that are necessities, such as housing, food, transportation, and clothing. Discretionary expenses include things like entertainment, vacations, and hobbies. You'll want to be sure to include out-of-pattern expenses (e.g., holiday gifts, car maintenance) in your budget as well.

To help you stay on track with your budget:

• Get in the habit of saving--try to make budgeting a part of your daily routine
• Build occasional rewards into your budget
• Examine your budget regularly and adjust/make changes as needed

Setting and prioritizing financial goals

The second step to creating and implementing a financial plan is to set and prioritize financial goals. Start out by making a list of things that you would like to achieve. It may help to separate the list into two parts: short-term financial goals and long-term financial goals.

Short-term goals may include making sure that your cash reserve is adequately funded or paying off outstanding credit card debt. As for long-term goals, you can ask yourself: Would you like to purchase a new home? Do you want to retire early? Would you like to start saving for your child's college education?

Once you have established your financial goals, you'll want to prioritize them. Setting priorities is important, since it may not be possible for you to pursue all of your goals at once. You will have to decide which of your financial goals are most important to you (e.g., sending your child to college) and which goals you may have to place on the back burner (e.g., the beachfront vacation home you've always wanted).

Implementing saving and investment strategies

After you have determined your financial goals, you'll want to know how much it will take to fund each goal. And if you've already started saving towards a goal, you'll want to know how much further you'll need to go.

Next, you can focus on implementing appropriate investment strategies. To help determine which investments are suitable for your financial goals, you should ask yourself the following questions:

• What is my time horizon?
• What is my emotional and financial tolerance for investment risk?
• What are my liquidity needs?

Once you've answered these questions, you'll be able to tailor your investments to help you target specific financial goals, such as retirement, education, a large purchase (e.g., home or car), starting a business, or increasing your net worth.

Managing your debt and credit

Whether it is debt from student loans, a mortgage, or credit cards, it is important to avoid the financial pitfalls that can sometimes go hand in hand with borrowing. Any sound financial plan should effectively manage both debt and credit. The following are some tips to help you manage your debt/credit:

• Make sure that you know exactly how much you owe by keeping track of balances and interest rates
• Develop a short-term plan to manage your payments and avoid late fees
• Optimize your repayments by paying off high-interest debt first or take advantage of debt consolidation/refinancing

Understanding what's on your credit report

An important part of managing debt and credit is to understand the information contained in your credit report. Not only does a credit report contain information about past and present credit transactions, but it is also used by potential lenders to evaluate your creditworthiness.

What information are lenders typically looking for in a credit report? For the most part, a lender will assume that you can be trusted to make timely monthly payments against your debts in the future if you have always done so in the past. As a result, a history of late payments or bad debts will hurt your credit. Based on your track record, if your credit report indicates that you are a poor risk, a new lender is likely to turn you down for credit or extend it to you at a higher interest rate. In addition, too many inquiries on your credit report in a short time period can make lenders suspicious.

Today, good credit is even sometimes viewed by potential employers as a prerequisite for employment--something to think about if you're in the market for a new job or plan on changing jobs in the near future.

Because a credit report affects so many different aspects of one's financial situation, it's important to establish and maintain a good credit history in your own name. You should review your credit report regularly and be sure to correct any errors on it. You're entitled to a free copy of your credit report from each of the three major credit reporting agencies once every 12 months. You can go towww.annualcreditreport.com for more information.

Working with a financial professional

Although you can certainly do it alone, you may find it helpful to work with a financial professional to assist you in creating and implementing a financial plan.

A financial professional can help you accomplish the following:

• Determine the state of your current affairs by reviewing income, assets, and liabilities
• Develop a plan and help you identify your financial goals
• Make recommendations about specific products/services
• Monitor your plan
• Adjust your plan as needed

Tip: Keep in mind that unless you authorize a financial professional to make investment choices for you, a financial professional is solely there to make financial recommendations to you. Ultimately, you have responsibility for your finances and the decisions surrounding them. There is no assurance that working with a financial professional will improve investment results.

IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Preparing for SAT/ACT

      
      Taking the SAT (Scholastic Aptitude Test) and/or the ACT is a rite of passage for most high school students. For some students (and parents), anxiety can be high due to the important role the test results can play in the college admissions process. However, some colleges make the tests optional. Also, there are scholarships available for students that score high on the SAT.

      Most students take the SAT and/or ACT in their junior year and possibly again later in their junior year or in their senior year. The most important thing a student can do is to be as prepared for the test as possible. The pre-SAT, or PSAT, is usually taken in a student's sophomore year. 
      To get ready for the real tests, your child can do some groundwork by reading testing guidebooks, practicing sample questions, and taking a sample test. Weaker areas can then be identified and strengthened. Though many students take special SAT or ACT prep courses, they are expensive, often costing $500 or more. As an alternative, free practice questions can be found online.

Financial Aid 101

Many parents pay for college with a combination of current income, savings, and financial aid. By learning the basics of financial aid, you'll be able to understand how the aid process works and compare the aid awards your child receives. 

What is financial aid? Financial aid can be further broken down into two types: need-based, which is based on your child's financial need, and merit-based, which is based on your child's academic, athletic, or artistic merit. Many parents pay for college with a combination of current income, savings, and financial aid. By learning the basics of financial aid, you'll be able to understand how the aid process works and compare the aid awards your child receives. Financial aid is money distributed primarily by the federal government and colleges in the form of student loans, grants, scholarships, and work-study jobs. Loans and work-study must be repaid (through monetary or work obligations), while grants and scholarships do not. A student can receive both federal and college aid. How is financial need determined? Financial need is generally determined by looking at a family's income, assets, and household information. The government's aid application, the FAFSA, uses a formula known as the federal methodology. A detailed analysis of the formula is beyond the scope of this discussion, but generally here's how it works: (1) parent income is counted up to 47% (income equals AGI plus untaxed income/benefits minus certain deductions); (2) student income is counted at 50% over a certain amount ($6,400 for the 2016/2017 school year); (3) parent assets are counted at 5.6% (home equity, retirement assets, cash value life insurance, and annuities are excluded); and (4) student assets are counted at 20%. The result is a figure known as your expected family contribution, or EFC. This is the amount of money you must contribute to college costs to be eligible for aid. Your EFC remains constant, no matter which college your child applies to. Your EFC is not the same as your child's financial need. To calculate financial need, subtract your EFC from the cost at a given college. Because tuition, fees, and room-and-board expenses are different at each college, your child's financial need will vary depending on the cost of a particular college. Example:  You fill out the FAFSA and your EFC is calculated at $35,000. College A costs $60,000 per year and College B costs $50,000 per year. Your child's financial need at College A is $25,000 and $15,000 at College B. Colleges use their own formula for determining financial need. Basically, the process works the same way except that the institutional methodology in the standard college PROFILE application typically takes a more in-depth look at your income and assets. For example, some colleges may consider your home equity in assessing your ability to pay college costs. Tip:  Just because your child has financial need doesn't necessarily mean that colleges will meet 100% of that need. In fact, it's not uncommon for colleges to meet only a portion of it. If this happens to you, you'll have to make up the gap, in addition to paying your EFC. How do I apply and when? The main way to file the FAFSA is online at www.fafsa.ed.gov. In addition, private colleges typically require the PROFILE form, which you'll need to submit by each individual college deadline (this form is usually submitted online as well). The FAFSA is typically filed as soon as possible after January 1st in the year your child is seeking aid (the official federal deadline for filing the FAFSA is June 30, but most colleges have an earlier deadline). Parents should try to submit the FAFSA as soon as possible because some financial aid programs operate on a first-come, first-served basis. Even if you haven't completed your federal income tax return, you can submit your FAFSA with estimated tax numbers and then update it later. Note:  Starting with the 2017/2018 school year, families will be able to file the FAFSA as early as October 1, 2016, using their prior year's tax information. This earlier timeline will be a permanent change. After your FAFSA is processed, you will receive a Student Aid Report that highlights your EFC. Colleges that you list on the FAFSA will also get a copy of the report. Then the financial aid administrator at each school that accepts your child will try to craft an aid package to meet your child's financial need. Colleges aren't obligated to meet all of it. Comparing aid awards Sometime in late winter or early spring, your child will receive financial aid award letters that detail the specific amount and type of financial aid that each college is offering. To compare offers, first determine your out-of-pocket cost, or net price, for each school by subtracting any grant or scholarship aid (which doesn't need to be repaid) from the total cost of attendance. Next, look at the loan component of each award to see how much, if any, you or your child will need to borrow. Then compare the net price and loan amounts across all colleges. If you'd like to lobby a particular school for more aid, tread carefully. A polite letter to the financial aid administrator followed up by a telephone call is appropriate. Your chances for getting more aid are best if you can document a change in circumstances that affects your ability to pay, such as a recent job loss, unusually high medical bills, or some other unforeseen event. Common federal aid programs Here are some names you'll be hearing as you navigate the world of financial aid: Stafford Loan--The most common student loan for college and graduate students. For undergraduate students, the interest rate is currently fixed at 4.29% for loans disbursed July 1, 2015 through June 30, 2016, and 5.84% for graduate students. Perkins Loan--A student loan for college and graduate students with the greatest financial need. The interest rate is currently fixed at 5%. PLUS Loan--An education loan for parents of college students and independent graduate students. A separate application is required, though filing the FAFSA first is a prerequisite. Parents can borrow the full cost of their child's education, minus any financial aid received; the only criteria is a good credit history. The interest rate is currently fixed at 6.84% for loans disbursed July 1, 2015 through June 30, 2016. Pell Grant--A Pell Grant is available only to undergraduates with exceptional financial need. A word about merit aid Colleges often use favorable merit aid packages to attract certain students to their campuses, regardless of their financial need. The availability of college-sponsored merit aid tends to fluctuate from year to year and from college to college as schools decide how much of their endowments to spend, as well as the specific academic and extracurricular programs they want to target. As a family researching college options, exploring college merit aid is probably the single biggest thing you can do to optimize your bottom line. If you want to get an estimate ahead of time of how much financial aid (need-based or merit) your child might qualify for at a particular college, visit the college's website and fill out its net price calculator, which all colleges are required to have on their websites. Net price calculators ask for parent and student income and asset information, and they take anywhere from 5 to 15 minutes to complete. Besides colleges, a wide variety of groups offer merit scholarships to students meeting certain criteria. There are websites where your child can input his or her background, abilities, and interests and receive (free of charge) a matching list of potential scholarships. How much should you rely on aid? With all this talk of financial aid, it's easy to assume that it will do most of the heavy lifting when it comes time to paying the college bills. But the reality is you shouldn't rely too heavily on financial aid. Although aid can certainly help cover your child's college costs, student loans often make up the largest percentage of the typical aid package, not grants and scholarships. As a general rule of thumb, plan on student loans covering up to 50% of college expenses, grants and scholarships covering up to 15%, and work-study jobs covering a variable amount. But remember, parents and students who rely mainly on loans to finance college can end up with a considerable debt burden.

Using home equity loan to pay for tuition costs

Question:

          Should I take out a home equity loan to pay for my child's tuition?

Answer:

          If you own a home and have equity in it, you may want to consider taking out a home equity loan as a source of funds for your child's private school or college tuition. A home equity loan is secured by the equity you have built up in your home and can be structured as either a revolving line of credit or a second mortgage.

      With a revolving line of credit, your lender establishes a credit limit that depends on the amount of equity you have built up in your home and your ability to make payments. You can then access as much money as you need (up to the maximum amount allowed) whenever you need it by writing a check or using a credit card. Generally, interest rates are variable and tied to an index, but may be guaranteed for an initial period (e.g., two years). Your monthly payments will also vary, depending upon your outstanding balance.

          If the home equity loan is structured as a second mortgage, you borrow a fixed amount (typically no more than 80 percent of the equity in your home) that is transferred to you in full at the time of the closing. You must then repay that amount over a fixed term, just like you do on your original mortgage.

      The advantages of a home equity loan include tax-deductible interest and, in most cases, a more favorable interest rate than traditional loans. Keep in mind, however, that a home equity loan puts your home at risk because it serves as collateral for the loan. In other words, your lender can foreclose on your home if you fail to repay the loan. In addition, you may have to pay closing costs, points, and other fees to obtain the loan.

      Before you take out a home equity loan, shop around and compare the interest rates on home equity loans with the cost of borrowing elsewhere (e.g., financial aid loan programs) to see if a home equity loan is the right choice for you.

Positioning Your Income/Assets to Enhance Financial Aid Eligibility

What does it mean to enhance your financial aid eligibility?

      If you qualify for federal financial aid, there are a number of strategies you can try to implement to enhance the amount of aid your child will receive when you apply for financial aid. The idea is to lower your expected family contribution (EFC), which in turn raises your child's aid eligibility.

      It is important to note that these strategies are perfectly legal and are not in any way meant to undermine the federal financial aid process. These strategies simply examine the federal methodology and take advantage of its rules regarding which family assets and income are included in determining a student's financial aid eligibility.

      There are a number of steps you can take to reduce your adjusted gross income (AGI) under the federal methodology for determining financial aid. The lower your AGI, the less money you will be expected to contribute toward college costs and the higher your child's aid eligibility.

      Remember, you apply for financial aid each year. Thus you should consider the following strategies for each of the years you will be applying for aid, not just for the initial application.

Time the receipt of discretionary income to avoid the base year

       Your income in the base year will directly affect your child's financial aid eligibility in the corresponding academic year. Although it is highly unlikely that you will be able to defer your weekly (or monthly) paycheck, it may be possible to defer other types of discretionary income beyond the base year. For example, if possible, you should try to:

• Defer receiving employment bonuses until after December 31 of the base year.
• Avoid selling investments that will have taxable capital gains or interest, such as mutual funds, stocks, or savings bonds, until after December 31 of the base year. To avoid taking an untimely distribution from an investment that is earning a favorable rate of return, use the investment as collateral for a low-interest loan instead.
• Sell investments that can be taken at a loss during the base year, as long as the investments are not expected to recover.
• Avoid pension and IRA distributions in the base year.
• If you are on an expense account, ask your employer to reimburse you directly so that any reimbursement amounts do not artificially inflate your income.

Pay all federal and state income taxes due during the base year

      Paying all federal and state income taxes due during the base year is advantageous for two reasons: it reduces the amount of available cash on hand, and you can deduct the total amount of federal and state taxes you pay during the base year on the FAFSA.

Leverage student income protection allowance.

      For the academic year 2015/2016, the first $6,310 of income a student earns is not considered in determining a child's total income. This is known as the student's income protection allowance. However, everything a student earns beyond the allowance is assessed at 50 percent for financial aid purposes. In other words, the federal government expects your child to contribute 50 percent of all income earned over the allowance (after taxes).

      To avoid this result, parents may want to consider having their children perform volunteer work once their kids reach the allowance limit.