Navy Pair May Be Too Anchored to Property

Linda Shinn’s decision to enlist in the Navy in 1980 has charted the course of her life and that of her family, which follows her wherever she goes.

Last year, Lt. Shinn finished a tour of duty in Okinawa, Japan, and she hopes to be transferred to a U.S. base in Italy in 2001. A registered nurse, Shinn is in charge of the obstetrics-gynecology clinic at the Naval Hospital at the Marine Corps Air Ground Combat Center in Twenty-Nine Palms, Calif.

With Linda’s military career taking priority, her husband, Harry Shinn, can’t always count on finding work.

He is an experienced mechanical engineer, but for now, Linda, 36, who became an officer in 1991, brings home the bacon. Harry, 38, raises their three children: Mitchell, 7; Connor, 5; and Lauren, almost 2.

Although the Shinns depend on only one income, Linda’s Navy job provides such valuable benefits as subsidized housing, medical care and base shopping privileges. An inheritance, mostly of real estate, has helped add more security and brought their net worth to about half a million dollars.

Linda would like to retire in 2005, when she could receive retirement income equaling half of her base pay. Harry figures that would be between $27,400 and $32,774 a year, depending on cost-of-living adjustments, Linda’s rank at the time and other variables. Linda now earns nearly $50,000 a year.

Besides running a tight ship on the home front, Harry occupies the role of family purser. He tracks the budget, invests in mutual funds and manages the family’s three rental properties in Escondido, which generate about $15,000 a year in profit. Linda is comfortable with that arrangement. The couple first met at Palomar College in San Marcos, Calif., in 1986, when Harry was Linda’s mathematics tutor.

Although in comparatively good financial shape, the Shinns are concerned that too much of their net worth may be tied up in illiquid assets that might be better parlayed into investments producing higher returns.

One of the rentals is a house where the Shinns lived from 1992 through 1995, when Linda was stationed at the Naval Medical Center in San Diego. In 1992 Linda inherited property from her mother: a home, an auto repair shop and an extensive collection of Hummel porcelain figurines.

Michele Moore, a certified financial planner in Indian Wells, Calif., who evaluated the Shinns’ finances at The Times’ request, confirmed their hunch that they should consider selling their real estate and collectibles and reinvest the proceeds. “Most people are comfortable with real estate because they can see it and touch it,” Moore said. “They think they’re doing OK because of the income, but they don’t look at all the expenses: mortgage, insurance, property taxes, maintenance.”

After analyzing the expenses, income, cost basis and market values of the Shinns’ rentals, Moore calculated annual rates of return of 5% and 1% for the homes. (The relative size of the mortgages makes a difference; the larger mortgage lowers the return.) The auto repair shop, which they rent to the business’ owner, doesn’t have a mortgage, resulting in a higher return, 14%, including expected appreciation.

“People need to analyze their real estate holdings once a year,” Moore said. “If they’re getting only a 1% to 5% return a year, people need to look at other assets, such as stocks and bonds. You have to think, “Could I do something better with the money?” Other factors are taxes and maintenance.

Barbara Williams, a certified financial planner in Carlsbad, Calif., who also reviewed the Shinns’ finances, agreed they are too heavily invested in real estate, which represents more than half of their net worth.

“There’s lack of liquidity and lack of diversification,” Williams said. “All their property is in Escondido. Then there are long-distance management problems.” So far, the Shinns have been fortunate to have responsible, stable tenants and helpful neighbors who live near the rentals.

“I think the lesson to learn here is when you inherit property, you should think about it as cash and think about how you would invest the cash,” Williams said. “Think in terms of, ‘If I had $170,000 in cash today, would I go buy an auto repair shop in Escondido?’ If the answer is no, ditch it.”

Before unloading any of their properties, the Shinns should consult a certified public accountant, Moore said, to discuss the tax strategies for minimizing capital gains taxes. She also suggested they consult an environmental attorney, because if oil or other chemicals were dumped at the auto repair shop, former owners can sometimes be held financially responsible for a cleanup.

While studying the Shinns’ portfolio and trust documents, Moore discovered that Linda’s inheritance had been accidentally commingled with other assets. Up until that point, Linda thought the auto repair shop and her late parents’ rental home were her “sole and separate property” in accordance with her mother’s wishes. Grant deeds conveying those assets to the family trust, however, had converted those items to “community property.”

“Does this mean if Harry divorces me tomorrow, he’ll get half the property?” Linda asked on learning of the change. “My mother liked Harry, but she said, ‘You never know.’ ”

Linda could get her inheritance reclassified as “sole and separate property” by hiring a lawyer to draft the appropriate documents, which would require Harry’s signature. That is a matter the Shinns must discuss.

Maintaining exclusive ownership of property can be a touchy subject among couples--with inheritances sometimes evoking feelings of distrust and jealousy. But the Shinns made light of Moore’s discovery.

“Hey! I do all the work,” Harry declared.

“I bring in all the money,” Linda retorted.

“We’re going to throw pies in a minute,” Harry said, laughing.

“We have a great marriage,” Linda added.

Should Linda decide to retain the auto repair shop and rental home as sole and separate property, she could put those assets in another trust that, upon her death, would provide income to Harry as long as he lives while designating their children as beneficiaries, Moore said.

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Given the Shinns’ sizable net worth, they might want to consider setting some age requirements for their children’s access to the existing family trust, she said. That way, if both died, the children would not be tempted to spend all the money at age 18. The Shinns might want to give them access to the income but not the capital until they are much older.

Moore also challenged the Shinns to think about their choice of a relative to be successor trustee, the person appointed to administer the family trust in the event of the couple’s untimely death. “Putting family members in that position isn’t the best place to be. Instead of becoming a role model, the relative then becomes the big meanie who says no to the kids. A good approach is having co-trustees: a relative and an outside professional. That way, the relative can defer to the professional and let the professional say no.” However, adding a professional trustee would add costs to the trust.

Moore said she is impressed by the Shinns’ ability to save. Other than mortgages, they have virtually no debt, and they set aside $400 a month in Franklin Income Fund Class A, a balanced fund that holds both stocks and bonds.

But Moore noticed the two mutual funds the Shinns own impose upfront sales commissions, or loads, so they’re incurring expenses right off the bat. The Franklin income fund charges a 4.25% load, and the AIM Value Class A stock fund collects 5.5%. Lower loads are charged if large amounts are invested.

Moore noted that the AIM fund has been an above-average performer in its class, averaging a 22% annual return over the last five years. The Franklin fund, a more conservative holding that aims for dividend income as well as growth, had an average annual return of about 8.6% in the same period, below average for its class.

Because the Shinns are mostly managing their own investments, there is little justification for paying high fund loads. Load funds are generally designed for investors working with a broker or advisor, and the load indirectly compensates the advisor.

Moore advised the Shinns to stop buying those two funds and divert their monthly payments into no-load stock funds. That way, all of their contributions would be applied immediately to the investment rather than getting siphoned off by fees.

Moore said some load funds are excellent investments and some no-load funds are poor performers. However, on average no-load funds generally perform better because of the automatic advantage of low costs and, often, lower annual expenses.

Moore suggested the couple consider other ways to invest the money in the growth and income fund.

But the couple might decide to keep the AIM fund, because it might be difficult to find a fund with such good prospects that it would be worth paying 20% capital gains taxes on what they’ve saved so far. If the couple do want to sell the fund, they might consult an accountant to see if their adjusted gross income could be low enough--below $43,000 in 1999--to fall into the 15% federal bracket, which would cut the gains tax to 10%.

For future investments, Moore favors Vanguard Standard & Poors 500 Index and Schwab S&P; 500 funds. Both mirror the index, and, because there is little trading relative to other funds, index funds minimize capital gains taxes.

Harry was disappointed to learn of the sales commissions charged by his funds. “I feel like I almost have to go back to school to learn about investments,” he said.

Although the Shinns need to fine-tune their portfolio to maximize their returns, Moore said, they should be proud of their progress, especially considering they’ve received no professional advice.

“You’re doing all the right things. You’ve managed the investments quite well. You have an excellent start. You’re going to be rewarded in the future.”

Suzy Hagstrom is a regular contributor to The Times. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053 or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/HOME/BUSINESS/FINPLAN/make-over.htm.

Information on choosing a financial planner is available at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

Investors: Linda Shinn, 36, Navy nurse; Harry Shinn, 38

Gross annual income: About $65,000

Goals: Allow Linda to retire from the Navy in six years. Refine portfolio for retirement savings.

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Current portfolio

* Cash and bank savings: About $2,000

* Real estate: A commercial property valued at about $170,000. Two rental homes with a combined equity of $164,000.

* Retirement accounts: Harry has a federal savings plan valued at $53,400. Linda is eligible for a retirement pension at about half her income.

* Other investments: Nearly $22,000 in Franklin Income Fund Class A. About $46,000 in Aim Value Class A. A collection of Hummel figurines valued at about $45,000.

* Debts: Mortgages totaling about $156,000 for the two rental homes. Credit card debt of less than $2,000.

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Major Recommendations

* Pay off credit card debt.

* Sell some or all of nonfinancial investments, the rental property and collectibles.

* Direct future investments to no-load funds.

* Consult a lawyer about proper ways to handle estate planning issues.

* Increase life insurance.

Meet the Planners

Michele Moore is a fee-only certified financial planner based in Indian Wells, Calif. Moore is a past president of the Desert Estate Planning Council.

Barbara Williams is a certified financial planner in Carlsbad, Calif., who charges by fees or commissions, depending on her clients’ preference. She is a past president of the San Diego Society of the Institute of Certified Financial Planners.