Prepare Now for Moves on the Estate Tax
The nonstop discussion this year of health care reform and the economy crowded out discussion on the estate tax, which was scheduled to expire December 31. But as of this writing it appears that the estate tax will be continued at 2009 levels through 2010, which means that the 2010 top rate will likely be 45 percent and the exemption will be $3.5 million per person.

For now, the Republican dream of killing the estate tax seems to be dead, at least through 2012 as federal spending continues to expand. That means it’s a good time to talk to tax and financial experts about the best ways to pass your holdings to the next generation no matter what happens with the future of the “death tax.”

If you suspect your estate or the estate of relatives you might inherit from may fall prey to the estate tax, it makes sense right now to enlist the help of experts. Assets may be expected to grow over time, and your estate may turn out to be larger than you may think. You should be talking to estate and tax specialists as well as financial advisors such as CERTIFIED FINANCIAL PLANNER™ professionals.

Here are some things to keep in mind as you prepare for those conversations:

Give during your lifetime: You can now give $13,000 per calendar year per recipient without paying gift tax or affecting your 1 million dollar lifetime exemption. You can also pay someone’s tuition or medical bills directly, or give to a charity, without paying gift tax on the amount, thereby reducing the size of your estate and your eventual estate tax bill after you die.

Check whether your state charges an estate tax: Roughly half of all states charge estate tax, and that’s a recent thing. States previously received a slice of the federal estate tax, which no longer happens, so it’s important to consider the state’s impact when making an estate plan.

Think about a life insurance trust: Whether you need it for estate liquidity or for other purposes, an irrevocable life insurance trust can be created to keep the proceeds of the insurance out of your taxable estate. An added benefit is that such trusts may permit spousal access to the cash value of the policy. Yet note the word “irrevocable” – it means a decision that cannot be changed.

Know if your assets are expected to increase: A grantor-retained annuity trust, or GRAT, is an irrevocable trust that is popular among families with assets that are expected to increase, because such appreciation can be passed on to heirs with minimal tax consequences.

November 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bonnie A. Hughes, CFP® , a local member of FPA.

While Real Estate is Struggling, Now’s a Good Time to Consider That Kiddie Condo

For parents with investment dollars to spare in deflated college-area real estate markets, there’s never been a better time to invest in condos or single-family homes to house a student during their undergraduate or graduate years while providing tax breaks and potential investment appreciation for the folks.

But, it’s very important to consider pros and cons because the potential rewards of buying housing for a student carries many risks. Over the past decade, the once-galloping real estate market made condo and home purchases in college areas attractive to parents looking for an actual return on the room and board expenses they would otherwise throw away to their kids’ schools. With the double-digit home appreciation of the 1990s, parents looked at buying property as a way to essentially house their kids for free.

Today, in most markets, home values have fallen, which makes for a better investment proposition. But it’s critical to talk to tax and financial experts such as a CERTIFIED FINANCIAL PLANNER™ professional. As a starting point, parents need to consider the following:

How responsible is your kid?
If your kid thinks you’re buying them a crash pad or party palace, you’re already in trouble. He or she will have to be responsible enough to act as an onsite landlord making sure the interior and exterior of the property stay in livable and salable condition. That’s not a job that every child can handle, so unless you can afford housekeeping and maintenance help, any doubts on your part should dissuade you from such a purchase. Also, if you have ANY suspicions that your child might drop out, take a break or transfer from her chosen school, do you want to risk becoming a landlord yourself or paying for an empty property?

How’s your cash flow?
If you are already a homeowner, you know what owning a home costs – mortgage payments, property taxes, insurance, homeowners or condo association dues, maintenance costs – can you cover these things in a remote residence (including emergencies) without batting an eye? And keep in mind those costs are going to be considerably higher for your kid’s property in downtown Chicago than they would be in Omaha. Also, keep in mind that it will cost considerably more to insure this property because even though it’s your kid, you’ll essentially need to be insured as a landlord based on the damage that can occur in rental properties.

When would you have to sell?
Most people think in terms of owning a kiddie condo for four years – the term of a standard degree. A decade ago, that was a relatively easy commitment to make as housing prices were skyrocketing and buyers always seemed to be circling. Today, however, owners have to consider that it may take them considerably longer to sell the property at a profit with necessary investments in maintenance along the way, and a big 5 to 6 percent slice off the top to pay a selling broker.

Location, location, location:
Buying a property in the immediate vicinity of campus might be great for your kid who rolls out of bed late for class, but bad for you if you’re expecting your property to appreciate. In most markets, on-campus real estate is notoriously low on appreciation (think how you’d feel buying next door to Animal House). This is why investors do better buying in established, off-campus residential areas or developments that are near but not on campus. Your child will have to miss the experience of living with their peers, though, and that’s a big consideration.

Can the property do double duty?
Students are pretty possessive about their space and privacy in college, which is why you don’t see many parents crashing in their kids’ dorm rooms for the weekend. But if you have regular business or vacation plans in the city where your kid goes to school, see if that might be one more incentive to invest as long as it doesn’t cramp your style or your kid’s.

Might your investment become your kid’s investment?
Again, this requires sensible planning and the full cooperation of a responsible child, but if your child is planning to stay in the city where they’ve graduated, parents might consider a plan to sell the property to their kids at graduation. This could give the grad a great start on their finances during their first earning years.

November 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bonnie A. Hughes, CFP®, a local member of FPA.

Sudden Money Talks to American

Capital Planning

“Never say you know a man until you have divided an inheritance with him.”

Johann Kaspar Lavater (1741-1801) Swiss theologian and poet.

Sept. 17^th, 2005

“For his 21st birthday, Britain’s Prince Harry received a £2.5 million inheritance — about $4.5 million — from his late great-grandmother, the Queen Mother.”

Sept. 9^th, 2009

“Prince Harry set to inherit millions from Diana’s estate

Changes agreed to the will in December 1997 meant that, upon reaching 25, William and Harry would be entitled to the whole of the income of their share.

Before the age of 25, income could be paid at the trustees’ discretion.

The trustees can pay over capital at any time, but when the princes turn 30, they can ask for their share of the capital in full.

The princess’s estate was made up of stocks and shares, jewellery, her multi-million pound divorce settlement, dresses and personal items from Kensington Palace.”

The last few years have been financially rewarding for Prince Harry.  Most 25 year olds that are in the headlines aren’t there because of the money they’re coming into.  Without knowing all the particulars of Harry’s inheritance, we know the folks who prepared his mum’s and his great grandmother’s estate papers had the foresight to put in place holds and restrictions on both the income and principal the prince ultimately receives.

This shows their understanding of youth and it’s limited perspective.  Prince Harry is also expected to work, which he does in the army.  There are many ways to lose an inheritance of course.  You could have relatives who decide to give it all to charity, you could lose it to the government through taxes and poor planning, you could lose it through changing family dynamics like divorce.  If you have inherited money and are married or expect to be, talk with your estate planning attorney about how to protect that by not co-mingling those funds or through whatever tool they believe works best in your state.

There are relatively simple ways to insure that a planned inheritance makes its way to the intended person.  First is to have your estate documents in order which includes a will for the state you reside in and addresses any property you own outside that state.  Second is to have named beneficiaries on all your accounts.  Third is to make sure these are up to date.

The sometimes larger problem of distribution of an inheritance is where things can get sticky.  There are a few deadlines after a death which can be a time of extreme stress for survivors who are not usually tied in to the necessity of the few decisions that must be made regarding certain accounts.  Annuities are paid to survivors in one of three methods, but the method must be decided within a specified time frame by the survivor.  Failure to make this decision can result in the annuity sum coming out more quickly and taxed more heavily than the deceased would have planned.  IRAs need to be planned out in advance if they are to be “stretched” – meaning distributed over the longer life span of the beneficiary.

Of course, you can always lose an inheritance by acting out as someone very different than the person with money believes you are (check recent celebrity stories where lifestyle choices meant losing millions).

Working with your advisor, make sure your paperwork is in order.  If an inheritance is in your future, let your advisor know about it and try to have discussions around the expectations that come with it from the person sending it your way.  It can be a huge leg up to receive unearned money if that gift is understood and utilized within the context of your life goals.