Q&A

Wealthy families may be missing an opportunity to save

August 17, 2012 By Liz Weston

This post won’t be relevant to the vast majority of you. But if you’re rich or have rich parents, listen up.

There’s a window of opportunity right now to reduce future estate taxes by moving money out of large estates. People who don’t take action could be missing a chance to save their heirs a bundle.

Here’s the deal: Currently, the estate tax exemption limit and the gift tax exemption limit are both $5.12 million. Both are scheduled to revert to $1 million after Dec. 31.

What that means is that wealthy people can give over $5 million away (over $10 million for a married couple) without owing any gift tax on that transfer. Such gifts can reduce the size of the wealthy person’s estate, so that the estate tax bill will be lower when he or she dies.

The money can be given away directly, or put into certain kinds of trusts. Any good estate planning attorney can outline the possibilities. If you’re planning to pass money to your kids, or a business, or real estate, it’s worth reviewing these.

Interestingly, a recent survey from U.S. Trust found two-thirds of the wealthy folks it polled hadn’t taken advantage of this opportunity and didn’t plan to do so. The survey respondents all had a minimum of $3 million in investable assets, with 31% having $5 million to $10 million and 32% having more than $10 million.

Now, it’s possible that Congress with pass some kind of patch or extension of the current exemption limits. It hasn’t been able to agree on much late, of course, but that can always change.

Still, if you’re concerned about estate taxes, it would make sense to meet with both a fee-only financial planner (to see if you can afford to give money away) and an estate planning attorney to see if it makes sense to pass some money along to your heirs now, rather than waiting until death.

Bypass trust can get money to the right heirs, eventually

August 14, 2012 By Liz Weston

Dear Liz: We married late in life and each of us brought separate property to the marriage. One spouse has four children and the other none. We have a marital trust that allows for the spouse upon death to receive the entire estate. Upon the death of both spouses, how would you draft a provision that would allow the remainder of one spouse’s separate property to be allocated to her children and the other spouse’s separate property to be donated to a charitable foundation?

Answer: Instead of allowing each other to inherit everything outright, you might want to consider a bypass trust. These trusts allow the surviving spouse to benefit from the assets during his or her lifetime. Upon the surviving spouse’s death, the assets are bequeathed to the ultimate beneficiaries. The survivor can’t alter the trust to change or prevent that.

Bypass trusts can create family tension, however. If the mother in your example were the first to die, her children would have to wait for “their money” until her spouse died. In the case of much younger or unusually healthy spouses, that can be a long wait, with the kids worrying that the surviving spouse will spend most or all of the money in the meantime.

If that could be an issue in your case, you might consider buying life insurance on the mother, Los Angeles estate planning attorney Burton Mitchell said.

“Some people fund for the children with life insurance on that parent’s life, so that the children don’t have to wait for the second death,” Mitchell said, “and to minimize tension with the children with the surviving spouse.”

You also should consider having a meeting with the children once you’ve decided how to handle this, Mitchell said.

“It is often better for them to understand what is happening and let them ask questions to their parent, before they discover the facts after the funeral,” he said. “At that point, someone is already dead and the survivor’s answers are suspect.”

If your estate is greater than estate tax exemption limits — currently $5.12 million, but scheduled to drop to $1 million in 2013 — you may want to take additional steps to reduce the future tax bite. One option is known as a qualified terminable interest property or QTIP trust. Your estate planning attorney can provide you with details. And yes, you should have an attorney, particularly if you have a large estate or someone may contest the will.

“Anyone can download documents off the Internet or go to a forms service or mill, but to do it right and to minimize problems later, you have to understand each individual’s situation and craft a plan that works best for them,” Burton said. “It’s like snowflakes — estate plans may look similar, but no two should be identical.”

Got money? Save some of it for college

August 9, 2012 By Liz Weston

“If you can save for college, you probably should.”

That’s the mantra I’ve chanted in columns, speeches and interviews over the years. An article in today’s Wall Street Journal shows a lot of upper middle income parents aren’t listening, gauging by the amount of student loan debt they’re taking on. What the Journal found:

Among households with annual incomes of $94,535 to $205,335 (80th to 95th percentile of all households), 25.6% had student-loan debt in 2010, compared to 19.5% in 2007. Among all households, 19.1% had education debt in 2010 compared to 15.2% three years earlier.
The amount borrowed by upper middle income households rose to $32,869 from $26,639, after adjusting for inflation.
Fat student loan bills are no longer an anomaly. More than three million households have a student loan balance of $50,000 or more. That compares to about 794,000 in 2001 and less than than 300,000 in 1989, after adjusting for inflation.

The Journal threw in another statistic: More than one in three households with incomes of $95,000 to $125,000 who had a child entering college in 2011 didn’t save or invest for that child’s education, according to a survey by Human Capital Research.

Here’s the deal: A child’s financial aid package will be based in large part on what the parents earn. If they have a six-figure income, or close to it, the kid won’t get much help. Colleges expect that if you have that much income, you should have been saving some of it for education–whether or not you actually did.

Even families with lesser means could find they’re getting a lot less help than they expected, with much of it coming in the form of loans rather than grants.

Either way, that means the parents, the kid or both could be taking on a lot of debt.

The Journal suggested that this burgeoning debt may lead more families to more carefully consider cost and value when considering colleges, something that “could make it difficult for all but the most selective schools to keep pushing through large tuition increases.”

We’ll see about that. In the meantime, if you’re lucky enough to have a decent income, consider putting at least some of it aside for your kids’ educations. Do it even if you won’t be able to pay for everything, or you want your kid to be mostly responsible for the cost. Every dollar you save is a dollar your child–or you–won’t have to borrow later.

Don’t throw that away!

August 7, 2012 By Liz Weston

Please welcome Jeff Yeager, one of my favorite cheapskates and an all-around good guy. I asked him to write the very first guest post for AskLizWeston.com based on advice from his latest book, “Don’t Throw That Away!” The book, and this post, focus on the middle part of the “reduce, reuse, recycle” mantra, with creative ways to get more mileage from what you already have. Here’s what Jeff has to say:

By getting a little creative and reusing would-be throwaway items, you’ll not only help save the Earth’s resources and live lighter on the planet, but you can also save some money at the same time. Here are a few examples of creative repurposing:

Fruit and vegetable peels: Of course you can compost them (and I give readers all the rotten details about composting in the book), but the skins of many types of fruits and veggies have a multitude of other uses as well, including: banana peels can be used to shine shoes (I call it a “banana split shine”) as well as fertilize your prize rose bushes and protect them from insects; papaya peels contain vitamin A and papain, which makes them great for softening skin and soothing cracked heels, and peach skins work similar magic; scrub copper pots and pans with lemon peels or other citrus rinds and a little baking soda for a bright and shiny finish; you can even naturally darken greying hair using potato peels!

Old cellphones: Did you know that under FCC regulations, you can call 911 in case of an emergency using any cell phone, even phones with expired service contracts? So don’t throw away your old cells when you get a new ones, just keep them powered up and scattered around the house, car, office, everywhere in case of a true emergency.

Refashioning: Restyling old clothing into new apparel (aka “refashioning”) is becoming a hot new trend, to the point where some designers are now coming out with lines that are simply made to look like refashioned garments– I guess that would be faux repurposing? Many of the projects are simple, like making “tee-skirts”– fun little skirts made out of old t-shirts – requiring little in the way of sewing skills or equipment.

Cheapskate-soap-on-a-rope: Save those little slivers of soap from the shower, put them in the heel of an old pair of pantyhose, and keep it tied to the outside water spigot to wash up after working in the garden. The mesh lets you get every last bit of suds out soap slivers.

Eggcellent reuses for eggshells: Crumble them up and sprinkle them around the garden to fertilize the soil and deter slugs, deer and other pests; add some along with the coffee in the filter for a less bitter cup of java; or make adorable “egg shell candles,” a chance to repurpose both eggshells and leftover candle stubs.

And whatever you do, don’t throw away that dryer lint! Stuff it inside an empty toilet paper tube and use it to light a fire in the fireplace. Dryer lint is highly flammable, so it’ll really light your fire, so to speak.

Remember: “Reduce – Reuse, Reuse, Reuse, and Reuse Again – Then Recycle.

# # #

Don’t Throw That Away! is only available in e-book formats, so you won’t have to worry about how to reuse it after you’ve read it. It is published by Three Rivers Press and is available wherever e-books are sold. Jeff Yeager is also the author of The Ultimate Cheapskate’s Road Map to True Riches and The Cheapskate Next Door. You’ll find him at The Ultimate Cheapskate.

Will her bad credit prevent him from getting a mortgage?

August 6, 2012 By Liz Weston

Dear Liz: Is it possible for me to buy a home without having my wife on the mortgage? She lost her business because of the recession. I do not want to deal with her creditors.

Answer: You can apply for a mortgage based solely on your own income, credit scores and debt-to-income ratio, if those are sufficient to buy the house you want. Your wife’s income and credit does not have to be considered.

If you can’t swing the purchase without her income, though, you’ll both need to spend some time improving her credit scores. That might include adding her as an authorized user to your credit cards. Another option is to negotiate settlements with her creditors in return for their deleting the collection accounts from her credit reports. You’d want to be cautious in these negotiations, especially if the statute of limitations on the debts hasn’t expired and your wife could be sued. Consider visiting DebtCollectionAnswers.com for help in negotiating with creditors.