Living Trusts

I don’t have time at the moment to describe all of the details of how living trusts work. Here is a good summary of the details.

From what I have seen over years, there are still a lot of misconceptions and errors with how living trusts are used in real life and death.

While most of the publicity and consternation is over the Estate (aka Death or Inheritance) tax, the truth is that most people don’t have estates large enough to be paying any of that tax. What should be more of a concern are probate fees. While estate taxes are payable on the net estate after deducting liabilities, charitable bequests and final funeral, medical, legal and tax preparation costs, probate fees are based on the gross estate values. It is possible that the probate fees are more than the net assets in the estate, requiring the heirs to pay in before the estate can be finalized. For example, an estate with assets of two million dollars and liabilities and other qualified deductions of two million would have a net estate of zero and thus no tax. The probate fees would be around $100,000 depending on the state or states in which the assets reside.

A growing number of people are using revocable living trusts in order to avoid probate. However, there is still a lot of confusion as to how they work. Many people confuse living trusts and living wills, when they are in fact two very different things. A living will is to document your wishes if you become incapacitated, such as a DNR (do not resuscitate) authorizing someone to “pull the plug” on you.

Another common misconception is that assets in a living trust are exempt from estate taxes. A living trust, because it is a revocable trust, has no effect on estate taxes or any other taxes available to individuals, such as the tax free residence sale. An irrevocable trust is a completely different entity that files tax returns and will affect estate taxes.

Another problem that often occurs is that people have set up a living trust, often with one of those cheap do it yourself kits, and then never got around to titling their assets in the name of the trust. I have seen several cases where the trust ended up doing absolutely no good for this very reason. While I still believe in setting up corporations by oneself, that is not the case for setting up a living trust. A good estate attorney will obviously take care of the asset titling at the time of the trust’s establishment, and prepare a pour-over will to cover assets obtained later on that aren’t in the trust’s name. The executor of the estate needs to be careful about titled ownership of assets as s/he is compiling the inventory and determining which assets can be transferred immediately to the heirs and which ones must go through the long and expensive probate process.

It looks like Scott Adams may be doing some estate planning.



KMK

Possible Tax Cut Scenarios

Recipe For Failure

Ben Stein has an interesting list of what things are needed in a society to destroy capitalism and innovation. It’s no surprise that almost all of the elements in his list are prevalent and growing in America today. The question is whether or not the growth trend of these counter-productive and outright destructive aspects of our society will be able to be stopped before it’s too late to recover true market freedom.

KMK

Survivor Assistance

While it sounds cold hearted to say this, it is a fact that when someone passes away, that person has it easy. Those that are left behind suffer much more, both in the emotional loss, as well as the overwhelming burden of tasks that have to be dealt with to make sure nothing is overlooked. Even when the death is not a big surprise, it’s hard for those left behind to know everything they need to take care. As I explained in this article from five years ago, the financial spouse is usually the first to go, leaving the non-financial spouse in the dark.

A new very handy resource is The Survivor Assistance Handbook, a 44 page booklet written by Certified Financial Planner Mark Colgan detailing all of the little things that a person needs to take care of after someone close to them passes away. I first learned of this booklet in this article on the FoxNews website. I ordered a copy from Mark’s website and was very impressed with it. Mark’s checklists of things to take care of after a person passes away is the most complete I have seen, even including such things as returning library books and videos that the decedent had out. At $14.95 plus postage for a single copy, it’s a bargain compared to the potential cost of overlooking even the smallest detail. Mark is also encouraging bulk sales for gifts with wholesale prices of $9.95 each in lots of 25 or $7.95 each in lots of 100.

KMK

George W. Bush hugged the third rail

Americans are tax cutters by nature

Tapping Into Equity

I have always considered it a shame to see older people sit on real estate worth hundreds of thousands of dollars, yet not be able to enjoy themselves. They are the classic real estate rich, cash poor. I normally meet heavy resistance when I recommend that they borrow against their property and live it up with the money. Because these people, who are often in their 70s, 80s and 90s, grew up during the big depression of the 1930s, they have a terrible fear of debt of any kind. They also have a misguided sense of duty to their kids. They feel guilty about the idea of saddling their kids with a mortgage when they pass away. I have to explain that anyone inheriting a $500,000 house with a $200,000 mortgage is still getting a heck of a windfall.

Reverse mortgages are becoming more common for situations such as this. My personal preference is to have the person borrow out a large lump sum of money as a conventional mortgage. This makes even more sense nowadays because the interest rate can be locked in at very low rates. Reverse mortgages are generally adjustable rate, which means they can go up.

While each person’s circumstances are different, I have worked with several people over the years in this scenario, where a large amount is borrowed and half the money is available to play with and the other half is deposited into an interest bearing bank account, out of which the monthly loan payments are made for the remainder of the person’s life. For someone in his/her 80s or 90s, such an arrangement isn’t difficult to set up.

KMK

Stock Losers

Here are some good tips on dealing with stocks that have declined in value. Some reminders:

To recognize a loss for tax purposes, you have to sell the stocks. Declines in portfolio value are not deductible, which is fair because portfolio gains in stocks still owned are not taxable.

Beware of the wash sale rule. You can’t deduct a loss on stocks if you repurchase shares in the same company within 30 days of the sale. The non-deductible loss has to be added to the cost basis of the replacement shares. One way to get around this is to repurchases the shares through your retirement plan (IRA, SEP, 401k, etc) because IRS considers such plans to be different entities than the individual beneficiaries.

Donating to charity

It only makes sense to donate appreciated stocks to charity because you can deduct the full market value and avoid any capital gain tax. However, if the stock has gone down, you can only deduct the market value at the time of the gift; thus forfeiting the capital loss. It’s a better plan to sell the stock, claim the loss, and donate the cash.

KMK