THE FORECASTER
19623 Ventura Blvd., Tarzana, CA 91356.
1 year, 40 issues, $180.
Longevity and estate planning
and liquidity issues
John Kamin: "Question: Are you or your folks in their 80s and 90s? If so, congratulations, you have chosen to be born into a family with good longevity genes!
Seriously though, on a daily basis we encounter complex questions from clients regarding what they should be doing in the last 1/3 of their lifetime. They're rightfully concerned about buying and selling properties, rare coins, gold and silver, charity contributions. They're being inundated by mail and phone solicitations with all kinds of advice from retirement planners; some of which advice is good, some of which advice is costly, and some of which is terrible. Heaven help them if they get taken in by scammers or their heirs do!
Those pushing into their 80s and 90s are concerned about liquidity for their estate plans. They wonder whether the death tax will be completely eliminated beyond 2010, as President Bush suggests, a legit concern.
Another Question: Should elders try to train their reluctant heirs in disposal of assets such as property, antiques, rarities? Or are their heirs, the sometimes "reluctant learners" just going to grab whatever money they can get from an estate in a big hurry so they can blow it? Will heirs and family make goofy moves in disposal of valuable assets, losing up to 50% to 75% of potential disposal worth in hasty decisions?
Another Question: Property values have been rising and growing nicely, as Forecaster predicted, especially in major metro outlying growth areas. Is it too soon to sell? What about 1031 exchanges, and TIC (Tenant-In-Common) 1031 disposal plans? In other words, elders and seniors have many complex issues and questions, legit concerns.
Strategic Guidelines. Death
Of Death Tax Likely?
1. Estate planning. Will the death tax be completely eliminated? The death tax is scheduled to die itself in 2010, then be 100% reinstated in 2011.
Strategic suggestion: before making any super-complex estate planning moves, I suggest instead you wait 12 to 18 months, see if Bush can get the estate tax eliminated for your heirs. The death of the death tax will either occur in that time period or it won't.
Prediction: It may be modified, or eliminated for those with 7-figure assets, but not for those in the super-wealthy category. Wait to see what the Administration and Congress does.
2. What about your heirs? Are they trained in money management and asset disposal? Or are they purposely deaf to your instructions and wishes, a common situation. If deaf to financial strategy suggested by you, sometimes a Forecaster subscription to purposely deaf 3rd parties help. Then, you've either got to turn them around, or take matters of asset disposal into your own hands. If they're trainable, train them now, while you're still able and around to do so.
It's a big mistake (if they're untrainable) to expect them magically to turn into financial strategists if that's the furthest thing from their mind now! Won't happen.
If financially deaf on purpose (none are so deaf as those who purposely choose not to hear) then you'd better strategize by yourself now, take care of asset disposal while it's easy. Train the trainable. Ignore the untrainable. Add liquidity to your estate while you can.
Take Advantage. TICs for You?
3. Our real estate strategy for several years has been to keep the best properties, but dispose of the worst now, while in today's hot-hot-hot 2005 property market. If you're cash-poor but property rich, don't leave disposal to you purposely-deaf untrainable heirs; dispose of it yourself; especially if your estate is property-rich but cash-poor. Clear enough? Assume nothing.
4. What about 1031 exchanges? I've told some clients in their 80s and beyond, selling into a 1031 exchange, especially in undesirable Tenant-In-Common 1031, just gets you out of one overpriced property (yours), deprives you of all cash proceeds of your sale, and gets you into someone else's current 1031 overpriced property, possibly with hidden markups, hidden problems! Careful.
My motto: If you have a good reason for selling something, sell it. If you have a good reason for buying something, buy it. But don't link transactions unnecessarily, you'll probably goof up both the purchase and sale.
One lady objects, But what do I do with the money if I sell the property (that I should sell) now?" I told her, "That's a very nice problem to have, too much cash!" If you get bored collecting interest on the money (up to 16% interest on Tax Liens, etc.) you can always buy more property, employ the cash judiciously after the next RE property down cycle!
5. What about charitable remainder trusts? Should you accept some 6% or 7% return, monthly payments when you are in you 80s and 90s? With the charity getting your entire property and disposing of it for the benefit (these assets will not go to your heirs) upon your demise? Frankly, looks to me like you're just getting earnable interest from the assets, plus the charitable tax deduction.
I ask, "Why don't you just sell the properties, pay the 15% long term Capital Gains Tax, pile up the cash and earn interest on it yourself, unless you want to buy another income-generating property down the line.
If you want to make a charitable contribution, you can put that in your will or trust for later disposal, it's up to you. But first I suggest you contact your lawyer, and your personal CPA, and see what advice they can give you. They may give you some very good advice indeed!
Another Question: Who will dispose of my coins? Should I stick to rare coins, or instead do something with gold and silver bullion coins (near gold and silver meltdown value)?
Legit questions.
Much depends upon your heirs. Are they interested in gold and silver bullion coins at all? Have they shown any affinity toward the hobby of rare coins? If the answer is no on both counts, suggest you either take care of things yourself, train them if they're trainable, or leave them clear instructions upon how to dispose of the coins in your will (and with the coins themselves, say, in the safe deposit box where they are kept).
Otherwise they may do what one farmer's son did, dispose of a $500,000 minimum value collection for $80,000! I've seen or heard of many stupid disposals in my time. But usually I hear about them after the fact, when it's too late and the coins are gone!
Also, you want to prevent your hidden treasure from being "cherry picked" (where a dealer buys the valuable ones, leaves all junk).
Strategic Suggestions Used
Some clients in their 80s and 90s are selling off their rare coins now and moving into faster-resale bullion gold coins with the proceeds, such as modern Gold and Silver Eagles near bullion value. Then their inheritors or widow or widower will have an easier time disposing mainly of bullion coins faster.
There's a time element too. Rare coins may take up to 3 to 6 months minimum to be adequately appraised, evaluated, described in an auction catalog, and then it usually takes 45 days or more after the auction before the owner is paid. We're used to negotiating with auctioneers, can get even better rates than you can, because we represent many clients. But it's a work-intensive negotiating process that can take months. Disposal methods should be worked out while you're around to influence them. Perhaps you'll find, after honestly talking to your heirs, that they may only be able to handle the simplest of disposals.
In that case you should consider: A) disposing of the tougher or rare items now, turning them into cash, or B) selling rarer items to replace with, say modern GE 1/2 oz and 1/4 oz coins near bullion value (if you still want some inflation-hedge protection linked to the price of gold) or C) leaving careful instructions as to best ways to get professional valuation of the coins and dispose of them when inherited.
Under no circumstances should you just: A) leave everything to chance, or B) make assumptions that your heirs will do a good proud job if you have not checked out heirs' abilities yourself (due to laziness, apathy, etc.)
Any lawyer who handles estate planning can tell you stories of goofy disposals and dumb moves made by heirs, in haste, heirs who knew little and wanted to learn even less! But because of attorney/client privileges they may not be willing to share details of these stories with you. Careful here. Make no assumptions. Check it out, or do it yourself, or leave precise instructions as to what's valuable, what isn't, how to dispose of things. Clear enough?"
THE MONEYPAPER
555 Theodore Fremd Ave., Ste. B-103, Rye, NY 10580.
Monthly, 1 year, $108.
Vita Nelson: "When you invest on margin, you're using to invest money that's borrowed from your broker. Unlike interest payments for regular consumer borrowing, margin interest can be tax deductible as long as the money is used solely for investment purposes. But there are lots of restrictions.
Even if it does meet the standard for deductibility, there's still no guarantee that the interest will be deductible. For full deductibility, you need enough investment income to fully offset the amount of interest you pay.
Investment income includes interest and short-term capital gains, excess interest charges can be carried forward and deducted against investment income in the future. (Dividends and long-term gains that qualify for the 15% maximum rate don't qualify as investment income for the investment interest deduction. However, you may elect to treat all or a portion of long-term capital gains or dividends as not qualifying for the 15% rate, in order to currently deduct investment interest expense).
If your portfolio is heavily weighted toward stocks, you may not have enough interest income to soak up the interest you'd like to deduct. If you're a buy-and-hold investor, you may not have many capital gains to offset either.
Margin interest isn't deductible if it's used to "purchase or carry" municipal bonds or bond funds. For example, if municipal bonds represent 20% of the assets in your brokerage account, you can write off no more than 80% of you investment interest.
The bottom line: if borrowing on margin is appealing for its potential tax deduction, you'll need to have large amounts of taxable interest income each year, large amounts of short-term gains, and no tax-exempt interest income.
If you generally contribute to charity and expect to be in a lower tax bracket next year than you are in this year, consider this tax-saving strategy.
If your usual annual contribution is about $10,000, you might want to increase charitable deductions this year, when you can reduce more highly taxed income. An interesting way to accomplish this is to give a large amount of appreciated stock (say, $50,000) to a donor-advised fund. You will get a $50,000 tax deduction this year, when it's needed and you can still make the actual charitable gift at your usual pace: $10,000 per year for the next five years. The gifts will come from your account in the donor-advised fund, under your name, so you'll get the same recognition as you would receive by making outright gifts.
Our course, once you've given the appreciated securities to a donor-advised fund, they no longer belong to you. If you think you might need income from your assets, you can give appreciated securities to a charitable remainder trust. Such trusts can pay a lifetime income to yourself and your spouse, after which the trust funds will go to charities you choose.
Charitable remainder trusts can be annuity trusts, which pay out a fixed amount each year, or unitrusts, which pay a fixed percentage of the trust fund each year. Many donors prefer unitrusts, which have growth potential: if you specify a 5% payout, for example, and the trust fund actually earns 8% per year, the fund will get larger, and so will the 5% payout.
Depending on the type and magnitude of the payout, you'll get a partial deduction right away for a future charitable contribution. You might get a $30,000 deduction this year for donating $100,000 to a charitable remainder trust, for example. Moreover, if you donate appreciated securities, your payout can be based on their full value while the capital gains tax is avoided.
The amount of the payout you specify will affect the amount of the upfront deduction. The minimum 5% payout would generate a larger charitable deduction than, say, a 9% payout.
Thus, donating appreciated securities to charity might be good lifetime tax planning. However, the rules change when you're developing your estate plan. Appreciated securities may be left to heirs, who'll get a "step-up in basis," effectively wiping out the capital gains obligation.
Therefore, it's best to leave appreciated securities to people rather than to charity. Make charitable bequests from your IRA. The charity can take money from your IRA without owing any income tax whereas the IRA will generate taxable income to the beneficiaries. Roth IRAs pay out tax-free income to heirs, so they're not good choices for charitable bequests."
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