Marketplace

Conflicting Advice? Not

Question: A couple of days ago, in response to a questioner's inquiry about some ideas which had been presented to his mother at a seminar, you dismissed charitable remainder trusts as one of several risky and wacko investing ideas. Yesterday, you suggested that they were a legit combination of charity and retirement planning. A number of years ago I purchased an annuity which combined life insurance with a traditional annuity, which I don't believe can be gotten today. After several years (required to hold for at least 7 years), I cashed it in, taking a 20 year payout at guaranteed interest, eventual payout to exceed my then current value of 25% appreciation, with the balance to be paid to my beneficiary. It seems that a charitable remainder trust combines this sort of annuity with a donation. Why is it not a good idea? Your advice seems conflicted. I had been considering changing my will to create a CRT for the small amount of giving which I feel I can afford, as it seemed to be a valid combination of giving and investment. Nick, Glover, VT

Answer: I'm a fan of charitable remainder trusts. The same goes for charitable gift annuities. In both cases, you support a charity. You get some nice tax breaks. And you can set up a steady stream of income for life. In answering the question where I made some negative remarks it was about the kind of financial conference where lots of high-fee high-cost peddlers of products get together to hawk their wares to unsuspecting and unsophisticated families. .

So, to be clear, products like charitable gift annuities can be a critical part of smart estate planning. However, there are a number of financial and emotional factors to consider before buying a charitable gift annuity and similar financial arrangements (such as a charitable remainder trust and a charitable lead trust). Top of the list are the many estate planning issues to think through, from your income stream to your children's inheritance. It's also important to realize that the decision is irrevocable. You can't wake up one morning and say to yourself, oops, I made a mistake. That's why in most cases sensible philanthropic financial planning requires professional guidance.

Still, the time spent researching the product and seeking out professional advice can be worth it. Seems to me you made a good move.

04/09/08 by Chris Farrell

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A Will: A Lawyer or Do-It-Youself Online?

Question: I know that my husband and I need to have a will, especially now that we are the parents of a 20-month old. We have a good referral to a local lawyer from my parents; however, the cost is a bit of concern. How much should we expect to pay for having a general will and living wills written? I did a search on the MarketPlace website and found an article about on-line wills. Are these services reliable and useful in all states? Chandler, Gate City VA.

Answer: Congratulations on pulling together a will. Everyone needs one, especially families with children. A will is also the foundation of all financial planning for families.

There are a number of good "do-it-yourself" products on the market. They are legitimate, and the price range seems to be in the $20 and $120 range. I used one of these products in a pinch. It was a will form created by Nolo Press, a long-time publisher of consumer-oriented self-help legal guides (www.nolo.com). Nolo offers several will writing products. I found the directions comprehensive and easy to follow for the one I used.

I haven't personally spent much time with other well-known do-it-yourself will products, such as legalzoom at www.legalzoom.com and buildawill at www.buildawill.com. But I do believe that all of these products work best for very simple estates.

Still, I remain a fan of hiring a lawyer to do a will. I think its worth the several hundred dollars they'll charge for their services--especially when children are involved. The reason is that a will is a critical foundation for any personal financial plan. You want to make sure you get it right, that you address all contingencies, and that you get any questions you may have answered by a professional.

So, while I have nothing against the do-it yourself wills, in many cases prudence dictates hiring a competent attorney.

06/13/08 by Chris Farrell

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Gifts

Question: My parents are really excited for my wife and I to buy a house, as is my grandmother. So much so that between them they'd like to give us $30K to help with a down payment. Would this gift become "income" and therefore be subject to taxes? If so, are there any clever ways to make this money non-taxable? Thanks! David, Walla Walla WA

Answer: There's no need to be clever. In 2008 you can gift up to $12,000 to a person without paying taxes on it. Your parents and your grandmother could gift you $12,000 each for a total of $36,000 without tax consequences. They could double that sum by gifting the same amount to your wife.

08/06/08 by Chris Farrell

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Sell the Farm?

Question: My mother, (who is in a nursing home in ND with dementia) and I own as a life estate/remainder, approx 150 tillable acres of North Dakota Red River valley farmland--The farm building site, which includes a house in severe disrepair, is an additional 9+ acres. I had the tillable land appraised and it came back at $367,000 which is just over $2400 per acre. Mother will soon exhaust assets and be eligible for medicaid (In ND, owning farmland is not a disqualifying asset). She has no long term care insurance. I am wondering if it would be the right time to sell--prices at an alltime high. Some friends say I should play it for a year and then sell. Another factor, our tenants have farmed it for over 25 years and I would give them right of first refusal. They are interested in buying, but they are my age (50+) with no children to pass farm onto--right now they are interested, they may not be in a year due to being older. Of course, it is as much an investment for them also. I looked at IRS tables a couple of years ago and mother's share would be approx. 41%. She is now 82 years old. I came late to my current position and don't have a lot allocated for retirement. I rent an apartment and am single. I have not paid to have the building site appraised yet. The tenants would be interested in buying it also, but only for the grain storage bins and storage shed. The advantage of selling it as part of the farm is that I lower risk of inadvertantly missing something in disclosing about condition of house--I can think of at least 9 things, four of which are severe basement water leakage, needs new roof, and needs new windows and furnace.

The alternative would be to continue to rent it to tenants, but when mother goes on medicaid, no land income can be used to pay taxes and utilities. Approximate tax and utilities Tax: $1600, utilities about $50 per month. I either find a way to come up with that amount or I enter into a "net lease" with renters who would at least pay taxes. I could find the money to probably keep utility payments up. The big question, take the chance that grain commodities go up and land prices go up for another year and put it up for bids--or sell to tenants this year? Remember tenants are interested buyers. I grew up on farm and it is very hard to think about selling it because, I feel I am letting my late father and mother down, by not holding onto it. When they built house and married in 1948, I am sure they did not forsee the change in agriculture that would see family farms get bigger and fewer. K, St. Paul, MN

Answer: I can imagine how hard it is for you to sell. But I'm glad for you and your Mom that farm prices have soared in recent years. My own sense is that farmland has made a step up in value with the growing wealth and better food consumption in China, India and the rest of the emerging markets. That doesn't mean there won't be violent changes in prices

To be clear, you need more expertise on the farm value side than I can offer. It reads as if you are up on the Medicaid rules, but if not that's another complicated area to invest in getting some expert help.

However, since you're in the market for gathering information I had a couple of reactions.

When it comes to investing, buying and selling, we can't pierce the fog of the future. As Peter Bernstein, the dean of finance economists likes to put it, it's in the nature of the beast. Still, one way to grapple with a question like this involves regret. Let's say you sell now to the tenants, and a year later prices are up another 10% to 20%. You'll regret selling to early. Now imagine you don't sell but hold on. Prices for farmland fall by 10% to 20%. You'll regret not selling. Question is, which regret would you--and your Mom-- rather live with?

Even more important is your aging mother and her dementia. You have a very specific reason for contemplating a sale now: To help her out financially. If you sell today, you essentially know what you'll get. Will this money make a difference for her once you've taken taxes and Medicaid into account? Assuming the answer is yes, if it were me her condition would push me toward cashing in my known chips rather than gamble on an unknown future.

I lean on the conservative side with financial matters, and I'd rather sell early at a profit and into a strong market (missing the market's peak) than wait and take the chance of selling into a weak or falling market even if I still end up with a profit. One reason is that the seller has negotiating power in a strong market, while its the buyer that wields more influence in a weak market.

The condition of the house makes me nervous.

By the way, in 1948 your Mom got married and your parents built a home. Now, 60 years later, what they built and nurtured will go toward making sure she gets the kind of care she needs in old age. That's a moving arc to a life story.

After gathering more information and thinking it through, let us know what you decide.

08/29/08 by Chris Farrell

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Under One Roof?

Question: After the death of my father, my siblings and I discussed one of us living closer to mom. She lives in SoCal and the cost of living is much higher there (duh). One option is going in on a place with my mother as co-owners, and I would live there. I am guessing I will need to locate some sort of contract, or meet with a real estate attorney to draw this up. Can you provide any advice on this topic, or just outline some of your thoughts? Andrew, Boise, ID

Answer: What you're thinking of doing could become increasingly common with the aging of the population. Indeed, many members of the "sandwich generation," who now find themselves responsible for the welfare of both their parents and children, are embracing such living arrangements that were more common a few generations ago. And even if young children aren't involved, living under the same roof offers less expensive independent living for older people and their adult children. It can be very good from a family perspective.

That said, the move represents a big financial and emotional commitment for an extended family. To make it work often takes many hours coming up with the right financial arrangement that not only are good for you and your Mom, but also take into account your siblings. You will need a lawyer to draw up legal documents, and in cases when substantial assets are involved working with a financial planner is common.

Among the questions to ask: How will you divide utility and other bills. Will you share co-ownership? Will you pay rent to your Mom or vice-versa. Who gets the tax deduction on the mortgages? Questions along those lines. All of this is routine in this market, and there is a fair amount of flexibility in making financial arrangement, but everything should be laid out and well-understood.

Family dynamics came into play, too. How will your siblings react to the financial arrangement?. Will they support you and your Mom? And what are the implications of living under one roof for the division of her estate?

Last, you will at some time in the future be the point person for dealing with disability and death. It's a good idea to talk them through, since you'll be living in the same place. You have to really think about the endgame, more than a lot of people are comfortable doing. That said, I do believe that this kind of arrangement can work for everyone.

09/11/08 by Chris Farrell

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Estate planning and same-sex couples

Question: Hi Chris - my partner and I are starting to accumulate assets together - equity in a jointly owned house, beneficiaries on each other's life insurance, etc. Although we are legally married in Canada, as a same-sex couple and US citizens our marriage is not recognized by the federal government nor the state of North Dakota. Should we spend the money to set up a trust in order to try to avoid the debilitating taxes that the other would incur should one of us pass away? Is there a better way to try to protect each other? Thanks! David, Fargo, ND

Answer: You have a lot of work to do to financially protect yourself and your partner. I wish I could say it was otherwise, but it isn't in the current environment. To be sure, the law is in flux in a number of states with same-sex marriage, civil unions, and domestic partnerships. But for now the burden is on same-sex couples to protect each other through a combination of a will, a living trust, power-of-attorney, and other legal documents. By the way, a trust won't save your partner or you from a tax hit at death. The real value of a trust is that it makes it more likely that your estate planning intentions are followed by the courts.

My favorite resource for understanding and dealing with the financial issues faced by same-sex couples is The Legal Guide for Lesbian & Gay Couples by Denis Clifford, Frederick Hertz, and Emily Doskow. It's a self-help legal guide published by Nolo.com. You can see it here. I would then work with an attorney to set up your finances in a way that protects both of you.

09/04/09 by Chris Farrell

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