Dropping the Baton in Estate Titling (2008-11-24)

Dropping the Baton in Estate Titling

(2008-11-24) by David John Marotta

How you "title" the property you own is a lot more important than you might think. Failure to title your assets properly could undo the best will and trust planning that money can buy. And it could make a huge difference in how much estate tax your estate will pay and how much hassle your heirs will experience when you die.

Consider the case of Jonathan and Martha Kent. Jonathan spent his entire adult life building his business in Smallville to a value of $5 million. Then the Kents were in a car accident. Jonathan was killed instantly, and his wife Martha died four months later from her injuries. Their son Clark returned from Metropolis to handle their estate.

Let's look at the different ways the Kents could have titled their property and the effect of each one. We'll think of Jonathan's estate as a baton. The various ways of titling that ownership are alternative ways to hold the baton.

Sole ownership

If Jonathan was the sole owner of his small business, he was the only one holding the baton. When he died as sole owner, the baton fell to the ground. The required legal process called "probate" would determine the next holder of the baton. If he did not have a will, the laws of the state where he lived at the time of his death in effect would write his will for him, under its laws of intestate succession.

In Virginia, state law assumes you would leave a third of your estate to your current spouse and two thirds to children, if you have children from a former marriage. If you don't have any children from a former marriage, state law provides that your entire estate goes to your current spouse.

The probate process can take months, even years. The personal representative must gather together the decedent's assets, pay his debts and taxes, and distribute the estate as directed in the will (if there was one) or as the laws of the state dictate if there was not. In Virginia, probate fees of about 0.15% of the value of the estate, are paid to the clerk of the court, and the executor of the state could charge an additional 3% to 5% of its value. On the Kent estate, probate costs alone might be well over $150,000.

You don't want to drop a $5 million baton into probate.

Also, if Jonathan was driving and a lawsuit was brought about the accident, his entire estate could be subject to any subsequent legal action. During the probate process, it might be difficult to pay Martha's medical bills.

Fortunately, no estate taxes apply when a spouse inherits assets. But just as probate has finished transferring assets to Martha, she dies, dropping the baton again and requiring another probate process.

During this second probate, assets are passed to the children, and all of the assets over $2 million are subject to 45% estate taxes. So the taxes on a $5 million estate would be $1.35 million. Even though the business is worth $5 million, Clark and his brother don't have the money for the estate tax, and they are forced to sell rather than inherit the business. Clark must return to his dead end job as a reporter for a city newspaper.

Joint tenancy with rights of survivorship (JTWROS)

In a JTWROS arrangement, two or more people hold the baton, and each one has an equal share. One person can sell his or her share and pass their grip on the baton to someone else. They can also break off their piece of the baton and keep the piece. But if they die, their share is given to those still holding on. The last one holding the baton owns it outright.

JTWROS does not require probate, which would make the transition of ownership from Jonathan to Martha easy and straightforward. But it does not protect the estate from legal action. Nor does it help solve the estate tax problem for Clark.

Joint tenancy titling trumps a will. Even if you have been careful in your estate planning documents, if you are not equally purposeful and intentional in how you title your assets you can ruin your plan. Financial accounts that use POD (payable-on-death) or TOD (transfer-on-death) arrangements, if sloppily done, can also thwart all your best estate planning intentions.

Tenancy by the entirety (TBE)

Only persons married to each other can hold property jointly as tenants by the entirety. With TBE, each spouse holds the entire baton. They can't sell their share and pass the grip to someone else because they don't hold a piece of the baton separate from the other tenants' pieces. And they cannot break off a piece of the baton and keep it for themselves.

TBE can provide asset protection features unavailable in other forms of joint ownership. Suppose Jonathan's accident was due to his negligence. If he and Martha held the baton as TBE, Martha can inherit the entire baton at Jonathan's death, free of Jonathan's liabilities.

In our litigious culture, wealthy individuals often have a bull's-eye painted on their backs. Everyone should make asset protection a priority. You should probably have an excess liability insurance policy, often referred to as an umbrella. If you are married, your real estate should be held in TBE. Virginia law also allows married couples to title their investment assets (called personal property) as TBE. Generally speaking, creditors cannot seize assets held in TBE because doing so infringes on the other tenants' rights to the entire baton. TBE isn't perfect, but it does give some liability protection to married couples.

TBE, like JTWROS, trumps a will. It has to be integrated carefully with your estate planning documents to ensure that it will not thwart your plan to reduce your estate tax exposure.

Revocable living trust

With a revocable living trust, the trust owns the baton. Think of it as a glove. The trustee controls the glove, and usually you name yourself trustee during your lifetime. Your hand is in the glove and holds the baton. Because the trust is revocable, you can do anything you want while your hand is in the glove. You can pass the baton from your gloved hand to your ungloved hand, passing the baton between the trust and sole ownership.

So long as the glove is holding the baton when you die, the baton does not fall into probate. The trust still holds the asset in the same way the glove still holds the baton. On your death the trust becomes irrevocable. The trust documents specify the next trustee and the distribution of the assets. The next trustee slips his or her hand into the glove and immediately controls the assets.

Revocable living trusts are common estate planning instruments. They avoid probate and thus help families hold on to the baton. By themselves they don't limit estate taxes or creditor claims, but they can be effective estate planning tools. In Virginia and many other states, the assets in your revocable living trust at your death are still subject to the claims of your creditors.

Bypass Trust

A bypass trust is someone who will hold the baton in a trust after you die, for the benefit of your surviving spouse. A bypass trust may provide Martha Kent with income from the business while she is alive, but it passes ownership in the business to her sons after she dies.

Upon Jonathan's death, with proper planning he could have arranged to put as much as $2 million free of estate tax in a bypass trust for the benefit of his wife for her lifetime. Upon her death it will pass tax free to the children. Martha can leave an additional $2 million to her children tax free. With the wise use of a bypass trust upon the death of the first spouse to die, up to $4 million can pass to the children tax free, leaving only $450,000 worth of tax owed on the remaining million. With additional estate planning, the family can avoid even this tax.

Depending on the asset, the process for changing the title of your assets varies. To change the title on your house you must record a new deed. Changing the title on your car requires a trip to the Department of Motor Vehicles. If you want to change the title on your investments, you must send your custodian a letter. Drawing up legal trust documents to facilitate asset titling and transfer requires professional legal advice, which could be expensive. But the alternative is often even more costly.

Aside from the expense, estate planning remains a topic that few people want to contemplate. On the one hand, raising these issues with family members can make you feel like the prodigal son wishing his father was dead and he could enjoy his inheritance now. On the other, avoiding these issues can mean a lifetime of regret.

I'm very grateful that my father asked for an hour of family vacation each year to talk about estate planning issues and explain the plan. It may feel morbid the first time, but after a while, it seems loving and caring.

When people die without proper estate planning, the state distributes their assets in their own time. If someone involved is incapacitated, you may not be able to act on their behalf. Just because you are expected to take care of their affairs doesn't mean you will have the legal right.

Clip this article and send it to your parents as a way to begin the discussion. They will realize you want to know exactly what to do in an emergency. For your own estate, bring this column to your financial advisor and ask for a review of your titling and beneficiaries.

from http://www.emarotta.com/article.php?ID=311

Marotta Advisors join NAPFA Bus in Richmond, Virginia (2008-11-20)

Marotta Advisors join NAPFA Bus in Richmond, Virginia (2008-11-20)

by David John Marotta

Financial Organizations Are Taking Financial Education On The Road:

NAPFA Consumer Education Foundation, TD AMERITRADE and Kiplinger's Personal Finance magazine

join forces with local financial advisors to deliver financial education during national bus tour

The national savings rate in the United States is currently at an all-time low, which means millions of American families are not in a position to plan for their long-term financial well-being. This is a trend that must end. To help educate people on the need to save and to promote the need for financial literacy, the National Association of Personal Financial Advisors (NAPFA) Consumer Education Foundation (NCEF), TD Ameritrade Institutional, and Kiplinger's Personal Finance magazine have teamed up with local members of NAPFA to bring this important message coast-to-coast.

NAPFA members from across the state of Virginia met in Richmond on Thursday, November 20th, 2008, to conduct free advice events and symposiums to help consumers get their financial life back in order. The State coordinator for this event, Matt Illian, of Marotta Wealth Management of Richmond, and Bob Arms and Frank McCraw, of Marotta Wealth Management of Charlottesville, were on hand to answer financial questions for the attending public. David John Marotta, President of Marotta Wealth Management, was a guest speaker at the symposium, which addressed issues of concern for Virginians.

For the next year, Your Money Bus Tour will be going from border-to-border and coast-to-coast to deliver this important message. Fee-Only financial advisors will be in cities across the country to conduct free advice events and symposiums where you can learn what you need to do to start saving and get your financial life in order.

Be sure to visit www.YourMoneyBus.com for information on the progress of the tour. Advisors also particiated in short video blogs including:
David John Marotta at http://www.youtube.com/watch?v=uo0TVi9sjgg
and Matt Illian at http://www.youtube.com/watch?v=0EfO-UBADi4

If you have questions about the NAPFA Consumer Education Foundation or would like a schedule of upcoming talks, please contact Marotta Wealth Management, Inc. of Charlottesville at (434) 244-0000, toll-free at (877) 244-1001, or by email at charlottesville@napfafoundation.org

You can also learn more about the NAPFA Foundation at: http://www.napfa.org/consumer/NAPFAConsumerEducationFoundation.asp





from http://www.emarotta.com/article.php?ID=312

Keep Christmas Your Own Way (2008-11-17)

Keep Christmas Your Own Way (2008-11-17)

by David John Marotta

In Charles Dickens's "A Christmas Carol," Ebenezer Scrooge calls Christmas a "humbug" because of the foolish way people celebrate it. He asks his nephew, "What's Christmas time to you but a time for paying bills without money?"

Sadly, that sounds like Christmas for many American families binging on expensive gifts.

Every year, Americans seem determined to be more frugal than the year before because of the latest economic conditions. One year it is rising energy prices; another year it is rising interest rates. This year, of course, the drop in everyone's investments looms large. And so once again Americans will promise to cut back on presents, food and decorations and to fund their celebration from actual income instead of savings or credit cards.

But while the retailers worry, cut prices and may have an off year, the credit card companies are never concerned. One in every five families won't pay off their credit cards in January. They will pay exorbitant interest rates instead and begin the downward spiral into financial ruin. Many families, in fact, are still trying to pay off their credit card purchases from last Christmas.

We are a nation of consumers and debtors. Total U.S. credit market debt has reached an all-time high in 2008 at 350% of gross domestic product (GDP), up from 255% a decade ago. This increase over the past 10years is not due to the federal deficit. Only a paltry 37% of GDP is federal government debt, which is down from 46% a decade ago. The largest increase has been in financial institutions, whose debt rose from 64% to 114% of GDP. The second largest increase has been in household debt, which rose from 66% to 100% of GDP. Now the country is de-leveraging, and American families must do the same.

Christmas is an emotional time. Few families set a budget for spending, and consequently credit card debt spikes considerably. Our materialism urges us to show our love for friends and family members with big and expensive gifts. As a result, we often buy even more lavishly than the receiver would have wanted us to.

It's time to differentiate between the celebration of Christmas and the commercialization of Christmas. This year, give your family the gift of financial peace of mind. Celebrate the season simply.

Four decisions, if made together as a family, can help reduce the frenetic materialism of the season and bring back the holiday's warm fuzzy feelings: Cut back your gift list. Limit how much you spend. Decide to be charitable. Determine which activities bring you real joy.

We get into trouble when the number of people we buy for increases beyond our means. Make a list. Cull the list. Engage in a little honest financial talk among friends and family. Copy this article and highlight this section. They will understand that your retirement account is way down, finances are tight and you need to be saving more money to get back on track. Other family members may be equally relieved to cut back their own gift list.

For example, you might decide that only children 12 and younger among extended family members will get gifts. If that decision doesn't keep gift giving reasonable, ask each extended family member to draw the name of one child under 12 and buy a gift. These seem like sensible rules.

Limit how much you spend. All of your excess holiday spending should fit inside 1% of your annual take-home pay. So if your net income is $40,000, you have a $400 budget for Christmas. If you bring home $100,000, you can spend $1,000. If these amounts seem small, you are in good company. On average, people spend about $800 on gifts alone.

Try taking care of all of your friends with a single baking project. Cookies, homemade granola, Russian tea, or herb mixes are easy to make in quantity and always welcome during the holidays.

Family Christmas letters are a wonderful way to keep distant friends up to date on your life, but consider sending them via e-mail or posting them on a blog or website for free. It is better for the environment--and your budget.

For family members, consider buying gifts that are already part of your budget or that encourage your children to develop their inherent talents. My favorite Christmas gift idea comes from "The Homecoming," the first movie about the Waltons, in which the father buys John Boy paper and pencils. His gift, which affirms his son's choice of writing as a career, is the emotional climax of the story. Many parents' gifts at Christmas have changed the course of their children's lives or careers by inspiring them thoughtfully in one direction or exposing them to a new interest.

Decide to be charitable. We either choose to be the kind of people who take delight in giving generously or we are not generous. Jesus, whose birth we celebrate at Christmas, saw a poor widow putting two small coins worth only a fraction of a penny into the treasury. He called his disciples and said, "Truly I say to you, this poor widow put in more than all the others. They gave out of their wealth; but she gave out of her poverty."

Giving ungrudgingly can be an act of faith, a recollection of all we have been given. It is ultimately a declaration that we want to be generous people.

Finally, decide which activities bring you real joy. Dickens himself understood this. As his son explained, Christmas was "a great time, a really jovial time, and my father was always at his best, a splendid host, bright and jolly as a boy and throwing his heart and soul into everything that was going on. . . . And then the dance! There was no stopping him!"

Take a lesson from how the reformed Ebenezer Scrooge celebrates Christmas. He does six things, and only first two of them cost money.

First, Ebenezer buys the Cratchits a prize turkey anonymously. He decides to treat his employee Bob Cratchit like family. Sharing a festive meal together promotes community. Today less than 20% of family meals are eaten together. Even if all you did during the holidays was to share a meal, it would make the season unique and special.

Expensive food does not make a meal a feast. In fact, it is eating out at fast-food places and precooked convenience foods that burden our budgets. The leisurely pace of homemade family meals costs a fraction of our typical eating on the run. Fold the napkins fancy, and use the good china.

Second, Ebenezer gives generously to the portly gentleman who was collecting for the poor. Ebenezer decides he wants to be charitable, and so he includes a great many back payments in his donation.

Third, Ebenezer is kind and gracious to everyone he meets. This attitude costs so little, but it sometimes seems as scarce as the latest sold-out fad toy. Ebenezer smiles. He is pleasant. He says, "Good morning, sir! A merry Christmas to you!" When he previously would have responded with a gruff word, he reacts now as a shock absorber with forgiveness and forbearance. These simple gestures cost us nothing but are all too uncommon.

As Ebenezer's nephew Fred describes Christmas in the opening scene of Dickens's famous story, it is "a kind, forgiving, charitable, pleasant time: the only time I know of, in the long calendar of the year, when men and women seem by one consent to open their shut-up hearts freely, and to think of people below them as if they really were fellow-passengers to the grave, and not another race of creatures bound on other journeys."

The fourth action of the reformed Scrooge is going to church. Worship is an act of celebration that helps us remember with gratitude all that God has provided. Our community provides scores of opportunities for free celebration during the holiday season.

Fifth, Ebenezer walks about the streets of London enjoying the sights. Sometimes a celebration can be simply taking time out of our busy lives to notice what is noble and beautiful all around us. Pausing and reflecting gives us time to refresh our bodies and renew our minds. It allows us to see beyond the ordinary and routine and appreciate life to its fullest.

Perhaps you don't feel that way. All the more reason to stop and reflect. Feelings often follow thoughts. Having an attitude of gratitude, being mindful of others in the present and looking confidently and eagerly toward the future encourages us to be people who live life with more satisfaction.

For his sixth and final new way to celebrate Christmas, Ebenezer goes to his nephew Fred's party for fun, games and music. Christmas provides the unique opportunity for the bonding that comes from joyful laughter.

After a musical interlude, the partygoers play "Forfeits" because "it is good to be children sometimes." The commands are usually silly requests intended to get everyone at the party laughing, such as "dance a jig," "tell how to make a pie without talking," "yawn until you make someone else yawn" or "try to stand on your head."

Next they play the games "Blindman's Buff," "How, When and Where" and then "Yes and No." None of these pleasures cost a cent, which is a lesson Scrooge as well as many of us have forgotten. Your best holiday delights need not even show up as a line item in your budget.

This year, take the hype out of the holiday. Feast merrily, give generously, show kindness, worship thankfully, live mindfully and laugh playfully. Cut back your gift list. Limit how much you spend. Simplify your Christmas, and set your family on the road to a lasting peace about finances.



from http://www.emarotta.com/article.php?ID=310

Give Generously During Hard Times (2008-11-10)

Give Generously During Hard Times

(2008-11-10) by David John Marotta

As a response to the recent market correction, you can enrich your life in three healthy ways: Cut back your spending, increase your savings, and give more generously to charities of your choice.

The first two recommendations are obvious. If your retirement account is down, reducing your spending and increasing your savings are the best ways to get it back on track. If you are still appreciating assets, this strategy will help you meet your retirement goals. And if you are retired, it will help you stay within your safe spending rates. Even trimming your expenditures by $100 a month during retirement can add an extra quarter of a million dollars to your estate over a 30-year retirement.

But just as critical during an economic downturn is increasing your charitable giving.

Charities are hit especially hard during rough economic times. They face reduced giving and often greater needs. They must find supporters who give more in order to offset those who give less.

Charity freely given is a virtue distinctly more valuable than any government program could be. For charity to be a virtue, it must be freely given. But government entitlement programs are funded from taxes. When you pay your taxes, it is no more virtuous if they are used to buy cruise missiles than to fund school lunch programs. The only virtue here is meeting your legal obligations.

Taxes are not freely given. They are coerced through the threat of imprisonment. Taxes are an obligation and a duty, not a virtue. Charitable begins only after you meet the financial obligation of paying your taxes.

The virtue of charity is an important one to understand and appreciate. True virtue and morality cannot be legislated. Government cannot make people virtuous; it can only make certain actions illegal. Coerced charity ceases to be charity. Politicians from both parties need to understand this principle.

Furthermore, only when you give of your resources is it true charity. Government has no resources of its own. It can only take the production of others and redistribute it, which certainly is not charity.

Those who seek to be charitable must first produce more than they consume to have something to share. As much as it may make you feel good to support laws that take from the productive and give to others, it is not charity on your part. Voting to spend tax dollars isn't charity. Only individuals who give from their own resources can be charitable. Voting for government entitlement programs is like being generous with your neighbor's credit card.

But doing good while doing well is an American tradition. We are a nation of generous people who generally don't want to pay taxes.

No matter what worthy organizations you support, you can donate up to 15% more if you give them appreciated stock instead of cash. For example, if you sell $1,000 worth of appreciated stock, you must pay the capital gains tax of 15%. If most of the stock's value is appreciation, the tax approaches $150, leaving only $850 for charitable giving.

This is the usual time of year to gift investments with gains to reduce your taxes. But that assumes you still have holdings with significant appreciation. Because of the market downturn, fewer people have appreciated stock, and nonprofit organizations as a result are feeling the pinch.

Fortunately another tax-savings opportunity is available for the charitably minded. The bailout plan includes one add-on that actually extended a good idea, at least for another year.

If you are age 70 1/2 or older and taking the required minimum distribution from your IRA account, you can give to charity directly from your IRA. Your gift will count as your required distribution. The gift will count as a distribution, but it won't be considered taxable income.

Normally you would be obliged to take the distribution, increase your adjusted gross income (AGI), and then gift to charity as a charitable deduction. The difference may not be obvious, but it's there. Many calculations in the tax code are tied to your AGI. Increase your AGI and you increase your phaseouts and other additional taxes. Take $5,000 out of your IRA and give it to charity, and you owe a significant additional tax on your generosity.

This provision in the bailout allows you to gift directly from your IRA. Although you won't get a deduction, it doesn't matter because it won't count as AGI in the first place. But here's the downside: This provision was only passed recently, and thus you can only use it on distributions you haven't taken yet. For many people, that might only mean their December distribution, but others take their entire distribution at the end of the year.

The details are complex, so contact your tax professional or financial planner to make sure you are complying with the IRS rules. And give purposefully what you have decided to give, not grudgingly or under compulsion, because God loves a cheerful giver.

If fear and worry about your own investments are eclipsing your charitable nature, there's help. The nonprofit National Association of Personal Financial Advisors (NAPFA) Consumer Education Foundation is offering a free seminar this Wednesday, November 12, 2008, from 7 to 8:30 p.m. at the Northside Library, 200 Albemarle Square, Charlottesville. The topic is "Five Things to Do in These Financial Markets." Bring your questions and your concerns.

from http://www.emarotta.com/article.php?ID=309