Monthly Planning Tips Archive
Planning a Worry-Free Vacation
Summer means vacation for many people, although “off-season” vacations are popular as well. If there’s a trip in your plans this year, here are a few tips you might want to consider as you start packing the sunscreen, novels and sandals.
• If your vacation plans include foreign travel, ensure that you have a current passport. The State Department is now processing routine passport applications in four to six weeks; two to three weeks for expedited service (call 1-877-487-2778). Look into possible visa requirements, as well. For detailed information, visit the passport website: travel.state.gov.
• For any foreign travel, you should also check your health insurance coverage. Medicare generally does not pay for medical care outside the United States. Private insurers and HMOs may have restrictions on what they will cover. Ask your medical insurance carrier prior to departure about any foreign travel limitations. Supplemental insurance may be available, either through your regular insurance or through a travel agent.
• Find out if your automobile insurance covers rental car liability – including damage to the rental car, bodily injuries and other property damage. Ask your insurance agent before you leave whether your auto insurance or any umbrella policies you own will provide the same protection as the optional insurance offered by the rental company.
• Make sure your financial and estate planning affairs are in order. Inspect your will or revocable living trust to see if any changes are needed. If it’s been five years since your attorney reviewed your will or living trust, make an appointment with him or her. Changes in state laws or the tax code may require changes in your will or trust.
• Jot down the names and phone numbers of your advisers – stock brokers, insurance agent, attorney, accountant, etc. Make a list of your savings, checking and money market accounts and write down the location of the keys for any safe-deposit boxes. Leave your list with a trusted friend or family member.
As you review your will or living trust, we hope you will consider a thoughtful bequest to our future as part of your estate plan. There are many ways to include us in your will or trust – options that offer tax savings as well as the personal satisfaction of memorializing your interest in our mission.
Gift Opportunities and Vacations
For friends who own vacation property – a cottage by the lake or a condo on the coast, for example – some special gift planning opportunities are possible. A vacation home that is used only part of the year is an excellent choice for a tax-advantaged charitable contribution. Consider the case of Jeanne, who owns a vacation home that she and her family use primarily in the summer months. Jeanne can contribute what lawyers call an “undivided fractional interest” in the summer home. For example, she might transfer a 25% interest in the property – making us a sort of partner in owning the home. In theory, we would have the right to use the property one-fourth of the year, but our real benefit would come when the property eventually is sold – probably after Jeanne’s death. At that point we would be entitled to 25% of the proceeds.
What are the advantages to Jeanne? She would be entitled to a charitable gift deduction of roughly 25% of the value of the vacation home. The gift could mean substantial income tax savings and nothing really changes in her life. She and her family continue to use the vacation home exactly as before. But Jeanne also has the satisfaction of making an important gift.
Keeping a “Life Estate” in Vacation Property
Andrew owns an A-frame mountain lodge in a resort area. He planned to leave the lodge to us at his death as a memorial to his late parents. His advisers have pointed out that he can make the gift now, qualify for an income tax deduction, and enjoy the lodge for the rest of his life. It’s called giving a “remainder interest” and keeping a “life estate” and has the same end result as a will: a gift when Andrew dies. But Andrew gains an important charitable gift deduction today, based on his current age (70). Deductions are particularly high in these times of low interest rates, and Andrew could deduct about $200,000, assuming the house is worth $350,000 and the lot $50,000.
Note: The gift ideas shown in the examples of Jeanne and Andrew can be especially helpful in a year of high income – such as the year you convert from a traditional IRA to a Roth IRA. Large charitable deductions can greatly reduce the tax burden of converting to a tax-free Roth and these gifts do not require transferring assets out of savings or a stock portfolio.
Avoiding Tax upon the Sale of Vacation Property
Ted and Alice have owned a lakeside cottage in a neighboring state since 1965. They and their family have enjoyed the property for many years, but now the children are grown and flown, and Ted and Alice find they no longer use their vacation home enough to justify the taxes and upkeep. They would like to sell and invest for more retirement income, but capital gains taxes would take a large part of the sale proceeds. (The $500,000 capital gains tax exclusion for “principal residences” does not apply to vacation homes.)
Solution? Ted and Alice decide to transfer the vacation property to a charitable remainder unitrust that will pay them 6% annual income for the rest of their lives. All capital gains taxes are avoided when the trustee sells (the trust is tax exempt), and about 35% the property’s value will be tax deductible. If the trustee can’t sell the cottage right away, it can be rented temporarily and the payments passed through to Ted and Alice.
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