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Miscellaneous

Tax-Wise Gifting Strategies for Seniors

You've spent most of your life building your wealth. Now, your concern may have shifted to reducing your estate and saving taxes. Making gifts is one way to reduce your estate. But because gifting can trigger federal gift tax, as well as federal generation-skipping transfer tax (GSTT) if the gift is to someone who is more than one generation below you (e.g., grandchildren), you'll want to consider making gifts in ways that will minimize tax. Here are some tax-wise gifting strategies to consider.

Take full advantage of the federal annual gift tax exclusion and lifetime exemption

For 2008, you can give tax free up to $12,000 per recipient ($24,000 if the gift is from both you and your spouse) under the annual gift tax exclusion. Gifts over that amount are tax free to the extent of your $1 million lifetime gift tax exemption ($2 million lifetime GSTT exemption).

Contribute to 529 plans

If you fund a 529 plan for your grandchild's college education, you can contribute up to five years' worth of gifts at once; that's $60,000 per child, or $120,000 per child if you and your spouse elect to make the gift.

Pay tuition and medical expenses

You can make unlimited tax-free gifts by paying medical bills or college tuition on behalf of a recipient. Payments must be made directly to the medical care provider or college.

Make charitable donations

Donations to charity are completely free from gift tax and are also generally deductible for income tax purposes, subject to certain limitations.

Make gifts and pay the gift tax

This may seem counterintuitive, but sometimes making gifts and paying the gift tax can be advantageous. The reason is that gift tax paid is removed from your estate. So, gift taxes paid on lifetime gifts can significantly reduce overall federal gift and estate taxes.

Types of property to gift

Selecting the type of property to gift can be very important. Here are some things to consider:

Gift property that may grow substantially in value over time, such as common stock, antiques, art, and real estate. This strategy removes any future appreciation of this property from your estate.
Be careful when gifting appreciated property. Because a property's basis (generally its cost) is carried over to the recipient, gifts of appreciated property can be good in some circumstances but not in others. You may not want to give highly appreciated property if the recipient will recognize a substantial capital gain when the property is sold. On the other hand, you may want to make that gift if the sale of the property is imminent anyway and the recipient would owe less tax than you upon the sale.
You should avoid giving property that is likely to lose value after the gift has been made. Also, it's not generally a good idea to give away depreciated property. The recipient's basis for recognizing a loss is the lower of your basis (carryover basis) or the current fair market value. The recipient may be unable to recognize the loss on the property. Both you and the recipient may lose the loss deduction.
Gift assets that yield higher amounts of income instead of those that yield lower amounts. This will prevent the buildup of income in your estate. Similarly, gift assets that produce taxable income instead of those that produce less taxable income, such as municipal bonds.
It may be possible to reduce your ownership interest in a closely held business (or an interest in real estate) so that it may be valued at a discount. For example, if you have a minority interest (49% or less) in the stock of a closely held business, you may qualify for a discount. Also, a fractional interest in real property may be valued at a discount. It may be beneficial to make a gift of stock or an interest in real estate to qualify for the discount.
Be careful when giving S corp stock to a trust, as the business may lose S corp status.

What You Should Know about Working Abroad

In today's global economy, more people than ever are working abroad. If you're contemplating a career move overseas, here are some things you should know.

Passport and visa requirements

Generally, you'll need a valid passport and visa (or work permit) to work abroad. If you're working for a global company, it might obtain the visa for you. Otherwise, you'll need to apply on your own. Your chances for obtaining a visa are best if you have a special skill that would make you an asset to a prospective employer. The U.S. State Department posts specific visa requirements (as well as travel warnings) for foreign countries on its website at www.travel.state.gov

Citizenship

No matter how long you work abroad, you'll remain a U.S. citizen, as long as you don't formally renounce your citizenship. And if you have a child born overseas, he or she will be a U.S. citizen too (assuming at least one parent is a U.S. citizen, the child enters the U.S. or is formally admitted, and other requirements for citizenship are met).

Taxes

Just because you're earning income outside the United States doesn't mean you won't owe income taxes to Uncle Sam--the United States taxes Americans on income no matter where in the world it's earned.

But there is some good news. Even though you'll still have to file a federal income tax return, if you meet certain requirements you may be able to exclude up to $87,600 (in 2008) of foreign earned income. You may also qualify for the foreign housing exclusion and the foreign tax credit. For details, see IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

But the tax laws of other countries vary widely. Although there's no guarantee you won't be taxed twice, most Western countries have tax treaties with the United States that attempt to eliminate double taxation. For a list of these countries, go to www.irs.gov and search "income tax treaties A to Z."

Also, any property you transfer while working abroad may be subject to federal gift tax, no matter where the property is located. And if you keep your U.S. residence while working abroad, you may still owe state income taxes.

The tax issues involved with working overseas can be complicated; you may want to consult a tax professional experienced in international tax matters.

Health care

Most U.S. health insurers don't provide coverage to Americans living abroad, so consider purchasing a supplemental policy that will cover any health-care expenses you incur overseas. (Some countries may require you to have such coverage in order to get a visa.) Make sure that any private policy includes emergencies and medical evacuations.

Banking

The availability of online banking and brokerage accounts makes it easy to manage your money in the United States while working abroad--all you need is an Internet connection. However, you might also need to open an account at a local bank, if for no other reason than to get cash. If you'll be converting local currency to U.S. dollars (or vice versa), make sure you understand how the exchange rate works to maximize your take-home pay.

Research, research, research

These are only a few of the issues you're likely to face. The best thing you can do to prepare is to research as much as you can ahead of time. The more you know, the more rewarding your experience is likely to be.

Ask the Experts: I'm planning a cruise to the Caribbean this winter. Do I need a passport?

Not yet. New passport rules requiring passports for all land and sea travel between the United States and Mexico, Canada, the Caribbean, and Bermuda were originally scheduled to take effect in January of 2008. But a massive backlog of passport applications (caused by another requirement that all travelers flying to these destinations have a passport by the fall of 2007) prompted the federal government to delay implementation of the new rules until sometime between the summer of 2008 and June of 2009. The precise implementation date will be announced later, with at least 60 days notice given.

In the meantime, beginning January 31, 2008, Americans traveling by land or sea to Mexico, Canada, the Caribbean, or Bermuda will need to show a government-issued photo ID, such as a license, and a birth certificate or other proof of citizenship.

And if you're planning to travel by land or sea to any of these destinations later this year or in 2009, consider applying for a passport as soon as possible. The State Department reports that the current wait time is 4 to 6 weeks, but recommends allowing 10 weeks during busier times like the summer travel season (during peak application periods in 2007, waiting times reached 16 weeks). The State Department estimates that 23 million passport applications will be filed in 2008, and 30 million in 2009. So don't delay.

For more details, visit the State Department's website at http://travel.state.gov and click on the link "Passports for U.S. Citizens," or call the National Passport Information Center toll free at 1-877-487-2778.

Ask the Experts: How convenient are credit card convenience checks?

If you have a credit card account, you've no doubt seen them: blank checks that may be used to make purchases, obtain cash, or transfer higher-interest balances. As it turns out, these checks are often more convenient to your creditor (for making a profit) and to thieves (for going on a spending spree at your expense) than they are to you.

When you use the checks, your creditor makes a greater profit than when you use your card. That's because:

The interest rate on convenience check usage is often higher than the rate charged on card purchases
The creditor may charge a substantial fee for using the check (up to 5% of the check amount, with no cap)
There may be no grace period on purchases made with these checks; interest accrues from the moment you write one
Your creditor may apply your payments first to balances (such as card purchases) with a lower interest rate

What's more, if you purchase defective merchandise with your credit card and you have no luck returning it to the seller, you may contact your credit card company for relief. If you use a convenience check to make the purchase, however, these protections may not apply.

Convenience checks are a favorite target of mailbox thieves. Unlike unsolicited credit card offers, you can't "opt out" of receiving them. Since you never know when the credit card company will send them, you can't report them missing when they don't arrive. Most creditors don't require a call to activate them, and merchants often don't verify signatures on convenience checks. To make matters worse, the regulations that limit your liability to $50 for use of a lost or stolen credit card do not apply to convenience checks.

So, the bottom line: It may be best to "inconvenience" yourself by using your credit card instead.

Don't Let This Year's Family Vacation Wreck Your Budget

With today's busy lifestyles, many people view a nice family vacation every year as an entitlement, even if it means going into debt to pay for it. They rationalize that they work hard all year and deserve it, or they become wistful after hearing about the fancy vacation plans of friends, co-workers, or neighbors. Sure, everyone needs a break, and parents naturally want their kids to have fond memories of endless summer days spent romping on the beach, but how can you prevent your vacation costs from spiraling out of control? Can you really afford it? First, assess honestly whether you can afford the vacation you're thinking about. If you have to borrow most of the money to pay for it, then you probably can't afford it. If you do borrow to pay for your trip, you might find yourself financially strapped later on if the roof starts leaking or one of the kids needs braces. At the very least, you'll inherit the stress that comes with trying to pay off that debt. Think outside the vacation box Not being able to take a dream vacation doesn't mean you can't take a vacation at all. Everyone needs time away from their job and normal family responsibilities to recharge. If you simply don't have the budget for the vacation you want, think of other creative ways to spend your time off. Here are some ideas: Try a few long weekends instead of one or two consecutive weeks. Perhaps you can afford a couple of nights at a hotel or bed and breakfast instead of all week. Or maybe you can camp for a few nights at a state or national park, where rates are very reasonable. Vacation from home. Take day trips into a nearby city and visit museums, restaurants, and other attractions. Or head out to the country for a hike, swim, and picnic. Doing things out of the ordinary, like eating breakfast three times a day or setting up a tent in the living room to play games and sleep in, can be a big hit with kids. Young kids usually just like being with their parents and are mostly happy to go along with what you have planned. Let older kids pick an activity. It might not be Disney World®, but what about a trip to an amusement or water park, a day or two at the beach, an afternoon canoeing or fishing, a movie and dinner outing, or a ballgame? Instead of lamenting the fact that you can't take an exotic vacation, focus on what you can do and enjoy the time with your family. Consider house swapping. If you're willing to trade houses with other like-minded families to save on room-and-board costs, there are several websites where you can find more information. Plan now for next year (or the year after) It's never too early to start thinking about next year, or the year after that. Start saving now for that future getaway by making a budget and seeing where you might be able to squeeze a few dollars. Then consider opening a separate vacation account for those funds; otherwise, the money may get "lost" in your regular savings account and used for other purposes. Where you put your money will depend on your time horizon and other factors. A financial professional can help you examine your options. If you can contribute monthly to your vacation fund, great. If you can't, consider adding small windfalls like your tax refund, year-end bonus, or cash from birthdays and holidays. Knowing that you're setting aside money for a planned "dream" vacation can go a long way to making you feel less deprived in the years you can only afford to stay close to home. And when it comes time to actually planning your big vacation, keep cost-cutting tips in mind. For example, you might consider less convenient flights or a night or two at a less fancy hotel. Forget about the Joneses It's tempting to want to take grand vacations every year when everyone else seems to be doing so. But don't fall into the trap of thinking that you or your family will somehow be scarred if you can't. The important thing is to relax in a way that you can afford, and then enjoy that time with your family. You will have taught your children an important lesson--how to live a financially sound life, without worrying about what the Joneses are doing.

Modifying a Home for Independent Living

Because many homes aren't designed to accommodate changing physical needs, it's sometimes challenging for people with disabilities to live independently. But fortunately, homes can be modified to remove barriers to independence and reduce reliance on caregivers. For older individuals, home modifications can delay or even prevent the need for costly care in a nursing home or assisted-living facility.

Improvement options will depend on individual needs and physical concerns. But here's a broad look at some of the home modifications that might help make day-to-day living safer and easier for you or a loved one.

Inside the home

Kitchen

Remove cabinet doors to make it easier to see and reach items
Use turntables inside cabinets to reach supplies easily
Lower countertop surfaces and kitchen cabinets to make them more accessible
Install a cook top and a low wall oven instead of using a range; install an adjustable mirror over the stove to make viewing cook top from a wheelchair easier

Bathroom

Install a raised toilet with attached handrails (portable seats are also available if replacing the toilet is impractical)
Cover sink handles with rubber grips to make it easier to turn the water on and off
Install grab bars or poles near the toilet and shower
Replace bathtub with low-threshold shower

Other living areas

Replace door knobs with lever-style handles, or install door knob covers that are easier to grip and turn
Add nightlights to prevent nighttime falls
Remove throw rugs and thick doormats; replace padded carpet with thinner, level-loop carpet to prevent tripping and facilitate wheelchair or walker navigation
Widen doorways, remove doors, or install special hinges that allow doors to open wider
Install a ceiling lift device that will allow independent movement around the home
Install a stair lift or an in-home elevator

Outside the home

Apply nonskid surfaces to garage floors, decks, stairs, and walkways
Install handrails on both sides of stairs
Replace standard exterior lights with motion-sensitive or photo-sensitive lights
Construct an entrance/exit ramp

Paying for home modifications

Many home modifications are simple and inexpensive, but if you need to remodel extensively or hire a contractor, you may need help paying for improvements. Fortunately, financial help is available from public and private agencies and charities. For example, states and communities may offer special financing or grant programs, and charities often organize repair or improvement projects. To find help available in your community, contact your local Area Agency on Aging through the nationwide Eldercare Locator at (800) 677-1116, or through their website, www.eldercare.gov.

Tax breaks

If you itemize deductions on your federal income tax return, you may be able to deduct home improvements that are primarily for medical care and prescribed by your doctor. However, you can deduct only the amount that is more than 7.5% of your adjusted gross income. For example, if your adjusted gross income is $70,000, then you would be able to deduct expenses that exceed $5,250. Expenses that generally qualify include the cost of installing ramps, lowering or modifying cabinets, and adding grab bars. If an improvement increases the value of your home, it may be only partially deductible. For more information and a list of deductible expenses, see IRS Publication 502, Medical and Dental Expenses.

Some employers are adopting "phased retirement" programs to help retain employees who might otherwise retire early, begin receiving their pension benefits, and then seek employment elsewhere, often with a competitor. Phased retirement usually refers to an arrangement that allows employees who've reached retirement age to begin receiving their pension benefit while continuing to work for the same employer with a reduced work schedule or workload.

Some states also offer tax breaks to their residents, including sales tax exemptions, deductions, or tax credits; local property tax credits or abatements may be available as well. For more information, talk to a tax professional.

Solving the Pension Payment Puzzle

If you participate in a pension plan at work, you may be offered several payout options when you retire. The form of benefit you choose could be one of the most important financial decisions you ever make. Defined benefit plans--a crash course In a traditional pension plan (also known as a defined benefit plan), your retirement benefit is generally an annuity, payable over your lifetime, beginning at the plan's normal retirement age (typically age 65). Many plans allow you to retire early (for example, age 55 or earlier). However, if you choose early retirement, your pension benefit is actuarially reduced to account for the fact that payments are beginning earlier, and are payable for a longer period of time. If you're married, the plan generally must pay your benefit as a qualified joint and survivor annuity (QJSA). A QJSA provides a monthly payment for as long as either you or your spouse is alive. The payments under a QJSA are generally smaller than under a single-life annuity because they continue until both you and your spouse have died. Your spouse's QJSA survivor benefit is typically 50% of the amount you receive during your joint lives. However, depending on the terms of your employer's plan, you may be able to elect a spousal survivor benefit ranging from 50% to 100% of the amount you receive during your joint lives. Generally, the greater the survivor benefit you choose, the smaller the amount you will receive during your joint lives. If your spouse consents in writing, you can decline the QJSA and elect a single-life annuity instead (or another option offered under your plan). Your plan must provide you with an explanation of your payout options prior to retirement, including an explanation of your right to waive the QJSA, and the relative values of the optional forms of benefit available to you. Single-life annuity or QJSA? If you're married, a QJSA provides you with the security of knowing that your spouse will receive a guaranteed monthly income after you die. Why, then, might you choose a single-life annuity instead, knowing that payments will stop at your death? The primary reason is that the single-life annuity pays a larger monthly benefit. For example, if your spouse is in ill health and unlikely to survive you, the single-life annuity might be the better choice. If you were instead to choose the QJSA and your spouse pre-deceased you, you'd be stuck with the smaller QJSA benefit for the rest of your life. The single-life annuity might also be the better choice if your spouse has enough other retirement income available if he or she outlives you. Your plan may offer other distribution options as well, such as period certain annuities, "pop-up" annuities that increase your QJSA benefit if your spouse dies before you, and level income options that coordinate your benefits with Social Security. Maximizing with life insurance One option to consider when deciding between a single-life annuity and the QJSA is "pension maximization." Under this strategy, you choose the single-life annuity, with its larger benefit, and then use the additional income to purchase life insurance with your spouse as the beneficiary, thereby providing for your spouse's financial future. Cash balance plans Cash balance plans are a special form of defined benefit that provide a payout option not usually offered by traditional pension plans--the ability to take a lump-sum distribution (again, with your spouse's consent if you're married). Unlike annuity payments, a lump-sum distribution from a cash balance plan can be rolled over to an IRA or to another employer's plan that accepts rollovers. This might be an attractive alternative if you don't immediately need the income when you retire. However, if you choose this option, you'll be giving up guaranteed income for your life (and your spouse's life if you're married). You'll also assume the risk (and the potential reward) of investing the assets yourself. Putting the pieces together The best option for you depends on your (and your spouse's) age, health, and other financial resources. Your financial professional can help you sort out the options available to you, and help you put the pieces of this complicated puzzle together.

Equity-Indexed Annuities

An equity-indexed annuity (EIA), like any annuity, is a contract between you and an insurance company. You pay premiums in a lump sum or periodically, and the issuer promises* to pay you some amount in the future. With an EIA, that amount is tied to the performance of an equity index. The EIA issuer also promises* that even if the index declines, the interest rate on your annuity will not fall below a minimum guarantee (typically 3%). You get the opportunity to gain if the market performs well, and you also get the comfort of knowing your return will not fall below the specified minimum if the market performs poorly, as long as you hold on to your annuity for the entire term. An EIA may be a good alternative if you want an annuity that has the potential to earn a higher rate of interest than a fixed annuity, but is less risky than a variable annuity.

Basics

The first EIAs that were introduced worked very simply; the interest rate was determined by computing the difference between the value of the index to which the annuity was linked on the annuity's issue date and the value of the same index on the annuity's maturity date. If the difference was negative (i.e., the market performed poorly and the value of the index decreased), interest was calculated using the minimum rate guaranteed* by the issuer. If the difference was positive (i.e., the market performed well and the value of the index increased), the interest rate used was a percentage of the difference--but usually not the entire difference.

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Trust Basics

Whether you're seeking to manage your own assets, control how your assets are distributed after your death, or plan for incapacity, trusts can help you accomplish your estate planning goals. Their power is in their versatility--many types of trusts exist, each designed for a specific purpose. Although trust law is complex and establishing a trust requires the services of an experienced attorney, mastering the basics isn't hard.

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Asset Protection

If you haven't done any asset protection planning, your wealth is vulnerable to potential future creditors and, should the worst happen, you could lose everything.

Lawsuits, taxes, accidents, and other financial risks are facts of everyday life. And though you'd like to believe that you're safe, misfortune can befall even the most careful person. What can you do? First, identify your potential loss exposure, then implement strategies that are designed to help reduce that exposure without compromising your other estate and financial planning objectives.

First, a word about fraudulent transfers

Part of your overall asset protection plan might include repositioning assets to make it legally difficult for potential future creditors to reach them. This does not, however, extend to actions that hide assets or defraud creditors. If a court finds that your asset protection plans were made with the intent to defraud, it will disregard those plans and make the assets available to creditors. How can you avoid running afoul of the fraudulent transfer laws?

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