11/25 Free Money Finance

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Free Money Finance - Grow your net worth.

Why Many Homeowners are Having a Tough Time
November 24, 2009 at 4:45 pm

Here are some interesting thoughts from the preface of Stop Acting Rich: ...And Start Living Like A Real Millionaire:

The reason why so many homeowners today are having a difficult time making ends meet goes way beyond mortgage payments. When you trade up to a more expensive home, there is pressure for you to spend more on every conceivable product and service. Nothing has a greater impact on your wealth and your consumption than your choice of house and neighborhood. If you live in a pricey home in an exclusive community, you will spend more than you should and your ability to save and build wealth will be compromised.

My research has found that most people who live in million-dollar homes are not millionaires. They may be high-income producers but, by trying to emulate glittering rich millionaires, they are living a treadmill existence. In the United States, there are three times more millionaires living in homes that have a market value of under $300,000 than there are living in homes valued at $1 million or more.

My thoughts here:

1. I understand completely what he's saying. When we were looking to move, I had estimated that the upgrades we needed to the new (bigger, more expensive) place would have cost us at least $20k initially (that doesn't count moving costs or fees to sell our home) and another $5k per year more in maintenance/on-going expenses. And we were looking at a home in the $350,000 range. Imagine what the costs would be on a million-dollar place!

2. Following that thought, just think what happens to the people who get Extreme Makeover homes. It's no wonder that many of them go into foreclosure or have to be sold -- even though they aren't in a new/more expensive neighborhood, costs for home maintenance are now way, way more than they were before.

3. We saw several high-priced homes on a recent tour of model houses. Some of our thoughts were along the lines of "boy, I'd hate to have their gas and electricity payments."

4. In the above, there's more keep-up-with-the-Joneses stuff going on.

5. The "treadmill existence" here is what The Difference: How Anyone Can Prosper in Even The Toughest Times called living "paycheck to paycheck." Again we see this from another set of research.

6. Wow. That fact on three times more millionaires living in homes under $300k than million-dollar homes is very interesting. BTW, our home is well under $300,000 in value.

7. I would be remiss if I didn't mention my formula for buying a house. Seems like the statements above bear out that this is good advice. :-)

How to Regift
November 24, 2009 at 11:45 am

Consumer Reports lists six steps for regifting the right way as follows:

Ensure the gift is something you really can give again.
Check the condition.
Consider the gift's desirability.
Think: Can you get away with it?
Wrap it up nice.
Explore other options.

We're regifters, though I realize not everyone is. That said, regifting isn't something only a few people do. According to CR, it's done by 36 percent of Americans and is growing (up from 31 percent the year before.)

Here's what we do when we receive a gift we don't want (assuming we can't return it):

If we think it's a nice gift but just not something we would personally use/like, then we put it in our "regifting dresser" (we have a couple drawers set aside for items that can be regifted). If it's a total loser item, we put it in another drawer to be donated at a later date.

When a birthday, anniversary, holiday, etc. comes up and we need a gift, we check out the drawer and see if there's a suitable item available. By "suitable item" I mean we ask ourselves "would the recipient like this?" If the answer is "yes", we give that gift. If there aren't any gifts that we can say "yes" to, we go out and buy them something else.

Every year we look through the drawer and see if there's anything in it we have had for awhile and we don't think we'll ever get rid of. If there is, we give it to charity at our next group donation (we let a few things build up and then drop them all off at once.)

How about you -- do you regift? Why or why not?

Preparing For The Death Tax Debate
November 24, 2009 at 5:29 am

This post is part of the one day blog event "The Spectrum of Personal Finance." In this event, Brian of My Next Buck, will discuss 8 different emotions and relate them to personal finance. Here at Free Money Finance we will be looking at Death. To view the rest of the event look at the bottom of the page to see the other blogs hosting articles.

In the coming weeks we are going to hear more and more stories coming from Congress discussing the death tax. For those that don't know, the death tax, more appropriately known as the "estate tax", is a tax on wealth being transferred (i.e. inherited) from one generation to the next upon the death of the owner. The estate tax has always been dubbed as a tax on the uber rich, but if Congress doesn't make some changes in the near future, this will be a tax on anyone with taxable wealth of over $1 million beginning in 2011.

Unfortunately, $1 million sure can't buy what it used to, especially if you plan to retire someday. It is likely that a lot of us will shoot for nest eggs well over the million dollar exemption by the time we reach retirement, making our wealth eligible to be taxed at an alarming rate of 55% upon our deaths.

Don't Plan on Dying in 2011

This topic does have a sense of morbidity about it. It's really not cool to think about an appropriate time to die. Then again, with the way the taxes are currently set up, dying in 2009 vs. 2010 vs. 2011 could mean millions of extra dollars in taxes for dependents. Here are those three years' exemptions and maximum tax rates:

2009 - $3.5 million; 45%
2010 – No exemption, 0% (tax repealed)
2011 - $1 million; 55%

If an individual with a net worth of $3.5 million dies in 2011 compared to 2010, the individual's family would pay $1.375 million in additional taxes. Regardless of your political affiliation, I think it's safe to say that no one would want to pay an extra $1.4 million in taxes on January 1st 2011 compared to $0 on December 31st 2010.

Why You Should Care

The $1 million exemption limit that will go into effect in 2011 may sound like a fair amount. After all, a million dollars is a lot of money. For those that have worked hard and accumulated wealth over the years to afford retirement, and for those that have helped their parent's estate plan, this could mean that a bulk of hard earned money could be going to the Fed's coffers instead of your family's.

It's never too early to worry about these issues. At the age of 25 I plan on saving, investing, and growing my wealth to a nest egg that greatly exceeds $1 million. I would hate to put 40 years of work into building my wealth, only to see 55% of anything in excess of $1 million be taken away from my dependents by the government.

If you are a small business owner, you have to be even more concerned as a lot of small businesses get liquidated as a means for families to pay the estate taxes of the deceased. Speaking of liquidation, if your assets are tied up in real estate and other non-liquid investments, beware that those assets are likely to be sold promptly to pay off these taxes. Many families lose their businesses and even their homes because the majority of the owner's assets are not liquid.

What Can You Do About It?

While estate taxes are going to be unavoidable in the future, it's in the best interest of you and your dependents to take a few steps NOW to minimize the effect of the tax on your wealth. Here are a few things you can do today to plan for tomorrow:

Make lifetime gifts (up to the point of hitting a gift tax) – You can give up to $13,000/year per recipient without paying any tax. You can also pay someone's medical bills, tuition or give to charity without paying tax. This reduces the size of your estate and the eventual tax bill.
Create an irrevocable trust – These trusts allow you to "remove" ownership of the assets held inside the trust (usually cash, investment assets, a business). Therefore you are technically removing the assets from your taxable estate. Furthermore, the grantor is also relieved of the tax liability on the income generated by the assets in the trust.
Create a Living Trust with "A-B Provisions" – This trust is complex, but in short, it allows you to pass your estate onto your heirs, while still allowing your spouse to have full access to the funds. The funds will not be transferred to the heirs until the spouse passes. However, the tax bill is for the original amount of the grantor's estate, which means any appreciation in value of the estate will not be taxed.
Set up and Transfer a life insurance trust – A life insurance trust exists to own a life insurance policy. If the owner of the policy transfers ownership of a life insurance trust to a beneficiary, the proceeds will be completely free of estate taxes.
Go see an attorney and an estate planner – This stuff is complicated and an attorney can help you sort through all of the fine print and possibly come up with some more creative ways to mitigate your estate tax liabilities.

Keep an eye out over the coming weeks as the estate/death tax starts to make more news. It is unlikely we will see a repealing of the tax for 2010, but it is possible that new legislation will be passed that may impact your estate plans. Pay attention and meet with your financial advisors to ensure that your family is taken care of with or without you.

For further reading of the Spectrum of Personal Finance Event, please see: