Vacation Properties and Income – Part 2

Another way for retirees to generate income from a vacation home is to sell it. By using the federal capital gains exclusion in conjunction with the sale of your primary residence, you can potentially realize tax-free income. Here’s how it works. The basic capital gains exclusion rules state that you must have owned and used the home as your primary residence for at least two years out of the five-year period ending on the date of the sale. If you are married, the full $500,000 exclusion ($250,000 for single homeowners) is available as long as one or both of you satisfies the ownership test (two years) and you both satisfy the use test (primary residence).

Vacation Properties and Income – Part 1

If you have a vacation home, you’re already aware of the enjoyment it provides and the benefits it can offer at tax time. But you may not be aware of how vacation property can be used to generate income in retirement or how it can play into an estate plan. In fact, vacation properties offer retirees a number of different options in managing their finances and estate.
Vacation property may be used to generate income in several different ways. The first, and most obvious, is renting it. The IRS allows you to deduct mortgage interest on your primary residence and one additional property up to a limit of $1 million in combined mortgage debt for mortgages taken out after 1987. Current tax rules also allow you to rent out a second home for up to 14 days per year without having to report the rent as income. If you rent for more than 14 days, the home is considered investment property, and rent must be reported as income. Converting the property to an investment property, however, allows you to deduct rental expenses, such as insurance and utilities, if you have a net profit on the property (deductions are limited if you report a loss). You can still use an income-producing property for personal use while maintaining your tax advantages — but only for the greater of 14 days or 10 percent of the total days it is rented. Maintenance days do not count as personal-use days, but use by in-laws or other part-owners does, even if rent is charged.

Simple Truths

As a financial advising firm, one of the simple truths we have learned is that relationships are the single greatest influence on how people use their money and plan for the future. When people talk about their hopes and dreams, they talk about the people they love. Their future, the life they wish to live, is always full of the people most important to them. They don’t talk first about dollars and cents, Dow averages, or bond yields. They talk about a spouse, a parent, a child. When imagining their financial futures, even those without family often focus on others, such as employees, friends, faith communities, and charities.

Keeping Your Emotions in Check…

In times like these, with the economy in a tailspin, and the stock market in the tank, investing requires an extra dose of patience, perseverance and perspective.
It takes patience to ride out the bear market, perseverance to continue to invest even through a difficult economy, and perspective to see the long-term picture and realize that recessions and bear markets are just part of the natural economic cycle. Slumping economies and bear markets of the past have always turned around — and there is no reason to believe that this time will be any different.

Saving for College

Saving for College
Another school year is around the corner and your children or grandchildren are that much closer to college. If you haven’t already started to save for their college costs, this may be a good time to talk to your adviser about setting up a tax-sheltered college savings plan.
By planning ahead, you can use a 529 college savings plan to give your children a head start on their college costs. There are two types of 529 plans: college savings plans and prepaid tuition plans.
College savings plans are state sponsored investment accounts that allow participants to contribute regularly. A 529 plan account grows tax-deferred and withdrawals from the plan for qualified educational expenses are exempt from federal income tax. There are no income limits.

Incentive Trusts — Keeping a Steady Hand on the Tiller Part 1

A good legacy may work wonders for those left behind, but you may also believe that your heirs need more than mere financial benefit from your estate. To provide direction and help ensure that important life goals remain foremost in their heirs’ lives, many people are including incentive trusts in their estate plans.
Where You Can Focus Your Legacy
Education: Incentive trusts have been used to provide extra support to those heirs who pursue advanced degrees, focus on designated fields of study, or attend specified institutions. Some trusts are designed to reward instances of outstanding scholarship and academic achievement. Some permit withholding support from those who fail to meet minimum levels of accomplishment.
Moral and family values: Some trusts are intended to promote family life by providing income support payments to heirs who choose to stay at home with children. Some trusts offer beneficiaries bonuses for childbearing, foster care, or adoption. Some withhold benefits from those heirs who might be convicted of a crime or fail a prescribed drug or alcohol screening test.

Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.

Financing Long-Term Care

One of the biggest worries of those caring for an aging parent is how to pay for the care needed. If you provide more than half of a parent’s support and his or her gross income is less than $3,400 in 2007 ($3,500 in 2008), you can claim your parent as your dependent, giving you a tax exemption for each parent so cared for and allowing you to write off much of the medical expenses. (Note: The dependent exemption phases out at higher income levels. Check with your tax advisor.) You may also be able to claim a federal tax credit that will enable you to take up to $3,000 off the cost of in-home care or day care. Another option is the flexible spending account (FSA), which lets you pay for a certain amount of care each year with pretax dollars.

If sending your parent to a nursing home is inevitable, make sure you research each home extensively. Reservations at the home selected should be made at least a year ahead of the time that you expect your parent will need it, as waiting lists are typically long at well-respected facilities.

Keep in mind, too, that the government offers limited financial help for those families paying for nursing home care. Medicare will only pay for care on a short-term basis, and Medicaid only offers benefits to low income individuals with limited assets. And, with the average nursing home stay costing upwards of $6,266 per month, financial planning has become even more crucial to the economic well-being of adult children responsible for the care of their elderly parents. Don’t wait until the last minute — start planning now to ensure the future care of your parents.

Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.

Helping to Care for Aging Parents – Research Your Options

Many Baby Boomers are finding that their aging parents are in need of health care assistance. Luckily, there are many options available today to help your parents grow old gracefully, either in their own home or in a facility, and several ways that you can finance the costs of the care.
If your parents are healthy seniors who can look after themselves, they generally are eligible to enter a continuing-care retirement community that allows them to buy or rent an apartment and ensures them lifetime nursing care when it is necessary. Another option for healthy seniors is private long-term care insurance, which can help cover nursing-home costs or the cost of an in-home aide.

There are a wide range of services and options available if your parent needs more substantial assistance and is not eligible for the above-mentioned services. Many families opt for moving an aging parent into their own home. If you are able to peacefully coexist with your parent, this may be a good idea because the arrangement frees you from worry about the upkeep of a second home, and you and your children can have valuable time to spend with your loved one.

Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.

Estate Planning Checklist

Bring this checklist to a qualified legal professional to discuss how to make your plan comprehensive and up-to-date.

Part 1 – Communicating Your Wishes
• Do you have a will?
• Are you comfortable with the executor(s) and trustee(s) you have selected?
• Have you executed a living will or health care proxy in the event of catastrophic illness or disability?
• Have you considered a living trust to avoid probate?
• If you have a living trust, have you titled your assets in the name of the trust?
Part 2 - Protecting Your Family
• Does your will name a guardian for your children if both you and your spouse are deceased?
• If you want to limit your spouse’s flexibility regarding the inheritance, have you created a Q-TIP trust?
• Are you sure you have the right amount and type of life insurance for survivor income, loan repayment, capital needs and all estate settlement expenses?
• Have you considered an irrevocable life insurance trust to exclude the insurance proceeds from being taxed as part of your estate?
• Have you considered creating trusts for family gift giving?
Part 3 – Reducing Your Taxes
• If you are married, are you taking full advantage of the marital deduction?
• Are both your estate plan and your spouse’s plan designed to take advantage of each of your $2.0 million applicable exclusion amounts?
• Do you and your spouse each individually own enough assets for each of you to qualify for $2.0 million applicable exclusion amounts?
• Are you making gifts to family members that take advantage of the $12,000 annual gift tax exclusion?
• Have you gifted assets with a strong probability of future appreciation in order to maximize future estate tax savings?
• Have you considered charitable trusts that could provide you with both estate and income tax benefits?
Part 4 – Protecting Your Business
• If you own a business, do you have a management succession plan?
• Do you have a buy/sell agreement for your family business interests?
• Have you considered a gift program that involves your family owned business, especially in light of “estate freeze” rules? (These rules were enacted by Congress to prevent people from artificially freezing their estate values for tax purposes.)

Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.

Collect Your Thoughts – Part 4 In a Financial Planning Series

Before you talk to a lawyer about what type of advance directive may be best for you, you can save substantial time by understanding the types of issues the document should cover.

Start by talking to your family, doctor(s), and potential health care proxy about your medical wishes in as much detail as possible, outlining any information about the types of medical decisions that may come up at a later time based on your current health. Then, have your attorney draw up your advance directive. You and several witnesses will need to sign it.

Once it is written, store this directive with your other important documents and make sure your family and lawyer know where to find it. Also, give copies to anyone you’ve named as health care proxy, your doctor, and health care facility (such as a nursing home). In addition, you and/or your lawyer should review this document at least once every five years, or when there is a major change in your life (such as a divorce or the death of a spouse).

Informing loved ones and doctors about the types of medical care you would choose in a wide variety of situations can bring peace of mind to those most concerned with your health. Though you cannot anticipate an unexpected health crisis, you can prepare ahead of time to ensure that you are cared for in a manner that coincides with your intentions, even if you cannot make this decision for yourself.

Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.