It’s surprisingly hard to buy a house. In today’s depressed housing market, home prices and interest rates are low. Normally that would mean that homes would be rapidly purchased, thus driving up home prices. But here in the “Great Recession,” buyers are finding it hard to qualify and often need to provide significant down payments.

More and more often, young people and couples are turning to parents for help in making that house purchase. From an estate planning perspective, the devil is in the details; the success of the transaction will lie in making the proper choices given the facts.

First, you need to decide whether the help is a gift or a loan. Second, you need to decide if there will be any type of security if it is a loan.  Third, you need to decide how to treat the assistance in the parents’ estate plan (will or living trust).

If the assistance is a gift, then the advantage to the parent is that they move some money out of their estate, thus reducing potential estate taxes on estates over five million ($5,000,000).  The disadvantage to the parent is that they might have to pay gift taxes on the transfer.

If the assistance is a loan, then there are two advantages that leap out. First, the parent can can secure the loan with a lien against the home. This would be a second, since the mortgage company is going to take the first position as the primary lender. Second, as a lender, the parent is creating a stream of income, essentially creating an annuity earning some interest.

The disadvantage of a loan is that if the parent suddenly needs money, the parent can’t pull the money out of the house, the way they could if they had put the money into a different investment vehicle like a mutual fund.  Also, if the child doesn’t pay back or misses payments, they are unlikely to enforce the lien, thus making the lien a hollow threat.  Finally, if the assistance the parent provides is to actually co-sign the loan, then they could be on the hook for the entire loan amount if child defaults, goes bankrupt, passes away, and can suffer credit blows from late payments.

Parents who want to help out should always remember that their investment could be lost due to child’s creditors foreclosing on the home with no other security.  Therefore, it’s the assistance, rather than the investment, that should be the driving motivation.

Whatever choices the family makes, the parent’s act should be memorialized in a writing so it can be understood in the context of their estate planning.  If this was a gift, was it an advance on their inheritance that should be taken into account when diving property among children?  If it was a loan, will it be forgiven on parent’s passing or should it count against the inheritance?  The idea here is to minimize the possibility of litigation between children on the parent’s passing by making the parent’s wishes about the assistance to that one child very clear.

If you’d like to help out your child with buying a house, or if you need assistance from your parent with a purchase, sit down with a certified financial planner and with an estate planning attorney to make sure it’s done right.  You can call my office at any time for a free consultation at (858) 720-8250.

A great additional resource can be found here – a comprehensive review of parent/child mortgage help advice!

As so often happens, the most important story is the one not told.  Yesterday, Inside Edition broke the news that the late Tony Curtis, who passed away in September of 2010, had specifically disinherited his children in his will. To the tabloids, what is important here is that, five months before his death, Tony Curtis re-wrote his will.  (Amusingly, some have referred to five months before his death as his “last days.”)

I haven’t personally seen the will, so I’m don’t know whether Inside Edition is correct in it’s implied allegation that Mr. Curtis apparently didn’t leave anything to his children. After all, he could have easily provided for them in other ways (life insurance, direct beneficiary investment accounts, etc.).

Assuming that they are correct,  what is astonishing is not that he disinherited his children, which frankly happens often enough not to produce comment by estate planning attorneys like myself, but that he chose to do so publicly when it would be so easy to privately leave his estate to his widow, Jill Vandenberg Curtis.  Let me quote InsideEdition.com:

“INSIDE EDITION has obtained the will, written five months before his death from cardiac arrest last year at age 85. His children are listed by name, including Jamie Lee. Then there’s this statement: “I acknowledge the existence of my children…and have intentionally and with full knowledge chosen not to provide for them.”  Instead, Curtis leaves his estate to his widow, Jill.”

Ignore for a moment that Tony Curtis has joined a long line of celebrities who fail to consider the ramifications of the Probate process.

Instead, consider this: Tony Curtis could have accompished the exact same thing, disinheriting his children and leaving his entire estate to his wife, and done it privately, without his widow and children being exposed to our prying eyes.

If Tony Curtis had made a trust, then his will would simply direct that his entire estate be distributed to the trust. Then, in the trust document, which would remain private, he could direct that everything be distributed to his wife.  Voila!  The exact same result, but without dragging the family through the tabloid mud. After all, it’s really none of our business.

Furthermore, by using a trust, he could have easily left something to his favorite charities, to particular friends, or to his grandchildren or great-grandchildren, who one assumes are too young to have voiced disapproval over Mr. Curtis’ life choices. It begs the question: was the omission intentional? Did he actually desire this result, or did he just not ask anyone’s advice? I think it was the latter – most people simply don’t know the right questions to ask.

Ironically, Jill Curtis’ response to the tabloid reports was: “Tony’s last will and testament and his passing wishes . . . are private family matters.” Sadly, they’re not private at all. But they could have been. 

PURPOSES OF AN INTERNATIONAL TRUST

There are two main purposes of an international trust for U.S. citizens.  The first is to combine domestic and offshore assets into a unified estate plan with a common trustee and set of instructions.  The second use of interantional trusts is for asset protection.

ASPECTS OF AN INTERNATIONAL TRUST

International trusts for asset protection are refered to as “Asset Protection Trusts.”  The countries which provide for Asset Protection Trusts are: The Cook Islands; Nevis; Belize; Bahamas; the Channel Islands; Switzerland; and, Liechtenstein.

According to Jacob Stein’s treatise on asset protection, common provisions enacted among some, but not all, of these countries are:

1. there is no recognition of foreign judgments with respect to trusts
2. there is a very short statute of limitations on fraudulent transfers
3. to establish a fraudulent transfer the creditor must show that the debtor was insolvent, and must establish the debtor’s intent to “hinder, delay or defraud” beyond a reasonable doubt;
4. the anti-duress provisions are incorporated into the statutes; and
5. spendthrift protection is extended to self-settled trusts.

CAUTIONS REGARDING INTERNATIONAL TRUSTS

Two things should be noted.  First, transferring your assets offshore does nothing to relieve a U.S. citizen from declaring income for tax purposes; we must declare non-domestic income and capital gains.  Also, there has been an increase in regulation regarding reporting requirements – as a result, some resident trustees in the foreign jurisdictions have either retired or greatly reduced the number of separate trusts they are willing to handle at a time.

Before implementing any estate planning, financial planning, or tax planning strategy, be sure to consult with and heed the advice of a professional certified to assist you with these matters!

Often, a person or couple will delay buying life insurance until they feel they can better afford it. However, that’s not wise. The older you get, the more expensive new life insurance policies become and the less insurable you become. At some point, life insurance will become unavailable to you, either due to age or to a medical condition. The best time to buy life insurance is while you are relatively young and healthy.

Why to buy life insurance? As a tool in estate planning, life insurance can:

1. Create an estate for your spouse or children.
2. Provide cash needed to settle your estate.
3. Allow you to give to charity without depleting your estate.
4. Cover estate tax expenses.

Like the federal government, most states have some form of Estate Tax (sometimes referred to as a ‘death tax’ when considered in combination with inheritence taxes).  The states generally follow the federal government’s exemption amounts – anyone who dies with less than the exemption amount in their estate is spared taxation.

California, however, is not one of those states.  California has no state Estate Tax, and is not likely to enact one in the next decade at least, based on current politics.  You will not file a California estate tax return, though you will still  need to consider filing the decedent’s past due tax returns, final tax returns, fiduciary tax returns, etc.

That doesn’t mean that, as a California resident, you can necessarily forget about state Estate Taxes.  If you have a diverse portfolio of investments, some of those assets may be in other states.  Typically, if you have property in two states, you’ll likely be subject to the tax laws of both states.

If you’re in that situtation, consult with an experienced estate planning attorney and an estates CPA.

The administration’s proposal also means that the temporary total repeal of the estate tax, which would have meant that even the very rich could have passed their entire estates free of estate tax at death, will not occur in 2010 as planned. It also means the estate tax credit won’t reset to Clinton-era levels of $1 million dollars and a 55% tax rate in 2011, which is when the current legislation, passed as part of the 2001 Bush tax cuts, was scheduled to expire.

The Senate’s recent legislation included an amendment that would increase the Estate Tax Exemption to $5M per individual, but that has to be hammered out with the House of Representatives, who if left to their own devices might argue for lowering it (don’t fret – they’re not left to their own devices!).

What this means for you and your estate planning attorney is that now is the time to do some serious planning – let’s pull out those dusty trusts, kick the tires, and do some serious wealth management. If you’ve been putting it off because of uncertainty about the estate tax, now is the time to act!