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!

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.

In my practice, I try to patiently walk  clients through the maze of choices they need to make as responsible parents.  Here are some of the topics every new parent should consider:

NOMINATING A GUARDIAN: Guardians are persons appointed by a court to care for minors too young to care for themselves. In a guardianship, the court appoints a “guardian of the person”, to make decisions about personal care, such as where the child will live and what kind of care they will receive. The court also appoints a “guardian of the estate” to handle the child’s financial affairs until he or she comes of age.

Choosing a person to nominate as guardian is rarely easy.  The place to nominate a guardian for your child is in your Will. You can use a Simple Will, Husband and Wife Wills, or a Pour-over Will attached to a Revocable Living Trust. The best choice for you will depend on your family and financial situation. We’ll provide you with the help you need to make the choice, and craft a nomination that can survive challenges by surviving relatives who might disagree with your choices.

INCAPACITY DOCUMENTS:  These days, estate planning is not just about your property; it’s also about you.  You may wish to consider signing an advance health care directive, formerly called a “living will”, which specifies your wishes about life-prolonging treatment should you become severely ill. There are also other documents, called durable powers of attorney, which can be used to give those you trust the power to look after your financial affairs while you cannot.  Without these documents, your spouse may not be able to handle all of your affairs!

If you don’t have Incapacity Documents, a court-overseen Conservatorship may be necessary, costing time, money, and invading your personal privacy. By crafting these documents while you are competent you may be saving your family from heartache and grief in the future.

PREVENT SQUANDERING OF ASSETS: Without a Will, or even with a Simple Will or Husband & Wife Wills, your children will be entitled to their whole inheritance when they reach the age of majority. Can you imagine having a windfall when you’re 18?

Sudden wealth and eighteen year-olds rarely go well together. They rarely have the maturity to resist temptation, and some are susceptible to swindlers. Left to his own devices, an eighteen year-old and his money will soon be parted.

Select a Testamentary Trust or Revocable Living Trust to delay the distribution of your assets until your children will be more mature. Also ask your attorney about Spendthrift Provisions, which will prevent your child from pledging his or her inheritance as collateral for a loan!

PRESERVE YOUR PROPERTY FOR YOUR CHILDREN: It’s important to minimize costs of administering your estate. There are many different costs associated with the passing of property on death. Doing nothing is the most inefficient way of going about things: a sizable portion of your estate may go to the government or lawyers, rather than to those you love.

With proper planning, some of these costs (such as probate fees) are completely avoidable. Others (such as federal estate tax) can be minimized. Without estate planning, though, you will leave less for your family.

Probate Fees are set by law in California and are based on your GROSS estate, without taking into account mortgages or other debts! Here is a chart that illustrates why you need to ask the Law Office of Daniel K. Printz to help you avoid probate:

Fair Market Value        Probate Fees                         Percent of Estate Lost

$200,000                        $14,000                                                     7%

$600,000                        $30,000                                                     6%

$1,000,000                     $46,000                                                     5%

$4,000,000                     $66,000                                                     3%

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!