Simple Wills and Living Wills

Do you need a simple will or a living will?

Probably you need both. One is effective before you die, the other after death. A "simple willl" is a generic name given to a will that has only a few dispositive provisions. The typical simple will leaves everything to the surviving spouse, or, if the spouse does not survive, to certain specified beneficiaries, such as children. It's called a simple will because it is simple, meaning it isn't a complicated document. A simple will takes effect upon death.

A "living will," on the other hand, becomes effective during life; hence the word "living." A living will is designed to set forth your wishes and desires about certain end-of-life matters, such as the extent to which your family and medical personnel should go to keep you alive. Many people do not want to remain alive if they are in a permanent vegetative state, unresponsive, comatose and unable to care for themselves in any way. A living will directs that if you are in such a state, you want life support (such as food or breathing assistance) to be removed, and you want to be allowed to die. In Utah a living will has a formal name: Advance Medical Directive, and state law specifies exactly what needs to be in the Directive to make it legal.

Regardless of whether you have a simple (or other) will or a living will, both need to be executed with certain formalities, and either can be changed at any time before death.

Having Your Cake and Eating It Too

No, you really can't have your cake and eat it too, but that's exactly what a lot of people want and even expect from bankruptcy. They look on bankruptcy as a magic potion that will solve all of their financial problems and let them live the lifestyle they dream of (and were probably living in the first place). Bankruptcy is a serious step and requires serious effort. It is possible, even likely, that when someone files bankruptcy they will lose their house, their car, their boat, and a lot of other things that they financed. The reason is, if they can't make the payments before filing, they won't be able to make the payments after filing.

Instead of focusing on what they lose by filing bankruptcy, they should look at what they gain: Freedom from debt collectors. Freedom from robbing Peter to pay Paul. Freedom from working two or three jobs to make ends meet. Freedom to spend more time with family and friends. The chance to start over.

Bankruptcy is intended as a second chance. The "fresh start" concept is central to bankruptcy. But a fresh start doesn't mean going back and doing the same things over again, making the same mistakes, incurring the same debt. It means starting over and doing it better this time. This probably means living within your means, absolutely, positively not buying anything you don't need and setting priorities among what you do buy. It's hard, but bankruptcy wasn't meant to be a simple solution. And in the end, it's worth it.

Deficit Commission Report Fails

My Facebook page has been alive with comments from Realtors and those in the real estate profession about the Deficit Commission Report that proposes, among other things, to eliminate the mortgage interest deduction (MID) for taxpayers. As the tax code now reads, interest paid on mortgage loans is deductible from income in calculating income tax. Real estate professionals are afraid that, if the MID is eliminated, the real estate industry will crumble.

Fears that the sky is falling are premature. The report failed to gain enough votes from the Congressional committee to advance to Congress as a whole. It received 11 votes, three shy of the 14 needed for advancement. While any of the proposals in the report could be considered piecemeal, its rejection assures that the entire report will not be voted on.

In addition to eliminating the MID, the report also called for changes to Medicare, freezes on federal salaries, an increase in the federal gas tax and raising the retirement age for Social Security. If France is any indication, the last will be wildly unpopular.

Credit Cards or Retirement?

One of the best reasons to file bankruptcy may be to plan for your retirement. If you're paying the minimum amount each month on credit card debt, you can't be saving for retirment. If you want to retire in any form, you have to start saving now.

Suppose you have $20,000 in credit card debt and all you're paying is the minimum amount each month. Under most credit card agreements, the minimum varies, based on the outstanding balance, and is often something like 1.5% of the balance. Paid at $300/month that $20,000 will take nearly 37.5 years to be paid in full at an 18% interest rate, which is pretty cheap for a credit card.

Now suppose that instead of paying the debt, you file bankruptcy and get a discharge. Then you pay $300/month into an IRA that earns 6% a year. At the end of 37.5 years, you will have over $500,000 in a retirement account.

Lots of people feel they are being irresponsible if they don't pay their debts. Being responsible also means that you have made adequate provision for retirement so you are not a burden to your family or society. Bankruptcy may be the responsible choice.

Last Minute Tax Planning

This is the time of year that many people start last-minute tax planning. This year, because the estate tax was repealed for 2010 and the gift tax was reduced to 35%, last minute planning is even more important, and may really be last minute. There is a lot of uncertainty about whether Congress will retroactively reinstate the estate tax for 2010 and retroactively increase the gift tax to the scheduled 55% that will be imposed on January 1, 2011. While we don't recommend that anyone die before December 31 just to take advantage of the lack of an estate tax in 2010, gift planning should be considered.

Everyone can give up to $13,000 tax free to any other person, and the number of people to whom you can give $13,000 is not limited. Beyond that, if you want to give more to a single person, you have a $1 million lifetime exemption that was formerly tied to the estate tax exemption. To the extent you use the lifetime exemption for gifts, it isn't available to reduce the estate tax. If you choose not to use the lifetime exemption, gifts in excess of $13,000 are taxed at 35%. However, if the gift tax bumps up to 55% as scheduled on January 1, and especially if the estate tax exemption is lowered to $1 million, also as scheduled, it might make sense to give gifts this year and pay the 35% tax as opposed to using any part of the lifetime exemption or paying the 55% tax rate next year.

The prudent thing seems to be to plan for some gifts, but not actually make them until late December when Congress has adjourned for the year and any retroactive legislation might be a little clearer. Then consult with your tax professional.

Estate Tax Status

We are fast approaching the end of 2010, and the end of the no-death-tax year. The estate tax went away on December 31, 2009, and hasn't been in effect since then. It is scheduled to return in 2011, with a higher rate and a lower exemption. Most observers don't believe that will happen, but Congressional gridlock might rule the day.

According to the Wall Street Journal, the most likely scenario is that Congress will enact a stop-gap measure that will reinstate the estate tax at 2009 levels. That means $3.5 million in exemption and a top rate of 45%, rather than the $1 million exemption and 55% rate now scheduled if Congress doesn't act. One thing that does seem certain is the estate tax will be back in 2011 in one form or another.

Debt Settlement Companies Prohibited from Collecting Advance Fees

Under amendments to the Telemarketing Sales Act that took effect October 27, 2010, debt settlement agencies that offer to renegotiate or settle consumer debts for a fee are now prohibited from collecting advance fees from consumers. Before such an agency can collect a fee, three things must happen:

The company has settled, reduced, renegotiated or otherwise changed at least one of the consumer's debts.
There is a written agreement between the consumer and the debt settlement agency.
The consumer has made at least one payment under the terms of the negotiated or changed agreement with her creditor.

This law applies to credit card or other unsecured debt, and is not applicable to companies that claim to renegotiate mortgage loans.