By Tom Lauricella
It's time to hear from you. In the past six months, this column
has covered everything from reverse mortgages to essential
estate-planning documents. We've also heard a lot from readers.
Here, we follow up on some of that mail.
Downsizing homes. In January, we looked at the benefit of
downsizing to a smaller home sooner rather than later in
retirement. That can boost savings and lower expenses. But several
readers noted a pitfall: property taxes.
Among them was a 92-year-old man from Mission Viejo, Calif.: "I
have been in my home for 41 years and pay property tax" under the
terms of California's Proposition 13 limits. If I sold it now and
had to pay today's prices for a smaller place the property tax
would be what? Five [or] 10 times what I pay now?"
This is a problem in California, where the state's Proposition
13 limits property taxes to 1% of the purchase price and caps the
growth rate at an annual 2% of assessed value, notes Sandra
Conners, a financial planner at Hokanson Associates in Solana
Beach, Calif.
Ms. Conners points to clients who bought their home 25 years ago
for $200,000. Today the house is worth $1.2 million, and the owners
are paying annual property taxes of $4,250. They are considering
buying a home worth 25% less than their current house, but would
face property taxes of more than $8,000 a year. "Even though they
are downsizing, their property-tax expense almost doubles," she
says.
Reverse mortgages. In March, we looked at how tighter rules for
obtaining reverse mortgages may make them a better retirement
planning tool. With a reverse mortgage, a homeowner borrows money
against the equity in his or her home.
A retired couple from Del Mar, Calif., asks if the interest on
the loan from a reverse mortgage is tax deductible. They noted
their statements show an "interest" charge.
The answer is no, says David Garcia, a senior financial planner
at Evensky & Katz, in Coral Gables, Fla. "When you die, the
lender gets the loan amount plus interest from the equity in the
home," he explains. "But you never make a payment on the loan. If
no interest is being paid, there cannot be a tax deduction."
Retirement documents. We wrote in April about four
estate-planning documents that are must-haves. First on the list
was a will. One reader wrote to ask, "I had a will made in Texas
but now live in Colorado and will remain here. Does it matter if
the will was made in one state but executed in another state?"
Bernard Krooks, an elder-law attorney in New York City, says
it's worth having a will reviewed after moving to a new state. But
"generally speaking, the will should be admitted and valid so long
as it was executed in the laws of the [original] state," he says.
"If he did it right in Texas, it should be good in Colorado."
Susan Pacheco, from Carlsbad, Calif., suggested the column on
must-have documents should have mentioned revocable trusts,
generally used to pass money or property to an heir without getting
tied up in probate court.
Alan Winters, a New York City estate-planning attorney, says
that for most simple situations, a will should do the trick. But
for those anxious about probate court, which entails a financial
cost and disclosure of certain information, a revocable trust is a
workable alternative, he says.
The complication, he says, is that for a revocable trust to
work, assets such as a home, car or accounts must be retitled in
the name of the trust. "If you forget something...your heirs end up
going through probate anyway."
He adds that a revocable trust can be helpful where elderly
parents can't manage their own finances. While a power of attorney
is usually employed in those situations, a revocable trust can
offer a less cumbersome way for a child or trustee to handle the
finances, he says.
A reader from Cary, Ill., wrote that we should have mentioned
the importance of naming a beneficiary on investment accounts. He's
right.
"Especially on an [individual retirement account] and a 401(k),
if you don't designate a beneficiary, that can tie up your heirs in
court for quite a long time" says Mr. Garcia in Florida.
A number of firms, such as Fidelity Investments and Vanguard
Group, offer "transfer on death" registration for non-retirement
investment accounts, Mr. Garcia adds. That enables non-retirement
assets to pass to heirs outside of probate.