Decision to Reduce Estate Tax Burden Is in the Hands of Owner, Not Heirs

Q: My mother is 82 and lives in Florida. She created a trust after her husband died and her estate is more than the $675,000 estate tax exemption. How can we reduce the estate taxes we must pay upon her death? She is afraid of running out of money if she reduces her estate to $675,000 by gifting. With nursing home costs, projected life spans and a conservative return on her investments, how likely is she to run out of money if she had $675,000? And how do we tactfully suggest these things to her so as not to seem like money grubbers and to dispel her fears of running out of money?

A: First, let’s correct a misconception: You won’t pay any estate taxes when your mother dies. Her estate will. Though estate taxes would reduce the amount that comes to you, it’s not coming directly out of your pocket. If your mom chooses not to do anything to reduce her estate tax burden, that’s her choice and there’s not much you can do about it. It’s her money. (You might repeat that to yourself several times, just to make sure it sinks in: It’s her money. It’s her money. It’s her money.)

You also should know that the amount that escapes estate taxes is scheduled to increase to $1 million by 2006. In addition, there is serious talk about doing away with the estate tax altogether. While that doesn’t eliminate the need for estate planning, it could lessen the damage if she decides not to do anything.

If your mother wants to reduce possible future estate taxes, she needs to talk to an experienced estate-planning attorney and to a good financial planner. The planner can help crunch the numbers to determine if her fears of running out of money are realistic or not.

Without knowing all the details--how much she spends now, how much her future care may cost, how she feels about giving money away and what she considers “enough”--it’s impossible to guess whether $675,000 is adequate or not. If she and the planner determine she can give some money away, the attorney can suggest the best ways to do it. That way, you can stay out of the “suggesting” business entirely.

You can raise the issue by asking if she wants help in finding the right advisors. But the choice to pursue the help should be hers and hers alone. Remember: It’s her money.

When to Drop Collision Policy

Q: When should a driver drop the collision and comprehensive coverage from his or her insurance policy? I’ve heard you should drop it after the car is 5 years old, but I’ve also heard there was some kind of financial rule of thumb.

A: There is. And like all rules of thumb, it must be applied carefully.

One rule suggests that if your auto insurance premium equals more than 10% of the value of your car, you should consider dropping your collision and comprehensive coverage. (Typically, you pay for three major types of coverage: liability, which pays for the damage you do to others; collision, which pays for the damage you do to your own car; and comprehensive, which covers theft, fire and other non-traffic incidents.)

The problem with that rule is that in areas with high insurance costs, such as Los Angeles, you’d be dropping collision and comprehensive shortly after buying the car. That’s why other people suggest dropping the coverage when your car is 5 to 8 years old.

Chances are an insurance company wouldn’t give you much if a car that age were totaled, especially compared with the cost of comprehensive and collision coverage.

If you’re not sure about the value of your car, you can check at a Web site such as https://www.edmunds.com or call your insurance company and ask how much you’d get if the car were totaled.

The value for insurance purposes is likely to be somewhere between the trade-in and what the car would sell for on a dealer’s lot. If your car would cost more to fix than the insurer thought it was worth, the company would just send you a check for that amount.

Before dropping these two coverages, make sure you can afford to buy yourself another ride if yours is totaled. You don’t have to come up with the money for a new car, but you should be able to scrounge up at least as much as the insurer would give you. Given how quickly most cars depreciate, that shouldn’t be too tough.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.