Making Cash Gifts to Intended Heirs Is Just One Way to Reduce Estate Tax
Q: I am retired and financially independent. I generally give my children and grandchildren generous cash gifts for birthdays, Christmas, etc. It has been suggested that I annually give each of them $10,000, the maximum cash gift allowed without gift tax consequences, in order to reduce future estate taxes. I have so far refrained from doing this because I want to remain independent and pay for long-term care, if necessary. Why should I be concerned about the taxes after I’m gone?
A: It’s interesting that those doing the “suggesting” didn’t mention that you can also reduce your estate by giving money to charity.
Some people want their heirs to get the maximum possible inheritance. Other people want to keep as much money from the government as possible. Because estate tax rates climb pretty quickly to 55%, and because the tax hit on retirement funds can go even higher, many people with estates larger than the exemption limit (currently $675,000) look for ways to shrink the future tax bill.
One simple way to reduce an estate before death is to make annual gifts of up to $10,000 each to family members or friends. Another way is by making charitable donations, which also have the benefit of offering a tax break. If you really don’t care one way or another, however, there’s little reason to take your heirs’ hints about dispensing money now. If you would like to reduce the estate tax bill but are not sure you’ll have enough money for yourself, it would make sense to talk to an estate-planning attorney.
Goal-Based Approach to Spending
Q: I have greatly enjoyed your columns, especially your no-holds-barred approach to the whiners who do stupid things or are just plain greedy. Keep it up! I have to admit I haven’t always managed my money very well, but it’s always been my fault, and I’ve learned from each mistake.
At one time (probably a long time ago) you asked readers for ideas on “psychological” approaches to saving money. One friend of mine used what I think is a novel approach to saving money for special things like a vacation. She broke down the expenses into small amounts--for example, the amount of one meal or the cost of each 100 miles of the air fare. Then, when faced with an impulse to buy something, she could say “Would I rather have this, or save the money to get 100 miles closer to my vacation spot?”
I’ve used this method myself with success and I hope it can help other people.
A: That is an excellent suggestion, especially for people who have trouble sticking to spending plans. Having a specific goal in mind and understanding the trade-offs involved in managing money are two key steps to financial fitness.
Another approach people use to control impulse spending is to understand what each purchase will cost them in terms of time and effort. A simple approach is to divide your take-home pay by the number of hours you work, and then ask yourself whether the cost of the item is worth X number of hours of work. Someone making a $40,000 salary might have a take-home hourly wage of about $16. She would have to ask herself whether that CD she wants to buy is worth an hour’s work.
Some people get even more elaborate with their “real hourly wage” calculations. They subtract all the costs of work--commuting, work clothes, child care, restaurant meals--from the take-home pay and add in all the hours related to work--time spent preparing for, commuting to and recovering from work. Folks who use this calculation say it gives you an even better idea of how much of your life energy is spent buying “things.”
If you want to know more about this approach, “Your Money or Your Life: Transforming Your Relationship With Money and Achieving Financial Independence” (Penguin, 1999) by Joe Dominguez and Vicki Robin is the place to look.
Playing Credit Card Game Right
Q: Credit card companies are happy to offer low teaser rates and other perks to people who carry a balance from month to month. Why isn’t there at least one company that gives a break to people who pay their bills on time?
A: Actually, most of them do. The perk is free use of their money. If you use a credit card with no annual fee and a grace period and you pay off the balance each month, you get the convenience of not having to fork out the cash for up to a month (depending on where you are in your billing cycle). Many cards also offer rebates, although you typically must pay an annual fee; still, if you pick the right card, charge enough and pay off the bill, you can get the perks for relatively little cost.
People who pay off their balances each month, in fact, are the only people who are playing the credit game right. Congratulate yourself, but don’t expect your credit card issuer to pat you on the back.
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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.
