Simple estate planning

Money Magazine recently covered the basics of estate planning. First, understand how the estate tax rates are going to change over the coming years.

In 2009 the federal exemption - the amount of an estate not subject to a 45% federal tax - has increased from $2 million to $3.5 million for individuals. This move is the result of a 2001 law that continually increased the limit for the eight years following. Oddly, the law calls for estate tax to be eliminated in 2010, then to revert back to 2001 levels ($1 million with a 55% tax rate above that) in 2011.

So, as of right now, you only have to worry about estate taxes if your estate is going to be over $3.5 million when you shed this mortal coil. However, even if your estate won't hit this level of assets, you should have an estate plan.

You need a will to make sure your inheritance plans are carried out as you instructed. Money recommended the site, aaepa.com, to help you find an estate planning attorney. You'll also want to do whatever you can to avoid probate. Why?

"It's not unusual for a $1 million California estate to generate $23,000 in probate fees," says Liza Weiman Hanks, a San Jose estate attorney and author of "The Busy Family's Guide to Estate Planning."

Some other things to understand; living trusts, 'pour over' will, irrevocable life insurance trusts, bypass trusts and disclaimer bypass trusts (read the fine article).

I'll describe irrevocable life insurance trusts to pique your interest. Normally, if you designate someone other than your spouse as the life insurance policy beneficiary, such as a child, the benefits paid will be taxed as being part of your estate. However, if there is a policy that covers you but that you don't own, the benefits shouldn't be subject to your estate taxes.

Enter the irrevocable life insurance trust. You set it up and the benefits are paid to the trust, free of estate taxes. There are some big caveats, however. For one, after the trust is established, you can't change the beneficiaries. This is part of the reason it's called irrevocable.

Estate planning tips for bear markets

There are a couple of estate planning "benefits" that you can get in bear markets and low interest rate environments. The first one is pretty trivial. Give away your assets that have lost value to your heirs. If an asset has fallen in value by 50%, you can now gift twice as much of it, up to the annual $13,000 limit, before having to pay taxes on the gift. Then, if the asset comes back in value, your heir should only have to pay the regular capital gains rates on the gain. If instead you held on to the asset and it came back to full value, when you shed this mortal coil, the asset could potentially be subject to the 45% estate tax, which is greater than the current capital gains rates.

Another tip is to use a grantor retained annuity trust, as described:

A GRAT is an irrevocable trust designed to transfer the appreciation on assets contributed to it with minimal or no gift-tax consequences. It's a popular strategy for transferring wealth in a low-rate environment. That's because of the current IRS-mandated interest rate of 2.4%. Here how it works: Let's say you set up a GRAT and fund it with $1 million in badly depressed stock. Assuming the simplest scenario and a trust term of two years (it could be longer), the GRAT would make annuity payments to you valued at $518,081 in each of those two years. (That includes a calculation of present value you don't want to do at home; those payments can be made in cash or stock.) If the asset appreciates more than those payments—and the odds of that seem good, with a low "hurdle" rate of 2.4%—the excess goes to your beneficiaries tax-free.

If it turns out the asset has appreciated less than those $518,081 payments, the trust fails. The asset returns to you, and you can start another GRAT and try again. A rolling GRAT strategy allows multiple possibilities of catching the asset's rise at a valuable moment. GRATs have a standard structure, so setting up the second or third one is less expensive than the first. (A simple GRAT might cost about $5,000.)

Now, those five grand fees can add up, so you wouldn't want to have too many failed GRATs.

Finally, the story points out that the IRS rate for intra-family lending is now %0.81. Try getting that rate from your local bank.

Falling air travel means bankrupt airlines

Plummeting jet fuel prices caused by the sharp decrease in the price of oil won't help the troubled airline industry. Passenger traffic was down 10.6% in November. We're also not talking about a nice (relatively) Chapter 11 bankruptcy that allows an airline to reorganize. Oh no, these are the Chapter 7s, liquidation.

Now, with both business and leisure travel in North America expected to fall as much as 15% this year, the industry may face another round of bankruptcies. Unlike the last spate of failures in the mid-2000s, not every airline may survive. In previous downturns, carriers often used Chapter 11 as a reset button that let them emerge from bankruptcy even stronger by shedding debt and other obligations, such as pensions. To play it safe, big carriers such as American Airlines and US Airways have raised fresh cash. But many airlines have hocked most of their assets, leaving them little to borrow against. "At this point, bankruptcy is liquidation," says Roger E. King, an airline analyst at institutional research firm CreditSights.

The 15% fall in North American passenger traffic squares with some numbers I found in a previous post (decrease to 240 million from 299 million passengers on American carries). That stories referenced from that post said ticket prices would rise. But this more recent article says that carriers are slashing fares to fill empty seats, but doesn't mention what's happening with capacity. Anecdotally, I haven't seen massive fare decreases.

The BusinessWeek article says Air Canada and US Airways are the two big airlines that are in danger of going under. From my reading, it seems that Air Canada's problems are due to the financial engineering of the hedge funds that bought it during its last bankruptcy.

Numismatist's dream

Over 100 years ago, a sketch was made of a potential $100 face value coin (free WSJ Yahoo! link). The coin was never made, but the sketch's discovery makes for good cocktail party chatter among numismatists. The details:

Such a coin would strictly have been used for commerce between countries, rather than general circulation, due to its hefty weight.

The sketch in question is one of many drawings contained in the so-called George T. Morgan sketch book. Mr. Morgan created one of the most popular silver coins, the Morgan silver dollar. That is the coin that appears in many Hollywood Westerns.

You may be asking yourself, "what is the highest face value U.S. coin actually made". It's the American Platinum Eagle. The market value of these coins is much higher than the face value though, so don't go using them as legal tender, even though you can.