June 17, 2012
DEAR BRUCE: I am single and own my home and car. I have never had an auto accident and don't throw parties at my home. I don't drive all that much, except back and forth to work.
Explain to me why I need to pay an extra $200 to $300 a year to have umbrella coverage. I am in my 50s, and my parents, who owned their own home, never had it. I do have $500,000 liability on my auto insurance policy. What's the likelihood I am going to overturn a school bus full of kids?
K.K. in Maryland
DEAR K.K.: From your lips to God's ears!
The likelihood is that you will never overturn a school bus full of kids. However, there is a very real possibility that you might hit a passenger car with one or two children in it. Do you have any idea what a lengthy hospital stay would cost? In today's world, it wouldn't take a whole lot of damage to well exceed $500,000 in terms of personal liability.
An umbrella policy is liability insurance that fills coverage gaps for all policies underneath it, such as homeowner and auto. In my view, carrying anything less than a $2 million umbrella policy is the next thing to being underinsured.
The awards in your parents' day were substantially lower, but even then they were foolish not to have an umbrella policy. Did your parents carry fire insurance all those years? The likelihood is yes. Did their house ever burn down? The likelihood is no, but insurance is still necessary. Accidents don't always happen to the other guy.
The reality is that for an extra $200 or more per year, an umbrella policy is one of the best buys you will ever make. Let's assume you have no claims whatsoever. At your age, that amounts to about $6,000 to $9,000 in premiums over your remaining years. I would think your peace of mind would be worth a great deal more than that.
DEAR BRUCE: To make a long story short, my brother is in prison and has at least 15 more years to go before his release. He's in on drug charges. He is working to make himself better upon his release. My siblings and I have remained close to him. Due to our parents' ages (68 and 73), it's likely they won't live to see his release. No one, including our parents, wants to disown him, and we all want him to get his fair share of our parents' estate.
Several people have told us that if our parents don't disown him, the state will get his share as payment for "housing" for him. Is that true? If so, is there anything we can do to prevent it?
He's married, and his wife is sticking by him. If something were to happen to her before he is released, she wants him to have their home, which is in both their names. Her two kids from a previous marriage are fine with this and, in fact, love my brother as if he were their father. Can the state take their house?
Believe me, we all realize what a huge mistake our brother made, but we don't want him to lose what may be his only way to make it once he's out again. Any advice would help.
Reader, via email
DEAR READER: Your brother is fortunate to have a family that is supportive. Many people who commit crimes don't have this outside support.
Whether or not it would be wise for your parents to leave a legacy to your brother is probably open for debate, but I would suggest that they do not. Leave an extra amount representing his percentage to one of his siblings with the understanding in the family that when he is released, that money will be turned over to him. This could involve paying some extra taxes, but I believe it is the best way to preserve the bulk of the legacy for him.
As for the house, it is probably held in "tenants by the entirety" or "equal tenants in common." You should suggest that your sister-in-law see an attorney. If your brother trusts her, find a way to put the house in her name alone. If she dies before him, she could again leave the entire house to a member of the family in some type of trust to protect it from any liens by the state.
Consult an attorney to be certain everything is done correctly, otherwise you or your sister-in-law could make heavy-duty mistakes that will result in tax consequences.
I hope that things work out for your brother and, most important, that he truly becomes a better person. Your collective help in that regard certainly will be important.
DEAR BRUCE: We own a home in Baltimore. We are buying a lot and building a new home in the country. Our accountant explains that if we don't sell our current house now in the city, capital gains taxes will occur. It's our understanding that if we sell it now, we won't have to pay any taxes, as the proceeds will go toward a new primary residence.
My husband thinks it is better to keep the house in the city and rent it so it pays for itself, and to sell it only when we need the funds. My concern is that this would not be a wise decision in that our profit will result in taxes because the home would no longer be our primary residence. Can you give us your thoughts?
Reader, via email
DEAR READER: I think you have misinterpreted the tax laws that pertain to the sale of a primary residence.
If you sell the current house and put all of the profits into your next home, no capital gains taxes will be assessed NOW. The tax obligation is deferred, even if you should buy and sell several more primary residences. But eventually the taxes will have to be paid. The tax is only deferred, not forgiven.
Here's the big decision you need to make: Is this a good time to sell your current primary house? The answer most likely is "no." The market is getting firmer, but it certainly has not fully recovered in most areas from the bursting of the real estate bubble with which we are all familiar.
I believe your husband is likely correct about keeping the house as a rental, but certain criteria must be considered: Is the house in an area that is solid and not depreciating like crazy? If it's in a neighborhood that is declining, bail out. If it's in a neighborhood that is stable and perhaps even improving — and if you can legitimately expect enough rent to cover taxes, insurance, monthly mortgage payments and possibly even a small profit — I would hang on to the house until the market stabilizes.
Recognize, too, that you would be taking on a part-time job as landlord. If you are not able or willing to assume the responsibilities of minor repairs, rent collections, etc., then you're better off staying out of the real estate business.
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