Gearing Up for Life on the RV Road

More than 30 million Americans are RVing these days.  But as romantic as it may appear, would-be buyers or renters of recreational vehicles need to do more than test drive a “home on wheels” before joining the avid community of those who live life on the road.

 

Would-be RVers should examine all aspects of RV living, including how to choose the right RV, how to negotiate with dealers, how to buy the right insurance, and how to drive an RV before chasing such an idyllic life.

 

Of course, would-be RVers should first examine whether to RV or not.  An RV is defined as a vehicle that combines transportation and temporary living quarters for travel, recreation and camping.  According to “The Complete Idiot’s Guide to RVing,” the typical RVer enjoys: the ability to travel where and when they want; the chance to spend time with loved ones; a way to travel relatively inexpensively; the ability to avoid the hassles of commercial travel; and the opportunity for those who have special needs to travel in comfort.

 

RVers, contrary to popular opinion, are not just retirees.  They come from all walks of life, according to a University of Michigan study commissioned by the Recreational Vehicle Industry Association (RVIA).  The typical RVer is 49 years old, married, with an annual household income of $68,000.  RV owners are likely to own their homes and spend their disposable income on traveling – an average of 4,500 miles and 26 days annually, according to RVIA.  Would-be buyers and renters should note that many dealers, in light of rising fuel costs, are now offering discounts, including gas cards and loyalty programs.

 

Getting a handle on the various types of RVs for sale is another necessary step.  RVs come in all shapes and sizes, the two major types being motor homes (motorized) and towable (towed behind the family car, van or pickup).  According to RVIA, Type A motor homes are generally the largest; Type B motor homes or van campers are the smallest and Type C motor homes generally fall in between.  Types of towable RVs are folding camping trailers, truck campers, conventional travel trailers and fifth-wheel travel trailers.

 

No matter which type you choose, your RV should have a place to sleep, a place to cook, and a place to live.  After that, choosing an RV that’s right for you is a function of budget and preference.  According to RVIA, prices for new RVs are typically $4,000-$13,000 for folding camping trailers; $4,000-$26,000 for truck campers; $8,000-$65,000 for conventional travel trailers; $48,000-$140,000 for Type C motor homes and $58,000-$400,000 for Type A motor homes.

 

Doing one’s homework before purchasing an RV is essential.  RVIA and others suggests the following: Attend an RV show or visit an RV dealer to comparison shop; examine different models, vehicle types and floor plans; learn about RV financing and insurance options; and check out other resources and Web sites including those of www.rv.net, www.rv.org,  Recreation Vehicle Dealer Association, Escapees, Family Motor Coach Association, and Trailer Life magazine.  Renting an RV can be an ideal way to “try before you buy.”

 

Would-be RVers need also to examine driving or towing abilities, how many passengers will be in the RV, and how they plan to use the RV – for recreational use or as a place to live.  At a minimum, would-be RVers should examine how livable the RV is.  That means testing the beds, showers, and living spaces.  What’s more, those buying a used RV should inspect inside and out for signs of previous repairs, rusts and leaks.  And would-be RVers should take the vehicle for a rigorous road test, listening for signs of engine trouble.  If you plan on buying a towable RV, check its weight.  Would-be RVers don’t want to find out after the fact that they have to buy a new car or truck to tow their new RV.

 

Other homework is required.  Lemon laws, which guarantee consumers replacement motor vehicles or refunds after a certain number of problems or days in the shop, vary by state and often don't apply to RVs, The Wall Street Journal recently reported.  Thus, RV owners, stuck awaiting repairs, often have little legal recourse.  RVs tend to have more problems than other vehicles because they are made in much smaller quantities than cars and without the same sophisticated manufacturing methods.

 

Buying an RV requires special skills and tactics, according to “The Complete Idiot’s Guide to RVing” and other resources.  Private sellers offer lower prices but no warranties or returns.  If you buy from a dealer, be sure to “audition” them with respect to price, knowledge of staff, service facilities and reputation.  If you learn the invoice price, you will likely reap the best deal.  Also, negotiate slowly and don’t sway from the price you want to pay.  If you want peace of mind, buy an extended warranty.  If not, choose the warranty that covers the full vehicle for the longest period of time.

 

Other tips to consider:

• Check whether the dealer and manufacturer you plan to work with have any complaints against them with the Better Business Bureau or regulators.
• Make sure your dealer has service department with RV-certified mechanics.
• If you are buying a used RV, get as much history as you can, especially repair records.
• Make sure the RV has a RVIA seal.

 

And no matter your final decision in the process, get out there and enjoy the open road!

 

July 2006— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Hillebrand Financial Planning, LLC, a local member of FPA

 

A Primer on the Tax Increase Prevention and Reconciliation Act of 2005

On May 17, 2006, President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005, or TIPRA for short.  TIPRA affects taxes on capital gains and dividends, the alternative minimum tax or AMT, the so-called kiddie tax, and Roth conversions.  Given all the changes, including those affected most by the sunset measures introduced in 2001 and 2003, the new tax law heightens further the need to do financial planning now rather than later.  Here’s a summary of the changes:

 

Capital gains and dividends

 

The Jobs and Growth Tax Relief Reconciliation Act of 2003 established a maximum tax rate of 15 percent for long-term capital gains and “qualified” dividend income.  These rates were scheduled to expire after 2008, but TIPRA extends the rates that apply in 2008 for two years, through 2010.  For taxpayers in the top four tax brackets, this means the tax rate on long-term capital gains and “qualified” dividends will be 15 percent for all years through December 31, 2010.  For taxpayers in the lowest two tax brackets (10 and 15 percent), the capital gains and qualified dividend rates will be five percent through 2007 and zero percent from 2008 through 2010.

 

Among other things, the extension may make it attractive for wealthy families to give appreciated assets—up to the annual gift tax exclusion limit ($12,000 in 2006 or $24,000 for married couples who gift split)—to children who are age 18 or older, but still in the lowest tax brackets.  In essence, any appreciation after the date of the gift should not be subject to gift taxes, so experts suggest gifting securities that may have growth potential.  The extension also creates the opportunity for Americans with low taxable income, including many retirees, to harvest small amounts of capital gains at zero percent in 2008-2010.

 

Alternative minimum tax (AMT)

 

AMT exemption amounts, which were expanded under various tax laws in 2001, 2003 and 2004, expired at the end of 2005.  TIPRA increases AMT exemption amounts beyond their 2005 levels for the 2006 year only.  New AMT exemption amounts for 2006 are:

            $62,550 for married individuals filing jointly

            $42,500 for single filers

            $31,275 for married individuals filing separately

 

The Act also resurrects, at least for 2006, the rules that allow non-refundable personal tax credits (the dependent care credit, the credit for the elderly and disabled, the Hope credit for certain college expenses and the Lifetime Learning credit, for instance) to offset the AMT.

 

In 2005, an estimated four million taxpayers were subject to the AMT, but a recent report from Congressional Research Services estimates AMT will affect 23 million Americans in 2007 without further tax law change.  That’s because the AMT is not currently indexed for inflation, while the regular tax system is, and consequently every year more average-income households cross over into the AMT.  Experts say the current relief is not substantial and it’s uncertain whether AMT will either be reformed or repealed because of the substantial tax revenue cost.

 

Roth IRA conversions

TIPRA eliminates the restriction that heretofore prevented individuals with adjusted gross income exceeding $100,000 from converting a traditional IRA to a Roth IRA.  This change is not effective, however, until 2010.

 

In addition, TIPRA enables individuals who convert a traditional IRA to a Roth IRA in 2010 will automatically spread the resulting reportable income over the following two years, including the income ratably in 2011 and 2012.  Individuals can elect to report 100 percent of the resulting income in 2010 if they wish.  Of note, income tax is due on the full amount of the traditional IRA conversion.

With this change to Roth IRA conversions, individuals who have traditional IRA balances can weigh the benefits of converting some or all of their balances to a Roth IRA.  The true potential benefit of Roth IRA conversions is this: the taxpayer would pay an income tax at current rates because they believe the rate will be higher in the future (either because the person who withdraws the money will have higher income then, or because they believe that Congress will raise tax rates in the future).

 

Kiddie tax

 

According to the IRS, the investment income of a young child may, under some circumstances, be taxed at the child's parents' top marginal income tax rate.  This is commonly referred to as the "kiddie tax."  TIPRA increases the relevant age of children that are affected by the kiddie tax rules from 14 to 18.  Retroactively effective to January 1, 2006, children under the age of 18 are subject to the kiddie tax rules.  Exceptions apply for minor children who are married and file a joint tax return, and distributions from certain qualified disability trusts.  The implication of this change is that it prevents parents from shifting any of their investment income to their children in a lower tax bracket.

This change affects families wealthy enough to gift assets with significant appreciation or short-term appreciation potential.  It also affects parents who were or are still saving for their children’s college using custodial accounts and affects a wide swath of young teenagers who simply saved enough of their own money for future college (or other purposes), who now get taxed at their parents’ rates for the income they saved entirely on their own.

 

TIPRA brought about a number of tax law changes, so it’s a good idea to consult with your financial planner to see how it might affect your own situation.

 

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July 2006— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Hillebrand Financial Planning, LLC, a local member of FPA

ILITS Remain a Popular Estate Planning Tool and Technique

The federal estate tax may or may not be repealed or reformed anytime soon. But such discussions in Washington should not dampen the use of irrevocable life insurance trusts as a still very viable and valuable planning tool and technique which has applications beyond the tax efficient payment of estate taxes.

 

Indeed, financial planners say irrevocable life insurance trusts, or ILITs, can fulfill many estate-planning goals, not the least of which is avoiding federal estate taxes on the death benefit amount of the life insurance policy.  By way of background, there are two major types of trusts: revocable—which can be changed as often as you want—or irrevocable—which generally cannot be amended or changed without the permission of a court, and then only for limited purposes.  These trusts can either be funded (assets that will produce premium dollars are put in the trust) or non-funded (premiums are contributed annually).  Typically, a person would either transfer an existing insurance policy on their life into a trust (or have a trust purchase a new insurance policy) if they were interested in controlling the distribution of the death benefit in a manner beyond the ability of the contract provisions to do so, if they wished to remove the proceeds from their taxable estate, or, in some cases, beyond the reach of the creditors of beneficiaries.

 

As the name suggests, an ILIT is a trust that cannot be changed or revoked by the creator or “trustor” once it is executed.  Generally the trustee cannot be changed, the beneficiaries or the terms of the trust cannot be changed, and assets in the trust cannot be removed by the person who created the trust.  By way contrast, a revocable trust can be changed by the trust’s originator, beneficiaries can be added or removed, assets can be withdrawn, and the trust can be terminated.

 

In general, here’s how it works: The life insurance trust is created first, and then the trust buys a life insurance policy in its own name on the trustor.  The trustor, in an unfunded trust, annually adds funds to the trust, which in turn, buys (and continues to pay for) the policy in its own name, and pays the policy's premium against its own account.  An independent trustee is generally required in this case if ”incidents of ownership” of the life insurance policy are to be avoided on the part of the person creating the trust.

 

It is possible to transfer an existing life insurance policy to such a trust however; in this case, the policy death benefit will remain part of the trustors’ estate for three years after the transfer.  It’s important that the trustor irrevocably relinquishes to the trust absolutely all control over the policy.  It’s best to work with an estate planning attorney when creating an ILIT.

 

In essence, the trust takes over ownership of the policy.  The trustor then makes contributions to the trust, which, in turn, uses the contributions to pay the policy's premium against its own account.

 

As mentioned, a major reason for an ILIT is that the assets in the trust -- the proceeds of the life insurance policy or the face value after the insured dies -- will not be included in insured’s taxable estate at their death.  As long as they do not retain any incidents of ownership in the life insurance policy, the proceeds should not be taxed in their estate.  Most people will use an irrevocable life insurance trust if they anticipate that their assets will be above the applicable exclusion amount (and, thus, subject to tax).

 

But having assets pass outside on a taxable estate is just one reason for using an ILIT.  The combination of life insurance and a trust assures the management, investment, and timing of that wealth.  And it does so with a great deal more flexibility than the name might suggest.

 

The combination of life insurance and trusts have amazing creditor protection potential – far more than either alone.  Once an individual has parted with (or never owned) life insurance and it’s safely in an irrevocable trust containing the proper “spendthrift” provisions, it’s almost impossible for the creditors of the beneficiaries to reach it.  In other words, one of the most effective ways to assure the financial security and future of loved ones (or a charity) is life insurance in an irrevocable trust.

 

The combination of life insurance with a trust can avoid the costs, delays, and aggravation of probate – not just once – but over several generations.  The life insurance/trust combo offers flexibility impossible to achieve through life insurance alone – while the life insurance in the trust makes a much larger and therefore more economical/practical/cost effective trust possible and in most cases is the only instrument capable of providing a benefit at precisely the time it is needed.

 

In addition, cash payments to an irrevocable life insurance trust may qualify for annual gift exclusion.  In order to qualify, beneficiaries of the irrevocable life insurance trust are given what are called Crummey powers or “present interest rights” to the monies which when structured correctly will be declined by them so that the monies can be used to pay premiums.

 

As a reminder, it’s best to work with an estate planning attorney when creating an ILIT.

 

July 2006— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Hillebrand Financial Planning, LLC, a local member of FPA