Happy Holidays! It’s difficult to believe but we’re already in December. In looking forward to 2013, many of us are setting new year’s resolutions. If one of those resolutions is to pay down your debt, here are some tips to get you started.

Start today

A common mistake I see clients make is waiting way too long before admitting that there’s a problem. If you dread opening your mail or answering your phone, it’s time to get help. If you’re making monthly minimum payments each month, you’re just prolonging the pain without an exit strategy.

What Not to Do

Let’ suppose you have $40,000 in credit card debt at 18% interest. Your monthly minimum payment will be around $1,000 per month. By paying just the monthly minimum payments, it will take you 480 months or 40 years to repay the debt. You’ll also pay $60,000 in interest! Many people blindly make minimum payments without realizing that it will take forever to repay your debt.

Better strategy

In order to have money to repay your debt, you must increase income or decrease expenses. There’s no magic here. Simple math. The basic formula is:

[Income - Expenses = Disposable Income]

If you’re determined to repay all of your debt, you can obviously increase your monthly payment. In my example above, if you increase your monthly payment to $2,000 per month, you can be debt free in 62 months or just over 5 years. (You’d pay $21,500 in interest.) One important thing to note here - your monthly minimum payment decreases as you pay down the debt. Instead of paying the lower minimum payment, continue to pay a fixed amount each month.

Fighting High Interest Rates

One of the biggest obstacles in repaying your credit card debt is the high interest rate. You may be able to negotiate a lower interest rate simply by calling your credit card and asking for a better rate!

By lowering the interest rate from 18% to 12% in my example, you’d be able to get out of debt in just 41 months or in about 3.5 years at $2,000 per month.

Consumer Credit Counseling

If you’re unsuccessful in negotiating your own interest rate or if you just need some help, consumer credit counseling may be a good alternative. CCCS will bundle all of your debt and give you a fixed monthly payment. When meeting with your CCCS counselor, be realistic in your expenses. You don’t want to end up with a high monthly payment you can’t afford because you underestimated your expenses.

Getting professional help

Finally, if you simply feel overwhelmed by your situation, go meet with a professional. You can meet with an hourly financial advisor, your CPA, or an attorney. We regularly meet with clients to help them sort through their financial situation and offer possible solutions, including repayment, debt settlement and bankruptcy. Call us for a debt consultation (415) 963-4004.

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Avoiding Debt Over Holidays - Plan Ahead

It’s only July so why am I talking about the holidays? Because lack of planning is one major contributor to why people go into debt. As many as 31% will go into some form of debt during the festive period. Yikes! If you fall into this category of folks who subsidize holiday spending on credit cards, make it your goal not to do this in 2012.

In the July issue of the Money Magazine, there was an interesting statistic that caught my attention. It said people who label their savings account with specific goals saved 31% more than those who didn’t. This makes perfect sense. When you put money into savings randomly, there’s no specific goal. But when you set a goal such as “Christmas gift fund for 2012” it makes it more tangible.

We are just past the halfway mark for 2012, so if you have been falling short on your savings goals for the year (like so many countless New Year’s resolution), why not set a new goal for December now?

The Math for Holiday Savings

For those of you that are counting, there’s 154 days left until December 1, 2012. So, if you want to save $1,000 by 12/1, you can save:

• $6.50 per day
• $45.45 per week or
• $200 per month

Can’t afford so much? How about half? Whatever the amount, the key is to set a realistic goal and stick to it.

Where to Park your Money

I personally like accounts that aren’t linked to primary checking account because you won’t see the balance each time you log into your account. This will make it less tempting to transfer the money back into your checking and spend it. Two online banks I like for savings accounts are ING Direct and Ally (both accounts are paying about 0.80%).

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I’ve invited San Francisco estate planning lawyer, Amir Rang to discuss why it’s a bad idea to leave property to your children by adding your child to the title. Frequently, I will meet with clients who will put their entire life savings at risk by doing their own estate planning. Penny wise, pound foolish. Here’s Amir on why doing your own estate planning is a bad idea. You can also listen to our Podcast on why cutting your own hair is a bad idea as well as Legalzoom.

Lifetime gifting of appreciated property can create unintended and disastrous consequences. In a loving and generous act, parents (or grandparents) often gift appreciated stocks or real estate to adult children (or grandchildren). The older generation usually adds the names of adult children to brokerage accounts as joint account holders in order to plan for incapacity and disability. Or, the older generation adds the names of adult children to title of homes as co-owners in order to avoid a probate court proceeding upon their death. Here’s why the adult children (or grandchildren) should respectfully tell the older generation, “If you love me, then don’t gift it to me.”

Gift and Estate Tax Consequences:

A donor (i.e., the person giving the gift) must file a form 709 (gift tax return) for any gifts over $13,000 per year per recipient. Because the current lifetime gifting exemption amount is high ($5 million), usually, there is no actual gift tax due when parents (or grandparents) gift appreciated stocks or appreciated real estate to adult children (or grandchildren). However, there are two common pitfalls in these situations. First, the older generation simply fails to file the required gift tax return, exposing the estate to non-filing penalties. Two, by haphazardly using up their lifetime gifting exemption amount, the older generation is unknowingly reducing their estate tax exemption amount as well. What does that mean? In effect, the older generation will be able to transfer less ‘estate-tax free’ wealth at their deaths.

Income Tax Consequences:

A gift recipient, who receives appreciated stocks or real estate, inherits the older generation’s original cost or basis in the property. This usually leads to a devastating income tax position for the adult children (or grandchildren). Example: (i) grandma purchased home for $10,000 a long time; (ii)grandma gifts home with a current fair market value of $1,010,000 to granddaughter; (iii) grandma dies; (iv) granddaughter sells home for $1,010,000. Granddaughter has to pay income tax (fed + CA) of about $200,000. If grandma had left the home to granddaughter in her will or in her trust (at her death instead of during life), then the granddaughter’s income tax would have been zero.

Liability Consequences:

Oftentimes, the older generation wants to allow the adult child (or grandchild) to claim the mortgage interest deduction for paying the monthly mortgage. So, they add the adult child to the title of a home without thinking twice. In fact, adding an adult child to the title of a home (or an investment property) can have disastrous liability consequences. If the adult child gets into an accident or if the adult child goes through a divorce or if the adult child goes through a bankruptcy, then the older generation’s home and sole sanctuary can be exposed to unknown creditors and drawn out court proceedings. Parents and grandparents should consult a tax attorney or CPA if they want to allow their child or grandchild to claim the mortgage interest deduction on their home.

Bottom line:

Given the potentially detrimental gift, estate, and income tax consequences and disastrous liability consequences of lifetime gifting of appreciated property, parents and grandparents should consult with their professional advisors before giving away too much!

Amir Atashi Rang is a San Francisco lawyer and he practices estate planning, tax law, and probate. You can reach him at 415-398-7275 or visit his website here.

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