Credit Card Guide, Estate Planning

An Overview of Filial Responsibility Laws

Father in a wheelchair and son outsideTaking care of aging parents is something you may need to plan for, especially if you think one or both of them might need long-term care. One thing you may not know is that some states have filial responsibility laws that require adult children to help financially with the cost of nursing home care. Whether these laws affect you or not depends largely on where you live and what financial resources your parents have to cover long-term care. But it’s important to understand how these laws work to avoid any financial surprises as your parents age.

Filial Responsibility Laws, Definition

Filial responsibility laws are legal rules that hold adult children financially responsible for their parents’ medical care when parents are unable to pay. More than half of U.S. states have some type of filial support or responsibility law, including:

  • Alaska
  • Arkansas
  • California
  • Connecticut
  • Delaware
  • Georgia
  • Indiana
  • Iowa
  • Kentucky
  • Louisiana
  • Massachusetts
  • Mississippi
  • Montana
  • Nevada
  • New Jersey
  • North Carolina
  • North Dakota
  • Ohio
  • Oregon
  • Pennsylvania
  • Rhode Island
  • South Dakota
  • Tennessee
  • Utah
  • Vermont
  • Virginia
  • West Virginia

Puerto Rico also has laws regarding filial responsibility. Broadly speaking, these laws require adult children to help pay for things like medical care and basic needs when a parent is impoverished. But the way the laws are applied can vary from state to state. For example, some states may include mental health treatment as a situation requiring children to pay while others don’t. States can also place time limitations on how long adult children are required to pay.

When Do Filial Responsibility Laws Apply?

If you live in a state that has filial responsibility guidelines on the books, it’s important to understand when those laws can be applied.

Generally, you may have an obligation to pay for your parents’ medical care if all of the following apply:

  • One or both parents are receiving some type of state government-sponsored financial support to help pay for food, housing, utilities or other expenses
  • One or both parents has nursing home bills they can’t pay
  • One or both parents qualifies for indigent status, which means their Social Security benefits don’t cover their expenses
  • One or both parents are ineligible for Medicaid help to pay for long-term care
  • It’s established that you have the ability to pay outstanding nursing home bills

If you live in a state with filial responsibility laws, it’s possible that the nursing home providing care to one or both of your parents could come after you personally to collect on any outstanding bills owed. This means the nursing home would have to sue you in small claims court.

If the lawsuit is successful, the nursing home would then be able to take additional collection actions against you. That might include garnishing your wages or levying your bank account, depending on what your state allows.

Whether you’re actually subject to any of those actions or a lawsuit depends on whether the nursing home or care provider believes that you have the ability to pay. If you’re sued by a nursing home, you may be able to avoid further collection actions if you can show that because of your income, liabilities or other circumstances, you’re not able to pay any medical bills owed by your parents.

Filial Responsibility Laws and Medicaid

Senior care living areaWhile Medicare does not pay for long-term care expenses, Medicaid can. Medicaid eligibility guidelines vary from state to state but generally, aging seniors need to be income- and asset-eligible to qualify. If your aging parents are able to get Medicaid to help pay for long-term care, then filial responsibility laws don’t apply. Instead, Medicaid can paid for long-term care costs.

There is, however, a potential wrinkle to be aware of. Medicaid estate recovery laws allow nursing homes and long-term care providers to seek reimbursement for long-term care costs from the deceased person’s estate. Specifically, if your parents transferred assets to a trust then your state’s Medicaid program may be able to recover funds from the trust.

You wouldn’t have to worry about being sued personally in that case. But if your parents used a trust as part of their estate plan, any Medicaid recovery efforts could shrink the pool of assets you stand to inherit.

Talk to Your Parents About Estate Planning and Long-Term Care

If you live in a state with filial responsibility laws (or even if you don’t), it’s important to have an ongoing conversation with your parents about estate planning, end-of-life care and where that fits into your financial plans.

You can start with the basics and discuss what kind of care your parents expect to need and who they want to provide it. For example, they may want or expect you to care for them in your home or be allowed to stay in their own home with the help of a nursing aide. If that’s the case, it’s important to discuss whether that’s feasible financially.

If you believe that a nursing home stay is likely then you may want to talk to them about purchasing long-term care insurance or a hybrid life insurance policy that includes long-term care coverage. A hybrid policy can help pay for long-term care if needed and leave a death benefit for you (and your siblings if you have them) if your parents don’t require nursing home care.

Speaking of siblings, you may also want to discuss shared responsibility for caregiving, financial or otherwise, if you have brothers and sisters. This can help prevent resentment from arising later if one of you is taking on more of the financial or emotional burdens associated with caring for aging parents.

If your parents took out a reverse mortgage to provide income in retirement, it’s also important to discuss the implications of moving to a nursing home. Reverse mortgages generally must be repaid in full if long-term care means moving out of the home. In that instance, you may have to sell the home to repay a reverse mortgage.

The Bottom Line

elderly woman in a wheelchair outsideFilial responsibility laws could hold you responsible for your parents’ medical bills if they’re unable to pay what’s owed. If you live in a state that has these laws, it’s important to know when you may be subject to them. Helping your parents to plan ahead financially for long-term needs can help reduce the possibility of you being on the hook for nursing care costs unexpectedly.

Tips for Estate Planning

  • Consider talking to a financial advisor about what filial responsibility laws could mean for you if you live in a state that enforces them. If you don’t have a financial advisor yet, finding one doesn’t have to be a complicated process. SmartAsset’s financial advisor matching tool can help you connect, in just minutes, with professional advisors in your local area. If you’re ready, get started now.
  • When discussing financial planning with your parents, there are other things you may want to cover in addition to long-term care. For example, you might ask whether they’ve drafted a will yet or if they think they may need a trust for Medicaid planning. Helping them to draft an advance healthcare directive and a power of attorney can ensure that you or another family member has the authority to make medical and financial decisions on your parents’ behalf if they’re unable to do so.

Photo credit: ©iStock.com/Halfpoint, ©iStock.com/byryo, ©iStock.com/Halfpoint

The post An Overview of Filial Responsibility Laws appeared first on SmartAsset Blog.

Source: smartasset.com

Estate Planning, Home

Popular Housing Markets During the Pandemic

There’s something weird happening with the real estate markets today. Normally in a recession, demand for rentals goes up while demand for houses goes down. But if there’s anything 2020 has taught us, it’s that everything is turned on its head right now. 

Instead, we’re seeing an interesting trend: despite the ongoing pandemic, home-buying is experiencing higher demand now than they have been since 1999, according to the National Association of RealtorsⓇ (NAR). If you’ve been hoping to buy a home soon, you’re probably already aware of this weird trend, and excited. But is it the same story everywhere? And is a pandemic really the right time to buy? 

How the Pandemic is Changing Homeownership

This pandemic is different from any other in history in that many people — especially some of the highest-paid workers — aren’t being hit as hard as people who rely on their manual labor for income. This, coupled with an ultra-low mortgage rate environment and a new lifestyle that’s not fit for a cramped apartment, is creating the perfect storm of high-dollar homebuyers. 

“I didn’t want to pay someone else’s mortgage to have three roommates,” says Amy Klegarth, a genomics specialist who recently purchased a home in White Center, a suburb of Seattle where she was formerly renting. “I moved because I could afford to get a house with a large yard here for my goats, Taco and Piper.” 

Whether you have goat kids or human kids (or even no kids), you’re not the only one looking for a new home in a roomier locale. According to the NAR report, home sales in suburban areas went up 7% compared to just before the pandemic started. In some markets, it’s not hard to understand why people are moving out. 

Where Are People Going?

Apartments are small everywhere, but they’re not all the same price. For example, homes in cities tend to be 300 square feet smaller than their suburban counterparts. Some of the hottest home-buying markets right now are in areas where nearby rents are already too high, often clustered around tech and finance hubs that attract high-paid workers. After all, if you can’t go into the office and all of the normal city attractions are shut down, what’s the point of paying those high rental costs?

According to a December 2020 Zumper report, the top five most expensive rental markets in the U.S. are San Francisco, New York City, Boston, San Jose, and Oakland. But if you’re ready to buy a home during the pandemic, there are nearby cheaper markets to consider.

If You Rent in San Francisco,  San Jose, and Oakland, CA

Alternative home-buying market: San Diego, Sacramento 

  • Average rent: San Francisco, $2,700, San Jose, $2,090; Oakland; $2,000
  • Average home value (as of writing): San Diego ($675,496) and Sacramento ($370,271)
  • Estimated mortgage payment with 20% down: San Diego ($2,255) and Sacramento ($1,236)

Big California cities are the quintessential meccas for tech workers, and that’s often exactly who’s booking it out of these high-priced areas right now. Gay Cororaton, Director of Housing and Commercial Research for the National Association of Realtors (NAR), offers two suggestions for San Francisco and other similar cities in California. 

San Diego

First, is the San Diego-metro area, which has a lot to offer people who are used to big-city living but don’t want the big-city prices. An added bonus: your odds of staying employed as a tech worker might be even higher in this city. 

“Professional tech services jobs make up 18% of the total payroll employment, which is actually a higher fraction than San Jose (15.5%) and San Francisco (9.3%),” says Cororaton.

Sacramento

If you’re willing to go inland, you can find even cheaper prices yet in Sacramento. “Tech jobs have been growing, and account for 7% of the workforce,” says Cororaton. “Still not as techie as San Jose, San Francisco, or San Diego, but tech jobs are moving there where housing is more affordable. It’s also just 2 hours away from Lake Tahoe.”

If You Rent in New York, NY

Alternative home-buying market: New Rochelle, Yonkers, Nassau, Newark, Jersey City

  • Average rent: $2,470
  • Average home value (as of writing): New Rochelle ($652,995), Yonkers ($549,387), Nassau ($585,741), Newark ($320,303), or Jersey City ($541,271)
  • Estimated mortgage payment with 20% down: New Rochelle ($2,180), Yonkers ($1,834), Nassau ($1,955), Newark ($1,069), or Jersey City ($1,807)

Living in New York City, it might seem like you don’t have any good options. But the good news is you do — lots of them, in fact. They still might be more expensive than the average home price across the U.S., but these alternative markets are still a lot more affordable than within, say, Manhattan. 

New Rochelle and Yonkers

Both New Rochelle and Yonkers are about an hour’s drive from the heart of New York City, says Corcoran. If you ride by train, it’s a half hour. Both New Rochelle and Yonkers have been stepping up their appeal in recent years to attract millennials who can’t afford city-living anymore (or don’t want to be “house poor”), so you’ll be in good company. 

Nassau

“NAR ranked Nassau as one of the top places to work from home in the state of New York because it has already a large population of workers in professional and business services and has good broadband access,” says Cororaton. If you have ideas about moving to Nassau you’ll need to move quickly. Home sales are up by 60% this year compared to pre-pandemic times. 

Newark or Jersey City

If you don’t mind moving to a different state (even if it is a neighbor), you can find even lower real estate prices in New Jersey. This might be a good option if you only need to ride back into the city on occasion because while the PATH train is well-developed, it’s a bit longer of a ride, especially if you live further out in New Jersey. 

If You Rent in Boston, MA

Alternative home-buying market: Quincy, Framingham, Worcester

  • Average rent: $2,150
  • Average home value (as of writing): Quincy ($517,135), Framingham ($460,584), or Worcester ($284,936)
  • Estimated mortgage payment with 20% down: Quincy ($1,726), Framingham ($1,538), or Worcester ($951)

Boston is another elite coastal market, but unlike New York, there’s still plenty of space if you head south or even inland. In particular, Quincy and Framingam still offer plenty of deals for new buyers.

Quincy

If you like your suburbs a bit more on the urban side, consider Quincy. Although it’s technically outside of the city, it’s also not so isolated that you’ll feel like you’re missing out on the best parts of Boston-living. You’ll be in good company too, as there are plenty of other folks living here who want to avoid the high real estate prices within Boston itself.

Framingham

Framingham is undergoing an active revitalization right now in an effort to attract more people to its community. As such, you’ll be welcome in this town that’s only a 30-minute drive from Boston.

Worcester

“Now, if you can work from home, consider Worcester,” says Cororaton. “It’s an hour away from Boston which is not too bad if you only have to go to the Boston office, say, twice a week.” Worcester (pronounced “wuh-ster”) is also a great place for a midday break if you work from home, with over 60 city parks to choose from for a stroll.

Renting Market(s) Average Rent for 1-Bedroom Apartment Housing Market Options & Avg. Monthly Mortgage*
San Francisco, CASan Jose, CAOakland, CA $2,700 San Diego ($2,255) Sacramento ($1,236)
New York, NY $2,470 New Rochelle ($2,180) Yonkers ($1,834)Nassau ($1,955)Newark ($1,069)Jersey City ($1,807)
Boston, MA $2,150 Quincy ($1,726)Framingham ($1,538)Worcester ($951)

*Average home mortgage estimates based on a 20% down payment.

Should You Buy a House During a Pandemic?

There’s no right or wrong answer here, but it’s a good idea to consider your long-term housing needs versus just what’ll get you through the next few months. 

For example, just about everyone would enjoy some more room in their homes to stretch right now. But if you’re the type of person who prefers a night on the town, you might be miserable in a rural area by the time things get back to normal. But if you’ve always dreamed of a big vegetable garden or yard for the family dog, now could be the right time to launch those plans. 

Another factor to consider is job security. And remember that even if you’re permanently working from home today — and not everyone has this ability — living further from the city could limit your future opportunities if a job requires you to be on-site in the city.

Finally, consider this: most homes in outlying areas weren’t built with the pandemic in mind. For example, “… open floor plans were popular, pre-pandemic,” says Cororaton. “If the home for sale has an open floor plan, you’d have to imagine how to reconfigure the space and do some remodeling to create that work or school area.” 

Here are some other things to look for:

  • Outdoor space
  • Area for homeschooling
  • Broadband internet access
  • Proximity to transport routes
  • Office for working from home

Is It More Affordable to Buy or Rent?

There aren’t any hard-and-fast rules when it comes to whether it’s cheaper to rent or buy. Each of these choices has associated costs. To rent, you’ll need to pay for your base rent, pet fees and rent, parking permits, deposits, renters insurance, and more. To buy, you’ll have an even bigger list, including property taxes, maintenance and upgrades, HOA fees, homeowners insurance, closing costs, higher utility bills, and on.

Each of these factors has the potential to tip the balance in favor of buying or renting. That’s why it makes sense to use a buy vs. rent calculator that can track all of these moving targets and estimate which one is better based on your financial situation and the choices available to you. 

In general, though, most experts advise keeping your housing costs to below 30 percent of your take-home pay when setting up your budget. The lower, the better — then, you’ll have even more money left over to save for retirement, your kid’s college education, and even to pay your mortgage off early. 

The post Popular Housing Markets During the Pandemic appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

Credit Card Guide, Estate Planning

A Guide to Schedule K-1 (Form 1041)

Man prepares his tax returnsInheriting property or other assets typically involves filing the appropriate tax forms with the IRS. Schedule K-1 (Form 1041) is used to report a beneficiary’s share of an estate or trust, including income as well as credits, deductions and profits. A K-1 tax form inheritance statement must be sent out to beneficiaries at the end of the year. If you’re the beneficiary of an estate or trust, it’s important to understand what to do with this form if you receive one and what it can mean for your tax filing.

Schedule K-1 (Form 1041), Explained

Schedule K-1 (Form 1041) is an official IRS form that’s used to report a beneficiary’s share of income, deductions and credits from an estate or trust. It’s full name is “Beneficiary’s Share of Income, Deductions, Credits, etc.” The estate or trust is responsible for filing Schedule K-1 for each listed beneficiary with the IRS. And if you’re a beneficiary, you also have to receive a copy of this form.

This form is required when an estate or trust is passing tax obligations on to one or more beneficiaries. For example, if a trust holds income-producing assets such as real estate, then it may be necessary for the trustee to file Schedule K-1 for each listed beneficiary.

Whether it’s necessary to do so or not depends on the amount of income the estate generates and the residency status of the estate’s beneficiaries. If the annual gross income from the estate is less than $600, then the estate isn’t required to file Schedule K-1 tax forms for beneficiaries. On the other hand, this form has to be filed if the beneficiary is a nonresident alien, regardless of how much or how little income is reported.

Contents of Schedule K-1 Tax Form Inheritance Statements

The form itself is fairly simple, consisting of a single page with three parts. Part one records information about the estate or trust, including its name, employer identification number and the name and address of the fiduciary in charge of handling the disposition of the estate. Part Two includes the beneficiary’s name and address, along with a box to designate them as a domestic or foreign resident.

Part Three covers the beneficiary’s share of current year income, deductions and credits. That includes all of the following:

  • Interest income
  • Ordinary dividends
  • Qualified dividends
  • Net short-term capital gains
  • Net long-term capital gains
  • Unrecaptured Section 1250 gains
  • Other portfolio and nonbusiness income
  • Ordinary business income
  • Net rental real estate income
  • Other rental income
  • Directly apportioned deductions
  • Estate tax deductions
  • Final year deductions
  • Alternative minimum tax deductions
  • Credits and credit recapture

If you receive a completed Schedule K-1 (Form 1041) you can then use it to complete your Form 1040 Individual Tax Return to report any income, deductions or credits associated with inheriting assets from the estate or trust.

You wouldn’t, however, have to include a copy of this form when you file your tax return unless backup withholding was reported in Box 13, Code B. The fiduciary will send a copy to the IRS on your behalf. But you would want to keep a copy of your Schedule K-1 on hand in case there are any questions raised later about the accuracy of income, deductions or credits being reported.

Estate Income and Beneficiary Taxation

Woman prepares her tax returns

If you received a Schedule K-1 tax form, inheritance tax rules determine how much tax you’ll owe on the income from the estate. Since the estate is a pass-through entity, you’re responsible for paying income tax on the income that’s generated. The upside is that when you report amounts from Schedule K-1 on your individual tax return, you can benefit from lower tax rates for qualified dividends. And if there’s income from the estate that hasn’t been distributed or reported on Schedule K-1, then the trust or estate would be responsible for paying income tax on it instead of you.

In terms of deductions or credits that can help reduce your tax liability for income inherited from an estate, those can include things like:

  • Depreciation
  • Depletion allocations
  • Amortization
  • Estate tax deduction
  • Short-term capital losses
  • Long-term capital losses
  • Net operating losses
  • Credit for estimated taxes

Again, the fiduciary who’s completing the Schedule K-1 for each trust beneficiary should complete all of this information. But it’s important to check the information that’s included against what you have in your own records to make sure that it’s correct. If there’s an error in reporting income, deductions or credits and you use that inaccurate information to complete your tax return, you could end up paying too much or too little in taxes as a result.

If you think the information in your Schedule K-1 (Form 1041) is incorrect, you can contact the fiduciary to request an amended form. If you’ve already filed your taxes using the original form, you’d then have to file an amended return with the updated information.

Schedule K-1 Tax Form for Inheritance vs. Schedule K-1 (Form 1065)

Schedule K-1 can refer to more than one type of tax form and it’s important to understand how they differ. While Schedule K-1 (Form 1041) is used to report information related to an estate or trust’s beneficiaries, you may also receive a Schedule K-1 (Form 1065) if you run a business that’s set up as a pass-through entity.

Specifically, this type of Schedule K-1 form is used to record income, losses, credits and deductions related to the activities of an S-corporation, partnership or limited liability company (LLC). A Schedule K-1 (Form 1065) shows your share of business income and losses.

It’s possible that you could receive both types of Schedule K-1 forms in the same tax year if you run a pass-through business and you’re the beneficiary of an estate. If you’re confused about how to report the income, deductions, credits and other information from either one on your tax return, it may be helpful to get guidance from a tax professional.

The Bottom Line

Senior citizen prepares her tax returnsReceiving a Schedule K-1 tax form is something you should be prepared for if you’re the beneficiary of an estate or trust. Again, whether you will receive one of these forms depends on whether you’re a resident or nonresident alien and the amount of income the trust or estate generates. Talking to an estate planning attorney can offer more insight into how estate income is taxed as you plan a strategy for managing an inheritance.

Tips for Estate Planning

  • Consider talking to a financial advisor about the financial implications of inheriting assets. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect with professional advisors in your local area in minutes. If you’re ready, get started now.
  • One way to make the job of filing taxes easier is with a free, easy-to-use tax return calculator. Also, creating a trust is something you might consider as part of your own estate plan if you have significant assets you want to pass on.

Photo credit: ©iStock.com/fizkes, ©iStock.com/urbazon, ©iStock.com/dragana991

The post A Guide to Schedule K-1 (Form 1041) appeared first on SmartAsset Blog.

Source: smartasset.com

Estate Planning, Home

How to Buy a Second Home that Pays for Itself

Recent data from the U.S. Census Bureau shows that home sales were up more than 17% in June 2020 from the month before, and up more than 13% compared to the year prior. Those who have the means to buy a second home are wise to take on mortgage debt (or reorganize their current debt) in today’s low interest environment.

With low 30-year mortgage rates, owning a rental property that “pays for itself” through monthly rental income is especially lucrative with a significantly lower mortgage payment. If you’re curious about buying a second home and renting it out, keep reading to find out about the major issues you should be aware of, the hidden costs of becoming a landlord, and more. 

Important Factors When Buying a Short-Term Rental

The issues involved in buying a rental home varies dramatically depending on where you plan to purchase. After all, buying a ski lodge in an area with seasonal tourism and attractions might require different considerations than buying a home in a major metropolitan area where tourists visit all year long.

But there are some factors every potential landlord should consider regardless of location. Here are a few of the most important considerations:

  • Location. Consumers rent vacation homes almost anywhere, but you’ll want to make sure you’re looking at homes in an area where short-term rentals are popular and viable. You can do some basic research on AirDNA.co, a short-term rental data and analytics service, or check competing rentals in the area you’re considering.
  • Property Management Fees. If you plan to use a property management company to manage your short-term rental instead of managing it yourself, you should find out how much other owners pay for management. Also, compare listing fees for your second home with a platform like Airbnb or VRBO.
  • Taxes. Property taxes can be higher on second homes since you don’t qualify for a homestead exemption. This means higher fixed costs each month, which could make it more difficult to cover your mortgage with rental income.
  • Competition. Check whether a rental area you’re considering is full of competing rentals that are never full. You can find this information on VRBO or Airbnb by looking at various rentals and checking their booking calendars.
  • Potential Rental Fees. Check rental sites to see how much you might be able to charge for your second home on a nightly, weekly, or monthly basis. 

5 Steps to Rent Your Second Home

Before purchasing a second home, take time to run different scenarios using realistic numbers based on the rental market you’re targeting. From there, the following steps can guide you through preparing your property for the short-term rental market.

1. Research the Market

First, you’ll want to have a general understanding of the rental market you’re entering. How much does the average short-term rental go for each night or each week? What is the average vacancy rate for rentals on an annual basis? 

Research your local rental market, the average price of rentals in your area, various features offered by competing rentals, and more.

Action Item: Dig into these figures by using AirDNA.co. Just enter a zip code or town, and you’ll find out the average nightly rate, occupancy rate, revenue, and more. Although some of the site’s features require a monthly subscription, you can find out basic information about your rental market for free.

2. Know Your Numbers

You need to know an array of real numbers before renting your second home, including the following:

  • Average nightly rate
  • Average occupancy rate
  • Fixed costs, such as your mortgage payment, taxes, and insurance for the rental
  • Property management fees and costs for cleaning between tenants
  • Additional fixed costs for things like trash pickup, internet access, and cable television
  • Costs for marketing your space on a platform like VRBO or Airbnb, which could be a flat fee or 3% of your rental fee depending on the platform

You’ll use these numbers to figure out the average monthly operating cost for your second home, and the potential income you might be able to bring in. Without running these numbers first, you wind up in a situation where your short-term rental doesn’t pay for itself, and where you’re having to supplement operating expenses every month. 

Action Item: Gather every cost involved in operating your specific short-term rental, and then tally everything up with monthly and annual figures that you can plan for.

3. Buy the Right Insurance

If you plan on using your second home as a short-term rental, you’ll need to buy vacation rental insurance. This type of homeowners insurance is different from the type you’d buy for your primary residence. It’s even unique from landlord insurance coverage since you need to have insurance in place for your second home and its contents.

Some vacation rental policies let you pay per use, and they provide the benefits of homeowners insurance (like property coverage, liability, and more) plus special protection when your property is rented to a third party. 

Action Item: Shop around for a homeowners insurance plan that’s geared specifically to vacation rentals. See our top picks for the best homeowners insurance companies out there.

4. Create a Property Management Plan

If you live near your second home, you might want to manage it yourself. There’s nothing wrong with this option, but you should plan on receiving calls and dealing with problems at all hours of the day. 

Many short-term rental owners pay a property management company to communicate with their tenants, manage each rental period, and handle any issues that pop up. Property managers can also set up cleanings between each rental and help with marketing your property. 

Action Item: Create a property management plan and account for any costs. Most property managers charge 25% to 30% of the rental cost on an ongoing basis, so you can’t ignore this component of owning a short-term rental. 

5. Market Your Space

Make sure you appropriately market your space, which typically means paying for professional photos and creating an accurate, inviting listing on your chosen platforms. Your property manager might help you create a marketing plan for your vacation rental, but you can DIY this component of your side business if you’re tech- and media-savvy. 

Action Item: Hire a photographer to take professional photos of your rental, and craft your rental description and listing. 

Risks of Purchasing a Short-Term Rental

Becoming a landlord isn’t for the faint of heart. There’s plenty that can go wrong, but here are the main risks to plan for:

  • Government roadblocks. In destinations from New York City to Barcelona, government officials have been cracking down on short-term rentals and trying to limit their ability to operate. New rules could make running your business more costly, difficult, or even impossible. 
  • Your home could be damaged beyond repair. If you read the Airbnb message boards and other landlord forums, you’ll find an endless supply of nightmare rental stories of houses getting trashed and rentals enduring thousands of dollars in damage. 
  • Housing market crash. If the housing market crashes again like it did in 2008, you might find you owe more than your second home is worth at a time when it’s increasingly difficult to find renters. 
  • Reliance on tourism. As we’ve seen during the pandemic, circumstances beyond our control can bring travel and tourism to a screeching halt. Since short-term rentals typically rely on tourism to stay afloat, decreases in travel can affect the viability of your business, quickly.
  • High ongoing costs and fees. Higher property taxes, property management fees, cleaning fees and maintenance costs can make operating a short-term rental costly in the long-term. If you don’t account for all costs and fees involved, you might wind up losing money on your vacation home instead of having the property “pay for itself”.

The Bottom Line

A short-term rental can be a viable business opportunity, depending on where you want to buy and the specifics of the local rental market. But there are a lot of factors to consider before taking the leap. 

Before investing hundreds of thousands of dollars, think over all of the potential costs and risks involved. You’ll want to ensure that you’ve done comprehensive research and have run the numbers for every possible scenario to make an informed decision.

The post How to Buy a Second Home that Pays for Itself appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

Credit Card Guide, Debt, Estate Planning

Can I Inherit Debt?

Man trying to role a huge boulder labeled "DEBT" up a steep hillWhen someone passes away leaving debts behind, you might be wondering if you have any personal liability to pay them. If you have aging parents, for instance, you may be worried about having to assume responsibility for their mortgage payments, credit cards or other debts. If you’ve asked yourself, “Can I inherit debt?” the answer is typically no, even though those debts don’t automatically disappear. But there are situations in which you may have to deal with a loved one’s creditors after they’re gone.

How Debts Are Handled When Someone Passes Away

Debts, just like assets, are considered part of a person’s estate. When that person passes away, their estate is responsible for paying any and all remaining debts. The money to pay those debts comes from the asset side of the estate.

In terms of who is responsible for making sure the estate’s debts are paid, this is typically done by an executor. An executor performs a number of duties to wrap up a person’s estate after death, including:

  • Getting a copy of the deceased person’s will if they had one and filing it with the probate court
  • Notifying creditors and other entities of the person’s death (for example, the Social Security Administration would need to be notified so any Social Security benefits could be stopped)
  • Completing an inventory of the deceased person’s assets and their value
  • Liquidating those assets as needed to pay off any debts owed by the estate
  • Distributing the remaining assets to the people or organizations named in the deceased person’s will if they had one or according to inheritance laws if they did not

In terms of debt repayment, executors are required to give notice to creditors who may have a claim against the estate. Creditors are then giving a certain window of time, according to state laws, in which to make a financial claim against the estate’s assets for repayment of debts.

If a creditor doesn’t follow state guidelines for making a claim, then those debts won’t be paid from the estate’s assets. But if creditors are less than reputable, they may try to come after the deceased person’s spouse, children or other family members to collect what’s owed.

Not all assets in an estate may be used to repay debts owed by a deceased person. Any assets that already have a named beneficiary, such as a life insurance policy, a 401(k), individual retirement account, payable on death accounts or annuity, would be transferred to that beneficiary automatically.

Can I Inherit Debt From My Parents?

Pencil erasing the word "DEBT"

This is an important question to ask if your parents are carrying high amounts of debt and you’re worried about having to pay those bills when they pass away. Again, the short answer is usually no. You generally don’t inherit debts belonging to someone else the way you might inherit property or other assets from them. So even if a debt collector attempts to request payment from you, there’d be no legal obligation to pay.

The catch is that any debts left outstanding would be deducted from the estate’s assets. If your parents were substantially in debt when they passed away, repaying them from the estate may leave little or no assets for you to inherit.

But you should know that you can inherit debt that you were already legally responsible for while your parents were alive. For instance, if you cosigned a loan with them or opened a joint credit card account or line of credit, those debts are legally yours just as much as they are your parents. So, once they pass away, you’d be solely responsible for repaying them.

And it’s also important to understand what responsibility you may have for covering long-term care costs incurred by your parents while they were alive. Many states have filial responsibility laws that require children to cover nursing home bills, though they aren’t always enforced. Talking to your parents about long-term care planning can help you avoid situations where you may end up with an unexpected debt to pay.

Can I Inherit Debt From My Children?

The same rules that apply to inheriting debt from parents typically apply to inheriting debts from children. Any debts remaining would be paid using assets from their state.

Otherwise, unless you cosigned for the debt, then you wouldn’t be obligated to pay. On the other hand, if you cosigned private student loans, a car loan or a mortgage for your adult child who then passed away, as cosigner you’d technically have a legal responsibility to pay them. Federal student loans are an exception.

If your parents took out a PLUS loan to pay for your higher education costs and something happens to you, the Department of Education can discharge that debt due to death. And vice versa, if your parents pass away then any PLUS loans they took out on your behalf could also be discharged.

Can I Inherit Debts From My Spouse?

When marriage and money mix, the lines on inherited debt can get a little blurred. The same basic rule that applies to other situations applies here: if you cosigned or took out a joint loan or line of credit together, then you’re both equally responsible for the debt. If one of you passes away, the surviving spouse would still have to pay.

But what about debts that are in one spouse’s name only? That’s where it’s important to understand how living in a community property state can affect your liability for marital debts. If you live in a community property state, debts incurred after the marriage by one spouse can be treated as a shared financial obligation. So if your spouse opened up a credit card or took out a business loan, then passed away you could still be responsible for paying it. On the other hand, debts incurred by either party before the marriage wouldn’t be considered community debt.

Consider Getting Help If You Need It

If a parent, spouse, sibling or other family member passes away, it can be helpful to talk to an attorney if you’re being pressured by debt collectors to pay. An attorney who understands debt collection laws and estate planning can help you determine what your responsibilities are for repaying debts and how to handle creditors.

The Bottom Line

Son talks with his mother about her debtWhether or not you’ll inherit debt from your parents, child, spouse or anyone else largely hinges on whether you cosigned for that debt or live in a community property state in the case of married couples. If you’re concerned about inheriting debts, consider talking to your parents, children or spouse about how those financial obligations would be handled if they were to pass away. Likewise, you can also discuss what financial safety nets you have in place to clear any debts you may leave behind, such as life insurance.

Tips for Estate Planning

  • Consider talking to a financial advisor about how to manage and pay off debts you owe or any debts you might inherit from someone else. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool can help you connect with an advisor in your local area. It takes just a few minutes to get your personalized advisor recommendations online. If you’re ready, get started now.
  • The Fair Debt Collection Practices Act caps the statute of limitations for unpaid debt collections at a maximum of six years, although most states specify a much shorter time frame. However, some debt collectors buy so-called zombie debts for pennies on the dollar and then – unscrupulously – try to collect on them. Here’s how to deal with such operators.

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