Q&A: Paying a deceased person’s debts

Dear Liz: When I read the letter from the woman about her mother’s debts, it brought back my situation with my brother and mom. My brother was trustee to my mother’s living will and told her she had no money. At 90, she became worried and wanted to cut back on the care she needed. My brother had the same attitude as the woman who wrote you that her mother’s property was not an asset for her to use but something to be hoarded for the heirs.

Answer: That’s not the situation the daughter described. She was asking whether she and her sister were responsible for her mother’s debts. They are not. The mother’s estate would be responsible, and her estate would include her home. If the estate’s assets aren’t sufficient to pay all the bills, however, the creditors wouldn’t be able to come after the daughters. Still, some collection agencies have been known to contact survivors, telling them they have a “moral obligation” to pay the dead person’s debts.

Q&A: Follow up on the Windfall Elimination Provision

Dear Liz: You recently addressed the issue of the Windfall Elimination Provision, which reduces Social Security benefits for people who paid into Social Security but who also get a pension from an employer that does not pay into the system. My wife taught for nearly 40 years. Neither she nor her employer contributed to Social Security. As a result she falls under the WEP. This also, however, affects her spousal benefits under my Social Security record. So, because of the WEP, any spousal benefits she would be entitled to are essentially zeroed out since she receives a pension. If she had never worked (thereby not contributing to Social Security), she would be entitled to her entire spousal benefit. That doesn’t seem reasonable to me.

Answer: What you’re referring to is a different provision, the Government Pension Offset. People who receive a pension from a federal, state or local government job that didn’t pay into Social Security can have their Social Security spousal or survivor benefit wiped out by the GPO. By contrast, the Windfall Elimination Provision typically leaves at least half of the worker’s Social Security benefit intact.

The rationale for the GPO goes like this: Spousal and survivor benefits are considered dependent’s benefits. The law has always required that these benefits be offset dollar for dollar by the amount of the person’s own retirement benefit. So if your wife had earned a $1,000 monthly Social Security benefit based on her own work record but a $500 spousal benefit based on yours, she would not receive both. Her own benefit would completely offset the spousal benefit.

Before the GPO, though, your wife could have received a $1,000 monthly pension from a job that didn’t pay into Social Security plus a spousal or survivor’s benefit from Social Security, leaving her much better off than someone who had paid into the system.

Q&A: The tax implications of downsizing

Dear Liz: My mother just turned 75 and wants to downsize from her four-bedroom house. My father passed away six years ago. She owns her home outright, and at the time of my father’s death the value of the house was estimated at $1.2 million. Right now she has enough income from retirement accounts and investments to live comfortably. She could even buy another smaller property if need be. As the executor of her estate, I’m trying to help her decide what to do with the house. She could let another family member live in it who couldn’t pay rent but could help with upkeep; she could rent it out for market value; or she could sell. We see advantages and disadvantages with all three options. What do you think?

Answer: If she hasn’t already, your mother needs to hire a good estate-planning attorney who can help her evaluate her options. Consulting a fee-only financial planner and a tax pro may be a good idea, as well.

If she sells, your mother could face a sizable capital gains tax depending on where she lives. Federal law allows a certain amount of capital gains on the sale of a primary residence — $250,000 per person — to be excluded from income, but after that, capital gains taxes apply.

The gain would be the difference between the home sale proceeds and your mother’s tax basis in the home. At least half of the home received a “step up” in basis to the then-current market value when your father died. If your mom lives in a community property state, such as California, both halves of the property would have received this step up at his death. Any increase in value since then would be subject to capital gains tax (minus, again, the $250,000 federal exclusion).

There’s another tax issue to consider. If she dies owning this house, her heirs would get a tax basis equal to the property’s value at her death. In other words, regardless of the state where she lives, none of the house’s appreciation during her lifetime would be taxable.

The tax issues alone shouldn’t dictate what your mother does. But she should be aware of them to make an informed decision about what to do next.

Q&A: Social Security survival and spousal benefits

Dear Liz: If my spouse takes spousal benefits from Social Security before his full retirement age, does that ultimately affect the survivor benefits he could receive?

Answer: As covered in previous columns, applying for spousal benefits before his full retirement age of 66 or 67 will lock him into a diminished check and preclude him from switching to his own benefit later. It does not, however, affect what he would receive as a survivor. His survivor benefit would be equal to what you were receiving at your death. To protect him (and yourself, should you be the survivor), you probably should delay starting benefits as long as possible to make sure you’re receiving the maximum benefit.

Q&A: Using a separate credit card for online purchases and automatic payments

Dear Liz: I saw your recent column from the couple upset about the inconvenience of having to reset the automatic payments when their credit card was reissued due to fraud. We had the same problem (our credit card has been reissued six times now!) and got some great advice I’d like to share. We got a separate credit card that is used for nothing but automatic payments and online purchases. It has never been hacked like our other card that we use constantly in the community because we earn airline miles. The last two times our regular card had to be replaced was in the Target and Home Depot hacking, but the other card has been fine so far. We are keeping our fingers crossed. Our issuer has now given us a chip card to replace the constantly hacked one, so I hope we have better luck going forward with both credit cards.

Answer: Several other readers wrote to say they do something similar by using different cards for different purposes, including devoting one to making automatic charges.

It might be wise to have a separate card just for online purchases, however, since the incidence of “card not present” fraud (including online and phone transactions) is higher than that for transactions where the card is physically presented to the merchant.

Tuesday’s need-to-know money news

321562-data-breachesToday’s top story: The big security threats headed our way in the new year. Also in the news: How to beef up your savings, what millennials should discuss before marriage, and tips on managing your credit cards in the new year.

The Big Scams & Security Threats to Watch Out for in 2015
If you thought 2014 was bad…

7 Ways to Beef Up Your Savings
Give your savings a workout.

4 Financial Issues Millennials Need to Discuss Before Marriage
Putting everything out in the open.

10 Tips for Managing Credit Cards in 2015
How to do a better job in the new year.

How Will You Keep Your Financial Resolutions?
You must commit.

Monday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: How to give yourself a gift without breaking your holiday budget. Also in the news: What you need to ask before buying a winter home, the big tax changes ahead for 2015, and how to avoid going into debt with your first credit card.

How to Treat Yourself Without Breaking Your Christmas Budget
Who knows what you want for Christmas better than you?

5 Questions to Ask Before Buying a Winter Home
Can you truly afford to become a snowbird?

The Biggest Tax Changes for 2015
Get ready.

First Credit Card: Tips to Avoid Going Into Debt
Don’t start off on the wrong foot.

Track Your Mileage to Save Money on Insurance
Using a mileage tracker provided by your insurer could save you big bucks.

Q&A: Talking money before marriage

Dear Liz: My daughter is getting married in September. She recently confided that she and her fiance have never discussed their respective debts (if any), credit scores or financial goals. She is hesitant to bring this up with him but realizes it’s a discussion that needs to happen before they marry. I suggested they consider meeting with a financial counselor so they can have an honest talk about money as a practical matter rather than an emotional one. Would a fee-only financial planner be appropriate in this instance?

Answer: Absolutely. If you’d like, you could make a session with such a planner your engagement present to them.

Of course, they don’t need a professional to start talking about their financial situations. Presumably she knows him well enough by now to have some idea about how best to broach the topic. It could be as simple as “Hey, I was just paying some bills and I realized we probably should talk about our financial situations.”

A way to start the decision is to talk about dreams and goals. Would they like to raise a family? Buy a home? Start a business? Travel a lot? Retire early? All financial planning stems from knowing what your goals are, and then you can figure out how to achieve them. Your daughter shouldn’t be too worried if they aren’t on exactly the same financial page, since few couples are. What’s important at this stage is knowing what’s important to each person.

It can be trickier to talk about the present. Most people have made mistakes with money, and many have more debt and less savings than they’d like. Being a sympathetic listener and suspending judgment can go a long way toward putting a partner at ease in these discussions.

After they’ve had a few talks and feel comfortable, they probably should take a look at each other’s credit reports. Those would give them a fairly good idea of how much each person owes. That can help them understand roughly how much of the family budget will need to go toward retiring those debts and how much is available to achieve their goals.

Q&A: Windfall Elimination Provision followup

Dear Liz: In a recent column, I believe you got one aspect of Social Security’s Windfall Elimination Provision wrong. If you’re affected by WEP, in no case can you get more than 90% of your Social Security benefit. It is a sliding scale. With 20 years of earnings under Social Security, you get 40%. It goes up 5% per year to a maximum of 90% at 30 years. I worked 28 years as a paramedic and firefighter, most of the time for agencies that offered a pension instead of paying into Social Security. I also have 22 years of substantial earnings that were covered by Social Security and plan on working eight to 10 more years to get to 90%.

Answer: It’s easy to get confused about how Social Security figures benefits, but rest assured: If you have 30 years of substantial earnings from jobs that paid into Social Security, you will get 100% of your Social Security benefit even if you have a pension from a job that didn’t pay into Social Security.

Here’s what you need to know. Social Security is designed to replace more income for lower-wage workers, because higher-wage workers presumably find it easier to save for retirement. People who get pensions from employers who don’t pay into Social Security, but who also had jobs from employers that did, can look to the Social Security system as though they were long-term low-wage workers even when they’re not. Without the Windfall Elimination Provision, they could get a bigger Social Security check than they would have earned had they paid into the system all along.

To compute our benefits, Social Security separates our average earnings into three amounts and multiplies those amounts by different factors. For a typical worker who turns 62 this year, Social Security would multiply the first $816 of average monthly earnings by 90%, the next $4,101 by 32% and the remainder by 15%.

Those affected by WEP have a different formula, but it affects only that first part of their average earnings — the part where everyone else gets credited for 90%. The WEP formula is, as you note, on a sliding scale. Someone with 20 or fewer years of substantial earnings from jobs that paid into Social Security would see the first $816 multiplied by 40%. Someone with 28 years, by contrast, would have the first $816 multiplied by 80%. Someone with 30 years or more would get the full 90%.

Social Security’s pamphlet on WEP lays this out, and notes that the Windfall Elimination Provision does not apply to anyone with 30 or more years of substantial earnings from jobs that paid into Social Security. You can read more about it here: http://www.ssa.gov/pubs/EN-05-10045.pdf.

Friday’s need-to-know money news

Holiday-tipping-in-tough-times-7FKMMIM-x-largeToday’s top story: A stress-free guide to holiday tipping. Also in the news: How to ease the financial strain of caregiving, financial resolutions to keep in 2015, and credit card strategies for travelers.

A Last-Minute Guide to Holiday Tipping
One less thing to stress over.

5 Ways to Ease the Financial Strain of Caregiving
Hiring help can actually save you money in the long run.

10 Financial Resolutions to Keep In the New Year
“Keep” being the operative word.

3 Irresistible Credit Card Strategies for Travelers
Supercharging your travel budget.

Retirement: 5 ways to make the most of 2015
Your retirement checklist for 2015.