Q&A: Fiduciaries can help with estate trusts

Dear Liz: I enjoyed your recent column about spendthrift trusts. You’re right that when parents assign the job of trustee to one sibling for the benefit of another sibling, it creates a hazardous situation that often results in a court battle. The appointed professional trustee should be a neutral party. You recommended a bank or trust company to fill the bill.

However, there is a third and often better option: a licensed professional fiduciary. There are about 600 in California. We are independent fiduciaries licensed by the state to manage clients’ assets in trusts and estates.

Professional fiduciaries will take the smaller trusts and estates, since banks and trust companies usually require a minimum of $1 million to $2 million under management before accepting a trust or remainder estate. Banks and trust companies also typically charge fees based on the amount of money under management, whereas California Licensed Professional Fiduciaries normally charge on a time-incurred basis.

Fiduciaries also give the beneficiary an annual accounting. A case I have now came to me when the sibling trustee failed to account for money spent for nine years.

Answer: Thanks for highlighting this option. Licensed professional fiduciaries aren’t available everywhere, but certified public accountants also can serve this function. The attorney who drafts the trust may have recommendations.

Friday’s need-to-know money news

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Old habits die hard.

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Simple savings can bring in big bucks.

Thursday’s need-to-know money news

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Plan ahead.

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Save money early and regularly.

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Wednesday’s need-to-know money news

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Planning for the future.

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Proceed with caution.

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Using your money wisely.

5 Good Reasons to Tap Your Home Equity

496065-570x225-2Lenders want you to borrow against your home equity again. The question is, should you?

Rising home values and a sluggish mortgage market mean banks are once more marketing home equity lines of credit. Last year, lenders handed out $156 billion in HELOCs, a 24% rise from a year earlier and a 138% rise from 2010.

HELOCs are typically a cheap source of credit, with current rates averaging less than 5%. (Here’s how to pick the right HELOC lender.) But borrowing against your home equity can be risky. Rates are typically variable, and payments can balloon after the initial interest-only period ends. A recent uptick in second mortgage delinquencies is being driven by an 87% jump in missed payments from loans made in 2005 that just ended their 10-year interest-only period, according to Black Knight Financial Services, which tracks mortgages.

In my latest for NerdWallet, when it makes sense to tap your home equity.

Tuesday’s need-to-know money news

how_to_build_an_emergency_fundToday’s top story: How two extra years in college could cost you close to $300,000. Also in the news: How a financial advisor can help with life insurance, tips for paying off student loans if you didn’t finish college, and why 66 million Americans don’t have an emergency fund.

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An incentive to graduate on time.

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A recipe for disaster.

Monday’s need-to-know money news

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Taxes and fees vary from state to state.

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The sooner the better.

Q&A: Pros and cons of refinancing college loans

Dear Liz: We took out parent PLUS loans to finance our two sons’ college tuition at private universities. We’ve received solicitations from a private lender offering to refinance. What are the pros and cons of doing so?

Answer: It rarely makes sense to replace federal student loans with private loans because the federal version comes with low rates, numerous repayment options, many consumer protections and the possibility of forgiveness. You lose all that when you refinance with a private loan.

Parent PLUS are a different story, however. Not only do they have higher rates (6.84% currently versus 4.29% for direct loans to undergraduates), but PLUS loans have fewer repayment options and no forgiveness.

If you have good credit and a solid employment history, you could dramatically lower your interest rate by refinancing with a private lender. Variable rates start at some lenders start under 2%, and fixed rates start under 4%. If you can’t pay the balance off within a few years, a fixed rate is probably your best option since rising interest rates could otherwise boost your payments.

A few private lenders even offer the option to have your child take over by refinancing your PLUS loan into his or her name.

You can shop for offers at Credible, a multi-lender online marketplace.

Q&A: How to start saving

Dear Liz: I have credit card debt, federal student loans and a car loan. I’m trying to save for a house, but I also know I should save for retirement. How do I figure out what to tackle first?

Answer: If you have a 401(k) with a match at work, take advantage of it first. That’s free money that typically equals an instant 50% to 100% return on your contributions. Then pay off the credit card debt. You normally don’t need to be in a rush to pay off federal student loans. Your car loan is probably OK to pay off as scheduled too, assuming you got a decent interest rate.

After the credit card debt is vanquished, beef up your savings. Eventually you’ll want a separate emergency fund, but for the moment you can earmark the money for your down payment, knowing you can raid it in an emergency.

If you don’t have a 401(k) match or even a workplace plan — about half of workers don’t — you should still save something, but your priority will be to pay off the credit cards as fast as you can. Once that’s done, you can open a traditional IRA or a Roth IRA. The traditional IRA will give you a tax break, but withdrawals will be taxed and may be penalized. If you contribute to a Roth, you don’t get to deduct your contribution but you can withdraw your contributions at any time without taxes or penalties. This makes a Roth a kind of emergency fund-slash-house fund. Ideally, you would leave the money alone until retirement, but it’s good to have a Plan B until you can build up your emergency and down payment funds elsewhere.

Q&A: How long should you keep paperwork about an estate?

Dear Liz: My mother-in-law died 11 years ago and had money everywhere. Thus, I have five drawers full of paperwork. With the exception of the IRS documents, I would love to throw everything out (shredded, of course). How long do I need the paperwork?

Answer: Two of the biggest risks to a settled estate are an IRS audit and challenges from unhappy heirs or creditors.

State laws limiting such challenges differ quite a bit, so you might want to talk to the attorney who helped you handle the estate to make sure you’re out of the woods. If there’s any doubt, you can always scan documents before you shred them so that you have an electronic record.

If it has been more than seven years since the estate and final income tax returns were filed, an audit is highly unlikely. It’s not a bad idea to hang onto tax returns indefinitely, though. Again, supporting documentation can be shredded, although you may want to scan a copy first if you’re nervous about discarding anything.

All this assumes that the estate was properly settled — that your mother-in-law’s property was inventoried, creditors paid and distributions made according to her will if there was one or state law if there wasn’t. If the proper steps weren’t taken to legally close the estate, you’ll want to talk to an attorney immediately about how to set things right.