Q&A:Prenup may help with student loan issue

Dear Liz: You recently heard from someone who discovered after marriage that his wife had more than $100,000 in student loans. Would having a prenuptial agreement help in this situation?

Answer: Possibly. Debts incurred before marriage are considered separate rather than joint debts, but creditors still sometimes try to go after joint assets to get paid. A prenuptial agreement, which is a written contract created before marriage, could help a couple limit liability for each other’s debts.

In this case, the husband was willing to help his wife resolve the debts, but knowing about them before marriage would have been helpful — to put it mildly. The loans probably would have turned up during the financial disclosures required when drafting a prenuptial agreement. Even couples who won’t consider a prenup should pull their credit reports together so each knows what he or she is getting into.

Q&A: How to track down an old retirement account

Dear Liz: I worked for a company during the late 1990s. When I left, I had a 401(k) worth approximately $10,000. I recently found an old 401(k) statement and called the plan administrator. I was told my company’s accounts had been transferred to another plan administrator in 2008. I called the new administrator and was told they also could not find my 401(k) using my Social Security number. How do I proceed? What are my options?

Answer: Get ready to make a lot more phone calls.

There’s no central repository for missing 401(k) funds — at least not yet. The Pension Benefit Guaranty Corp., which safeguards traditional pensions, has proposed rules that would allow it to hold orphaned 401(k) money from plans that have closed. That wouldn’t start until 2018. Another proposal, by Sen. Elizabeth Warren (D-Mass.) and Sen. Steve Daines (R-Mont.), would direct the IRS to set up an online database so workers could find pension and 401(k) benefits from open or closed plans, but Congress has yet to take action on that.

If your balance was less than $5,000 — which is possible, given the big market drop in 2008-2009 — your employer could have approved a forced IRA transfer and the money could be sitting with a financial services firm that accepts small accounts. If the plan was closed and your employer couldn’t find you, the money could have been transferred to an IRA, a bank account or a state escheat office. You can check state escheat offices at Unclaimed.org, but searching for an IRA or bank account may require help.

If your employer still exists, call to find out if anyone knows what happened to your money. If the company is out of business, you may be able to get free help tracking down your money from the U.S. Department of Labor (at askebsa.dol.gov or (866) 444-3272) or from the Pension Rights Center, a nonprofit pension counseling center (pensionrights.org/find-help). Another place to check is the National Registry of Unclaimed Retirement Benefits, a subsidiary of a private company, called PenChecks, that processes retirement checks, at www.unclaimedretirementbenefits.com.

One more wrinkle: Your employer or a plan administrator could insist you cashed in your account at some point. You may be able to prove otherwise if you’ve kept old tax returns, since those typically would show any distributions.

Your experience shows why it’s important not to lose track of old retirement accounts. Your current employer may allow you to transfer old accounts into its plan, or you can roll the money into an IRA. Either way, it’s much better to keep on top of your retirement money than to try to find it years later.

Q&A: Discontinuing automatic payments after death

Dear Liz: I use auto-pay for bills in both my business and my personal life. What can we, as consumers, do to protect ourselves and our estates from companies taking advantage of the auto-pay when we die? Do our heirs have to cancel right away? They will have so many other things to deal with in those first months after a loved one dies.

Answer: You may have read about Pia Farrenkopf, the Michigan woman whose mortgage and utility bills continued on auto payment for five years after she died. It was only after her account ran dry, the bank foreclosed on her home and a contractor was sent to fix a hole in the roof that her mummified corpse was found in a Jeep parked in her garage.

The companies receiving the payments weren’t taking advantage of her — they had no way of knowing she was dead. And not all bills will or should stop getting paid at the moment of someone’s death. Even if Farrenkopf’s death had been noticed right away, the person settling her estate likely would have kept the utilities paid and the insurance in force until the home was sold.

If you’re concerned about auto-payments continuing for too long, make sure that your executor or successor trustee has access to your bank accounts. Your bank has a power of attorney form that you can use to grant instant access, or you can provide your login credentials, either now or in the estate planning documents this person will receive at your death.

Q&A: Will closing high-interest cards hurt your credit score?

Dear Liz: I have a few credit cards with very high interest rates — in the mid-teens. My FICO has improved (805 to 830) and I carry little or no balance on the credit cards. I have contacted the issuers asking for lower interest rates but they won’t budge. I have other credit cards with single-digit interest rates. I would like to close the credit cards with the higher interest rates and understand that I may see a drop in my FICO score. How long will take to get my credit score back in the 800s? Is this a wise move?

Answer: Sites that offer credit scores often also have simulators that estimate what might happen if you take certain actions, such as closing cards. You’ll note, though, that these simulators come with plenty of caveats that add up to: Your mileage may vary. A lot.

The reality is that it’s often tough to predict exactly how account closures will affect your scores or precisely how long those scores will take to recover. That doesn’t mean you can never close a card. For example, if you’re not using the card and you’re tired of paying an annual fee, then closing it can make sense if your scores are good and you’re not going to be in the market for a major loan, such as a mortgage. (You don’t want to close or open other accounts while you’re in the process of getting a loan.) If your scores drop a bit, it won’t be a crisis.

Closing a bunch of accounts at once, however, is generally not a good idea — particularly if you’re just doing it to “show them who’s boss.” If you’re not paying interest on these cards, their rates are irrelevant.

Q&A: Options for a pension payout

Dear Liz: I am a single, 52-year-old female. I just received some information about my pension from a previous employer that gives me the option to take a lump sum of $18,701 that I can roll it into an eligible retirement plan. Or I could also take it now and be subject to penalty and taxes. Or I could defer taking payment until I’m 65, when I would start getting a monthly estimated check worth $218.68. The time is limited to make my decision. I don’t need income now, so I am interested in taking the rollover and severing ties with them. But I could wait until I am 65 and take the monthly payments. Which deal is better financially?

Answer: Theoretically you can do better with the lump sum — assuming you roll it over into an IRA or other retirement plan, invest at least half of it in stocks for long-term growth and keep your hands off the money until you’re ready to retire. If you would be tempted to do something stupid like cash out, then you’re better off with the annuity. The annuity check also is for life, while the fate of the lump sum depends on market returns.

Q&A: What happens to debts after death?

Dear Liz: When a person passes away, what happens to their debt obligations? A brother has been diagnosed with terminal cancer, and my husband is listed as the beneficiary. His residence is paid off but has monthly homeowners association fees and property taxes that we would expect to pay. However, he has had low income for years, so he also has substantial credit-card debt, a line of credit with a large outstanding balance and some other debts. He refuses to share pertinent details (such as account numbers) so that we can address these issues when he dies. It’s clear that he will not be able to address them. Any advice?

Answer: Your brother-in-law’s creditors typically will file claims against his estate after he dies. Those bills are paid before what’s left, if anything, can be distributed to his heirs. If his home equity and other assets aren’t sufficient to pay his debts, however, those heirs won’t be on the hook. The creditors will take what they can get and write off the unpaid balance.

You say your husband is “listed” as the beneficiary, but you don’t say where. If his brother doesn’t have a will or living trust, he should be encouraged to visit an estate-planning attorney as soon as possible. He should also have powers of attorney drafted that name the people he wants to make healthcare and financial decisions for him should he become incapacitated.

In the meantime, stop bugging the poor man for his account numbers. There’s no need for you to have that information while he’s still alive and able to handle his own affairs.

Q&A: How to tell if you’ve got the right financial advisor

Dear Liz: I have met with a financial advisor, but he wants every investment to go through him. Although he is an advisor, he works for a company and wants me to buy their products. I’m a little resistant about this. What’s your advice?

Answer: Anyone can call himself or herself a financial advisor or a financial planner. There are no education, experience or ethics requirements for using those titles. A more accurate job description for this guy might be “product salesman.” He may not charge you upfront, but he’ll make commissions from those products and will recommend them even if there are better, cheaper options available.

If you want someone who puts your interests first, look for a fee-only advisor who’s willing to act as a fiduciary. “Fiduciary” means the advisor promises to act in your best interests. And don’t confuse “fee only” with “fee based.” Fee-only advisors are compensated only by their clients. Fee-based advisors may charge their clients while accepting commissions for the products they recommend. You can get referrals to fee-only advisors from the Garrett Planning Network at www.garrettplanningnetwork.com and the National Assn. for Personal Financial Advisors at www.napfa.org.

If you want someone to give you comprehensive financial planning advice, make sure that he or she has the appropriate credential such as Certified Financial Planner (CFP) or Personal Financial Specialist (PFS) and that you verify the credential with the group that issued it (the CFP Board of Standards for the CFP, and the American Institute of Certified Public Accountants for the PFS).

If all you want is help with investment management, though, you may not even need an advisor right now. “Robo advisors” offer automated portfolio management using computer algorithms. Robo-advising began with start-ups like Betterment and Wealthfront and it’s now offered by more established companies, including Charles Schwab and Vanguard.

Q&A: Cleaning up your credit score

Dear Liz: I have several small dings on my credit. I’m now in the position to pay them off, but how do I know my credit will be improved? Should I call the companies and ask if they will remove it if I pay in full and get it in writing?

Answer: Paying off collections won’t help your credit scores, and creditors rarely agree to delete collection accounts in exchange for payment. You can always ask, but don’t count on this as a way to improve your credit. The best way to recover from “small dings” is to use credit responsibly in the future. That means paying bills on time and using less than 30% of your available credit on your cards. You don’t need to carry balances to improve your credit.

Q&A: Avoiding estate taxes

Dear Liz: You recently answered a question about what a wealthy couple could do to reduce future estate taxes, and you mentioned the annual exclusion. They also could pay education and medical expenses for anyone, and there’s no annual limit.

Answer: Absolutely — and the couple’s estate planning attorney almost certainly would have informed them of this option.

The original letter came from one of the couple’s children, asking what their parents could do to reduce future estate taxes, in addition to the irrevocable trust that already had been set up. The reader lamented that the estate was bigger than the current exemption limits (now $10.98 million for a married couple) and so could incur estate taxes.

My answer was that the couple’s attorney would have told them of other options. One of those options is to use the annual exclusion of $14,000 per recipient to gift tens if not hundreds of thousands of dollars out of their estate. If the couple chooses not to use available options, and instead lets the estate incur the taxes, there’s not much the heirs can do about it.

Q&A: Paying an advisor vs. doing it yourself

Dear Liz: I started with a fee-only advisor 10 years ago. She moved to another company a few years after and I followed. She’s really done well for me. My question is, now that I’m getting ready to retire, should I manage my own accounts to avoid incurring commissions or fees? I don’t anticipate making any major changes to my portfolio.

Answer: If your advisor is truly fee-only, then you aren’t paying commissions on your investments. You’re paying fees to her plus fees for the various investments you own.

You can’t avoid fees. While you’re smart to want to avoid paying too much, you also need to consider the value you’re getting. Is your advisor a comprehensive financial planner who can answer your questions on most aspects of your finances, from budgeting to estate planning? Has she helped you stick to your investment plan in good times and bad? Can she serve as a watchdog as you age, monitoring you and your accounts for signs you’re at risk for fraud or bad decisions?

If you’re not getting your money’s worth, then you have two options: looking for a cheaper deal or an advisor who will give you more service.

For example, if your advisor is just providing investment management and you’re paying more than about 1% of your portfolio for her services, then you might well consider doing it yourself or turning to one of the many automated investing services that charge one-quarter to one-half a percentage point. Alternatively, you could look for an advisor who can be a comprehensive planner for the same fee, or less, than you’re paying now.