Q&A: Government financial help after disaster may come as a loan

Dear Liz: With all the recent hurricanes and other natural disasters, people are being helped by the Federal Emergency Management Agency with money for rentals or home replacements. What repayment does the government expect? Are there taxes owed by the recipients of that money?

Answer: FEMA grants aren’t taxable, but they’re typically not enough to replace a home. FEMA may provide up to $33,000, but the typical grant is much smaller — in the $3,000-to-$8,000 range, according to recent data from the agency.

Most financial assistance after a disaster comes in the form of low-interest loans to renters and homeowners, offered through the Small Business Administration. Recipients are expected to repay those loans.

Q&A: More reasons why adding an adult child to a deed is a bad idea

Dear Liz: I’m an estate planning attorney and I agree with your warning to the couple who wanted to add their daughter to their house deed to avoid probate.

The daughter’s share of the home would lose the step-up in tax basis she would get if she inherited instead, plus there are several other issues. What if the daughter gets sued or has creditor problems? The house could be at risk.

The parents also may not have thought through what might happen if the daughter marries, divorces or dies before they do. A living trust would cost some money to set up but would avoid these problems.

Answer: A revocable transfer-on-death deed is another option for avoiding probate, but a living trust is a more all-encompassing solution that also can help the daughter or another trusted person take over in case of incapacity.

In any case, they should consult an estate planning attorney, who has a far better understanding of what can go wrong after a death and how to prevent those worst-case scenarios.

Q&A: Here’s a way to fight Social Security fraud

Dear Liz: To make us less likely to become victims of fraudulent activity, years ago I froze our credit bureau files. I assume the Social Security Administration could be hacked as well. Can those files be frozen?

Answer: No, but you can create an online account to track and monitor your Social Security records — and it’s probably a good idea to do so. Fraudsters are creating such accounts and using them to divert benefits onto prepaid debit cards. If you created yours first, this fraud will be harder to pull off. If someone has already created an account in your name, you can find out and start the process of taking back your identity. The place to set up your account is www.ssa.gov/myaccount.

Q&A: Don’t jump into early retirement without considering these things

Dear Liz: I am almost 59½. Can I retire at 60½?

I have $570,000 in a 401(k) and $180,000 in an IRA. I owe $253,000 on a condo that would sell for $600,000. I plan to buy a home next year for $400,000 and pay off the mortgage with the proceeds of the condo. Then I would be left with no bills. I will start collecting Social Security at 62 for approximately $1,850 a month.

I had a wonderful job for 23 years but something changed at work and now just going to work is hard on me. Let me know if you think this is doable.

Answer: That depends. How much do you need and want to spend?

Financial planners typically consider a 3% to 5% withdrawal rate as “sustainable.” The rate depends on how long you’re expected to live and your asset allocation, among other factors, but you should err on the conservative side if you expect to retire early.

A 3% initial withdrawal rate would give you $1,875 a month. A higher withdrawal rate could dramatically increase your chances of running short of money later in retirement.

While you might not have a mortgage, you would certainly have other bills, including the cost of healthcare insurance. If your employer is subsidizing your coverage, as many do, you could end up paying a lot more.

And if Congress dismantles or alters the Affordable Care Act, your health insurance could get even more expensive or perhaps hard to find. Your healthcare costs may go down once you qualify for Medicare at age 65, but they certainly won’t go away.

Also consider that taking Social Security retirement early means a smaller check for the rest of your life. If you do run short of money, that check may be your only source of income, and you may curse yourself for locking in the smaller amount.

You certainly shouldn’t bail on your job before you’ve had a fee-only financial planner look at your situation and see if your plans are realistic.

Q&A: Saving for retirement can’t wait

Dear Liz: I have a family member who at 57 has no savings, a house whose value is 58% mortgaged and debt from a family member of $180,000.

This person is just starting a new job that will cover expenses with about $1,000 left over each month. The job offers a 401(k) but doesn’t allow contributions until employees have been with the company for eight months.

This person has paid into Social Security so that will be there (hopefully!) at retirement. What would be the best way for this person to start saving toward retirement?

Answer: Your relative shouldn’t wait to be eligible for the 401(k). People 50 and older can contribute up to $6,500 annually to a traditional IRA or a Roth IRA, which is $1,000 more than the usual limit.

If your relative didn’t have a previous job that offered a workplace plan in 2017, then this year’s contributions to a traditional IRA should be deductible.

Next year, when your relative is eligible for the 401(k), the deductibility of contributions will depend on that person’s income. In 2018, deductibility begins to phase out when modified adjusted gross income reaches $63,000 for singles. If IRA contributions aren’t deductible, after-tax Roth contributions typically are a better deal, but the ability to contribute to a Roth begins to phase out for singles at $120,000 in 2018.

Encourage your relative to save and to delay starting Social Security for as long as possible. When Social Security makes up the majority of one’s income in retirement — as it will for your relative — it’s important to maximize that check.

It’s not clear why your relative has been saddled with a family member’s debt, but any retirement plan needs to include options for paying off, settling or even erasing (through bankruptcy) such a substantial amount. Your relative should talk to a credit counselor and a bankruptcy attorney to better understand the options.

Q&A: Free credit monitoring won’t prevent identity theft

Dear Liz: I thought I would share some information in light of the Equifax disaster.

Two of my credit card issuers provide free credit monitoring. Capital One scans my TransUnion file and Discover uses Experian. Both send email and text alerts about new activity and a monthly “reassurance” email when no such activity turns up in the previous 30 days.

Along with the credit freeze I placed at Equifax, I feel pretty secure at the moment. I’m sure that other credit card issuers have similar programs in place, and perhaps people should ask their financial institutions if such monitoring is available to them as account holders.

Answer: Free credit monitoring can certainly be helpful, but understand that it can’t prevent identity theft. At best, credit monitoring alerts you after the fact if someone has opened a new account in your name. Only credit freezes at all three bureaus can prevent those accounts from being opened in the first place.

Unfortunately, credit monitoring and freezes can’t help you with the most common type of identity theft, which is account takeover. That’s when someone makes bogus charges to your credit cards or steals money from your bank accounts.

Financial institutions use different types of software to detect fraud, but nothing replaces vigilance on the customer’s part. We should be reviewing transactions on our accounts at least monthly if not weekly. Online access to accounts can help you better monitor what’s going on.

You also can set up alerts that will email or text you if large or unusual transactions happen. (Just beware of a common scam where you’re texted an “alert” that your account has been frozen, along with a link that encourages you to divulge your login information.)

Even if you do everything in your power to avoid identity theft, you still can’t prevent scammers from using your information to file bogus tax returns, get medical care or commit criminal identity theft (by giving your name to the police when they’re arrested, for example). As long as Social Security numbers are used as an all-purpose identifier by businesses and government agencies alike, you can’t make yourself completely secure.

Q&A: To give or not to give can be a taxing question

Dear Liz: A good friend who is childless wishes to give his property to my daughter before his death. He has been an informal uncle for the whole 50 years of my daughter’s life, and we are, in effect, his family. However, I am concerned that the gift tax may be more than he bargained for. He is not tax-aware, and earns very little, so his tax knowledge is skimpy. He owns his property outright, however.

I know that someone can give as much as $14,000 without having to file a gift tax return and that there is a “’lifetime exemption” of more than $5 million. If his property is worth, say, $500,000, can he be tax free on a gift of that magnitude by, in effect, using his lifetime exemption?

Answer: Essentially, yes, but he may be creating a tax problem for your daughter.

Gift taxes are not something that most people need to worry about. At most, a gift worth more than $14,000 per recipient would require the giver to file a gift tax return. Gift taxes wouldn’t be owed until the amount given away in excess of that annual exemption limit exceeds the lifetime exemption limit of $5.49 million.

Capital gains taxes are another matter and should always be considered before making gifts. Here’s why.

Your friend has what’s known as a “tax basis” in this property. If he sold it, he typically would owe capital gains taxes on the difference between that basis — usually the purchase price plus the cost of any improvements — and the sale price, minus any selling costs. If he has owned the property a long time and it has appreciated significantly, that could be a big tax bill.

If he gives the property to your daughter while he’s alive, she would receive his tax basis as well. If she inherited the property instead, the tax basis would be updated to the property’s value at the time of your friend’s death. No capital gains taxes would be owed on the appreciation that took place during his lifetime.

There’s something else to consider. If your friend doesn’t make much money, he may not have the savings or insurance he would need to pay for long-term care. The property could be something he could sell or mortgage to cover those costs.

If he gives the property away, he could create problems for himself if he has no other resources. Medicaid is a government program that typically pays such costs for the indigent, but there’s a “look back” period that could delay his eligibility for coverage. The look-back rules impose a penalty for gifts or asset transfers made in the previous five years. He should consult an elder-law attorney before making such a move.

Q&A: Should grandma sue over the student loan she co-signed?

Dear Liz: You recently answered a letter from a grandmother who co-signed a student loan for a granddaughter who isn’t paying the debt. Although you did not suggest it, a very viable option would be for the grandmother to contact an attorney and sue her daughter and her granddaughter for the debt owed.

It doesn’t appear that they care for the grandmother anyway, so why feel bad about holding their feet to the fire? The grandmother may not have a legal leg to stand on with the daughter, but surely the granddaughter received the benefit of the loan and should ante up.

Answer: Suing a family member is a pretty drastic step that many people are reluctant to consider. If the grandmother is in fact “judgment proof” — if creditors who sue her wouldn’t be allowed to garnish her income or seize her property — then the lender might start focusing its collection actions on the granddaughter. The grandmother wouldn’t have to go to the expense of suing the young woman or trying to collect on a judgment.

Either way, the bankruptcy attorney I suggested she consult to help determine if she’s judgment proof also would be able to advise her about filing such a lawsuit.

To reiterate, student loans typically can’t be discharged in bankruptcy, but bankruptcy attorneys understand the credit laws of their states and can help people assess how vulnerable they are to lawsuits and other collection actions.

Q&A: How to divvy up your wealth when you don’t agree with one offspring’s life choices

Dear Liz: I am reasonably well off thanks to hard work, some luck and a hard-earned (by my mother) inheritance. I don’t spend much because I prefer a simple life, so the money has piled up over the decades.

I have two children. One has a college degree, a decent job, and is saving for retirement. The other dropped out, became an actor and lives hand-to-mouth, getting very little paid-acting work. I want to help my kids while I’m alive, not wait to leave them money. I will help my worker bee to buy a home but I am at a loss how to help my actor. I hate to reward a lifestyle of “I can’t work a 9-to-5 job because I need to be free to audition.” On the other hand, don’t affluent parents help their artistic kids pursue their dreams?

What kind of financial advisor or family dynamics expert can I consult? Do you have any suggestions? I don’t need a money manager as the funds are handled well already. I need help to disburse funds in keeping with my values.

Answer: Talk to your estate planning attorney. If you don’t have one, get one. These professionals do more than draw up wills and trusts to distribute your assets after you’re gone. They also can help advise you about disbursements during your lifetime, including any gift tax implications. A fee-only financial planner who charges by the hour could be another good resource for you.

In answer to your question about affluent parents, some do help their children pursue dreams that aren’t wildly remunerative. The parents might supplement the income of an altruistic daughter who wants to teach in a low-income school or a talented son who needs time to build up a portfolio of artwork for a gallery show. It’s the parents’ choice, obviously, and there’s certainly no requirement they support career choices they think are questionable.

You have many options to be fair to your kids without enabling them. For example, you could put aside an amount equal to the down payment you’re giving your daughter and let your son know the money’s available when he’s “ready” to buy a home. That is so much nicer than saying, “When you snap out of your delusion that you’re going to make a living in a field where so few actually do.”

Q&A: Obsessing over taxes is foolish

Dear Liz: Most of your articles are from people who have not yet retired. I am retired and always expected to be making less money now than when I was working. But the opposite has happened. I am making almost twice as much and I have a lot of money in stocks, which have increased dramatically. I want to travel and use that money but anything I sell will be taxed at the 25% rate. Any ideas how to get my money out and be able to use it?

Answer: Sure. Place a sell order, set aside 25% for taxes and enjoy your life while you still have a life to enjoy. If you’d like to reduce your yearly tax bill, consider bumping up your charitable contributions to help those who aren’t so fortunate.

Paying taxes is not fun, but obsessing about ways to avoid them or letting them dictate your decisions is foolish. You’ll still be far better off than you expected to be after you pay Uncle Sam, and you’ll have the cash to do what you want. So do it.