Q&A

Q&A: Sorting out trust confusion

April 4, 2022 By Liz Weston

Dear Liz: In a recent column you wrote of bypass trusts that “for many people this estate planning tool has outlived its usefulness.” In California, a trust avoids probate. Isn’t avoiding probate a reason to continue with a trust?

Answer: What you’re referring to is a living trust — a revocable (which means changeable) trust created while someone is alive. A bypass trust is irrevocable (which means not changeable) and typically goes into effect when someone dies. To further complicate matters, a living trust or a will can have provisions that create a bypass trust after someone dies.

Living trusts are indeed designed to avoid probate, the court process that otherwise follows death to settle an estate. Living trusts remain useful to many people who live in states where probate can be expensive and prolonged, such as California and Florida. Living trusts are also private, unlike wills, which typically become public record after death, and so are favored by people who want to avoid publicity.

Bypass trusts, on the other hand, were primarily designed to minimize or avoid estate taxes, which are no longer a concern for the vast majority of people. Bypass trusts have a number of disadvantages, so if you have one in your estate plan, you’ll want to consult an experienced estate planning attorney about whether to keep it.

Q&A: The ins and outs of I-bonds

March 28, 2022 By Liz Weston

Dear Liz: As you know, interest rates on certificates of deposit are extremely low. I was thinking of investing in government I-bonds. Can you discuss the pros and cons?

Answer: I-bonds are guaranteed by the U.S. government and currently pay an interest rate of 7.12%. But they do have some downsides.

The rate on Series I savings bonds is a composite of two rates: a fixed rate, which is currently zero, and an inflation rate, which changes every six months. The semiannual inflation rate is currently 3.56%, which translates into a 7.12% annual rate. This rate applies for I-bonds issued November 2021 through April 2022 and is good for the first six months you own the bond, according to Treasury Direct, the financial services site that allows you to buy securities including I-bonds directly from the U.S. government.

Although the rate can change, it can’t go below zero, so you can’t lose your principal. However, you also can’t cash in I-bonds for the first year, and if you cash them in before five years, you’ll lose the previous three months’ worth of interest.

Also, the bonds don’t pay interest to you directly. Every six months, the interest earned is added to the bond’s principal. That creates a new principal value, and interest is then earned on that value.

The bonds are exempt from state and local taxes but subject to federal taxes. You can opt to pay federal tax on the interest each year, but most people defer reporting the interest until they cash in the bond or it stops earning interest at 30 years, in which case it’s automatically cashed out and the interest reported to the IRS.

You can buy up to $10,000 in I-bonds electronically each calendar year. You can buy another $5,000 in paper bonds, but only if you use your tax refund to do so.

Q&A: No cash-back offer on unused exemption

March 28, 2022 By Liz Weston

Dear Liz: When selling a home and qualifying for the $500,000 exemption, but only needing to use $250,000 of it, what happens to the unused balance? An accountant told my friend she would get it in cash, which sounds incorrect to me.

Answer: You’re right — that’s not correct. It’s so incorrect, in fact, that your friend is probably an unreliable narrator. It’s hard to imagine an accountant being so out of touch with this basic tax provision as to offer that advice.

Each homeowner can exempt up to $250,000 of home sale profits provided they owned and lived in the house as their primary residence for at least two of the previous five years. That means a couple can exempt up to $500,000.

There’s no cash-back offer if someone uses less than the full exemption. On the other hand, the exemption potentially could be used every two years, so it’s not exactly a “use it or lose it” proposition, either.

Q&A: Why your estate plan might need a do-over

March 28, 2022 By Liz Weston

Dear Liz: We had a living trust done in 2006. The lawyer recently died and his office mailed us a packet with the trust document in it. We want to make a few changes. Every lawyer wants to do the whole thing over and have us sign papers giving them powers.

Answer: Your estate plan is probably ready for a do-over.

Previous columns have mentioned that estate planning laws have changed significantly since 2010. Any estate document created before that point needs to be reviewed and updated. Your previous attorney can’t do the updating, and another lawyer might be wary of being held responsible for a document they didn’t draft.

That said, it’s not clear what “powers” you’re being asked to give. What these attorneys may want to do is have you create powers of attorney that would allow a trusted person to make financial and healthcare decisions should you become incapacitated. These documents are essential and a good reason to schedule an appointment with the attorney of your choice today.

This advice is well worth repeating: Do-it-yourself estate planning can create a mess for your heirs that could incur far more in legal fees than you would have spent getting expert, personalized advice in the first place.

Q&A: Your earthquake kit should include cash. But how much?

March 21, 2022 By Liz Weston

Dear Liz: In these uncertain times, I decided I need to have cash on hand. I withdrew $500 in small bills from the bank and put it in a fireproof pouch. Is there a recommended amount of cash one should have available for emergencies?

Answer: The appropriate amount depends on how much you spend and how paranoid you are.

Many financial planners recommend storing a few hundred dollars somewhere safe in your home in case a widespread electrical outage — after an earthquake, for instance — affects ATMs and point-of-sale devices. The idea is that you’ll want enough cash to cover spending for a few days until the power comes back on. Smaller denominations are better than larger ones because you may have trouble finding anyone to give change for $50 or $100 bills.

Emergency preparedness sites tend to recommend storing even larger amounts — $1,000 to $3,000, or whatever you would need — in case access to ATMs and credit cards was affected for a few weeks.

Obviously, storing cash has its perils. The money could be lost, stolen or destroyed in a disaster. You’ll have to weigh those risks against the possibility of needing the cash, and make your own call.