Ask Liz Weston

Get smart with your money

Liz Weston

Q&A: What can be done with unused 529 funds?

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Dear Liz: My parents set up 529 college savings accounts for my niece and nephew. The accounts are now quite substantial. My nephew chose to go to community college for his freshman year, and seems to be leaning toward not continuing in college. If he chooses to go to a trade school instead of college, can the 529 funds be used for that? Or, if he decides not to pursue either college or trade school, what becomes of those funds in his 529 account? Can they be transferred to his sister (who may not need it due to the large amount in her own account)? Is there any ability for my parents to recoup the money? What are the available options?

Answer: College savings accounts can be used at any eligible post-secondary institution, including most trade and vocational schools. In addition, up to $35,000 of unused 529 funds can be rolled tax- and penalty-free into a Roth IRA for your nephew, subject to various rules. If your nephew had student loans, up to $10,000 could be used to pay those, as well.

Your parents have many other options for unused funds. They can change the beneficiary to your niece, or any other eligible family member (which can include the original beneficiary’s spouse, children, siblings, nieces, nephews, cousins, in-laws, or parents). In addition to college expenses, 529 withdrawals can pay for up to $10,000 in annual expenses for tuition at elementary and secondary schools.

Account owners can even change the beneficiary to themselves, although they would need to incur expenses at an eligible institution to get tax-free withdrawals.

Finally, your parents could simply withdraw the money and owe income tax on the earnings plus a 10% federal penalty.

That should probably be a last resort, though. Since there’s no deadline to use the money, it can be left alone to grow for the future. Your nephew may want more education later, or your niece’s education could be more expensive than expected. Even if they don’t use the money, either or both of them may someday have kids who could use the money for their schooling.

Q&A: Should I take a bridge loan to build an ADU?

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Dear Liz: We live in a high fire risk area and feel it is too risky to keep our home. Our daughter and her husband invited us to build an accessory dwelling unit on their property. With the tariffs, it is estimated the construction will cost about $600,000. We have a nest egg of about $1.3 million and could sell our current home for about $1 million (we still owe $235,000 on the mortgage).

Our advisor at the bank has recommended a “bridge loan” to pay for the construction, or we could use the money from the sale of our home and our savings, which makes us nervous. I know we need advice but are unsure where to turn.

Answer: You aren’t really facing a choice between financing the ADU and using your own resources. You’ll pay for it either way.

Bridge loans are short-term financing that typically must be repaid within a year, at most. Presumably, you would use your nest egg and/or your home sale to do that.

Another financing alternative would be a home equity line of credit or home equity loan, using your current home as collateral. The interest rate would be somewhat lower, and you wouldn’t be under the same time pressure to pay off the loan in case construction takes longer than expected. Still, the loan would need to be paid back, so the debt will reduce your resources.

If you were building or buying a replacement home, you could get a mortgage to pay off the bridge loan. But in this case you are probably pouring money into someone else’s property. Your daughter and her husband likely would own the structure that you build.

That’s not to say this is a bad idea — far from it. ADUs can help bring families closer and make caregiving easier, while allowing each generation some privacy. But understanding how this works — who pays and how, who benefits and how — can help with decision-making.

So yes, you need advice, and lots of it. You should be talking to a lawyer, a tax pro and a financial advisor who is a fiduciary (someone who is obligated to put your best interests first).

The lawyer can discuss ways to protect your investment in the ADU. The tax pro can advise you about the various tax consequences, including the likely bills for tapping your nest egg and selling your home.

A fee-only financial planner can discuss the options with you to figure out the best course. If you don’t already have an attorney and a tax pro, the planner can give you referrals.

Q&A: Free service can help taxpayers file overdue returns

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Dear Liz: I am 85, and my husband is 87. We are both retired. He has not paid our income tax for three to five years. I have given up trying to get him to do it. I know it’s partly my fault, as I should have taken more responsibility. What should I do? Whom should I call?

Answer: Presumably, when you write that your husband has failed to pay your taxes, you also mean he’s failed to file your returns. Failing to file actually incurs much larger penalties than failing to pay, but either way, your tax debt is likely to have grown over the years due to inaction.

Some good news: AARP Foundation Tax-Aide offers free help with tax returns, including catching up on prior year filings. Tax-Aide is designed to benefit low-to-moderate income people, particularly those 50 and older, but anyone can use its service unless their returns are particularly complex. You can find the various preparation options in your area using the locator tool at https://www.aarp.org/money/taxes/aarp-taxaide/locations/.

Another option is to ask friends and family for a referral to tax professionals they trust. You can use the IRS Directory of Federal Tax Return Preparers to verify credentials.

Recognizing and coping with cognitive changes can be terribly difficult. Your husband may have been too proud to say that he’s no longer capable of this chore. But as you noted, taxes are typically a joint responsibility and now it’s your turn to step up and get the help you both need.

Q&A: Who is responsible for the costs of settling an estate?

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Dear Liz: Our dad is 93 and has a reverse mortgage on his house, where he lived until recently with my brother and my brother’s friend. In August, we had to move Dad into assisted living. Shortly after that, the “friend” locked my brother out of the house and has been a squatter ever since.

We hired an attorney, and the case was reviewed by judges near the end of last year, but we still don’t know the outcome. Hopefully, we will get him out, but the house has so many costly repairs required, even before the squatter, that we don’t think we would clear enough from selling it to pay what is owed to the bank. Probably the most that we could get for the contents is $5,000 to $10,000.

The question is: once the house is gone, are there many fees we will need to pay to settle our dad’s estate? He has named my brother and me as co-executors. Since we both still work full-time, is there a way to avoid being the executor? What happens if there is no executor named?

Answer: What a nightmare. If it helps, take comfort in knowing that you won’t be on the hook if the house doesn’t sell for enough to pay off the loan. That’s part of the deal with a reverse mortgage. If there’s equity left over, the borrower (or their heirs) can keep it. But if the debt exceeds the sale proceeds, that’s the lender’s problem.

In fact, you may not have to deal with a sale at all. Once you get rid of the squatter, your dad can sign over the deed to the lender (a recourse known as “deed in lieu of foreclosure”) rather than go through the hassle of selling the property. Discuss the situation with your attorney — who should be keeping you updated about the status of the eviction, by the way — and contact the lender to find out its process for this option. The lender needs to be informed anyway since reverse mortgages come due when the borrower dies, sells or permanently moves out.

You also won’t be on the hook for settling the estate once your dad dies. That can be costly, but the expenses come out of the estate itself, not the heirs’ or executors’ pockets. If there isn’t enough left over to pay all the bills, there’s a legal process for prioritizing what gets paid and how much.

As mentioned in previous columns, no one can be forced to be an executor. The probate court can appoint someone to settle the estate if necessary. Serving this function, though, can be a way to honor our loved ones.

Q&A: Should I close paid-off, high-rate credit cards?

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Dear Liz: I paid off my high-interest credit cards. Should I close the accounts or leave them open? I heard a long time ago that closing the accounts will affect my credit score because less credit is available to me. But I don’t want to use these credit cards anymore because they have a high interest rate.

Answer: A card’s interest rate is irrelevant if you pay off your balances in full each month, which is the best way to use credit cards.

Closing a bunch of your credit cards at once can have a negative impact on your credit scores. That’s why the general advice is to leave cards open if possible, making a small charge once in a while so the issuer doesn’t close them.

If you can’t trust yourself to use the cards responsibly, though, closing them may be the best option. Or you can ask the issuers for a “product change” to a lower interest card.

Q&A: Tuition payments could require filing gift tax return

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Dear Liz: I have been paying college tuition for my grandson: $20,000 per semester for the last three years. He has used the university’s online option to pay the tuition by transferring the money from my bank checking account. Am I entitled to a tax exemption? How should I claim it when I return my tax return?

Answer: There’s no tax exemption or other direct tax break for paying someone’s tuition. If the money went directly from your account to the school, however, you don’t need to file gift tax returns to report your generosity. The tuition gift tax exclusion allows you to pay an unlimited amount of tuition as long as it’s paid directly to a qualified educational institution. A similar exclusion exists for paying medical bills for someone else, as long as the payments go directly to the medical providers.

If the money went from your account to his and then to the school, however, you would be required to report the amounts you gave above each year’s annual gift tax exclusion amount using IRS Form 709. (The exclusion amount was $17,000 in 2023, $18,000 in $2024 and $19,000 in 2025 and 2026.) If that’s the case, contact a tax pro for help in catching up on this paperwork. You won’t owe gift taxes until the amount you give away above those annual limits exceeds your lifetime gift and estate tax exemption amount, which is $15 million in 2026.