Get smart with your money
Dear Liz: I would love to give my grandchildren money, but I don’t want to pay the income tax on withdrawals from my IRA or 401(k). Will they get it tax-free when I die?
Answer: Unfortunately, no.
Withdrawals from retirement accounts are generally taxable, whether the person making the withdrawals is the original contributor or an heir. Furthermore, non-spouse beneficiaries of retirement accounts generally must withdraw the money within 10 years.
Dear Liz: A reader recently asked about giving a rental house to the sister that has been living in it for 10 years. You mentioned that the reader would have to file a gift tax return since there is a max of $15,000 for a gift exemption. Couldn’t the owner simply add the sister to the title so when they pass the sister becomes the sole owner of the house without having to deal with taxes, probate, etc? Similarly, if the sister dies first the current owner would retain ownership to give, sell, donate as they choose.
Answer: Adding the sister to the deed would be considered a gift, so the reader would still have to file a gift tax return.
Owning the home together would avoid probate and give the surviving sister a tax break, and that half of the house would get what’s known as a step-up in tax basis at the first sister’s death. Another option, if the reader wanted to retain ownership, would be a transfer-on-death deed, which is available in many states. The reader was clear that she wanted to give an outright gift, but she could consult a real estate or estate planning attorney about other options.
Dear Liz: Our 23-year-old daughter has a low-limit credit card from her bank, primarily to build her credit history. For the same purpose, we also added her as an authorized user on one of our credit cards (yes, we can trust her). When she checked her credit reports recently at annualcreditreport.com, one of the agencies produced a report but another claimed they couldn’t find her. Is that normal for a relatively new credit user? Could it possibly be because she has a hyphenated middle name? Should we worry?
Answer: It can take 30 days or more for information to be updated at the credit bureaus, so she should try again and also check the third credit bureau. If two bureaus can’t find her after 30 days, then it’s possible that both credit cards report to only one bureau. In that case, she should consider getting a credit-builder loan from a credit union that reports to all three bureaus.
Otherwise, the problem is likely the credit bureau’s, and she should try ordering the missing credit report via the U.S. mail. The bureau that couldn’t find her will have instructions for requesting a report that way on its site.
Today’s top story: Student loan pause is extended. Also in the news: A new episode of the Smart Money podcast on what our listeners accomplished this year, 6 Instagram tips for small-business owners, and for young adults, building credit starts now.
Student Loan Pause is Extended
Payments will resume May 2nd.
Smart Money Podcast: What Our Listeners Accomplished This Year, Part 2
This week’s episode continues our celebration of our listeners’ money wins in 2021.
6 Instagram Tips for Small-Business Owners, by Small-Business Owners
Learn how to build an effective small-business Instagram strategy that takes up minimal time.
For Young Adults, Building Credit Starts Now
Building your credit while you’re young will pay off in the future, and it may be easier than you think.
Dear Liz: You recently advised against keeping one’s will in the bank safe deposit box. That was on the grounds that upon death, the bank could seal the box. My daughter is named on my box (she is also named as executrix) — that is, the bank ran her through several hoops, and the result is she can gain access to the box as she wishes. Does your advice hold in this case?
Answer: Find out what the bank’s policy is. If the bank confirms your daughter will have access in the event of your death, ask that the assurance be put in writing.
One problem with keeping anything in a safe deposit box is that the contents can be escheated — turned over to the state — if the bank decides the box has been abandoned. That usually won’t happen if you’re paying the bill for the box on time and making sure the bank has up-to-date contact information, but physically checking the box’s contents once a year or so is a good practice.
Dear Liz: You recently advised a person to leave their original will or trust with their attorney. As a practicing attorney, I cannot tell you how many times original wills and trusts have been lost as the attorney that prepared the documents retired or died before the client. There are requirements to inform clients of a retirement, but very few lawyers follow those rules, unfortunately. The best thing is to buy a home safe or put the documents in double zip-close freezer bags in your freezer (which should be fireproof and is a great preserver of the documents). Or, hire a younger lawyer who will still be around when you want to amend your will or trust or you pass away.
Answer: Thanks for sharing your perspective, but freezers are not fireproof. A fireproof home safe would be a better option for those who want to keep their wills at home.
There is, unfortunately, no one perfect option for storing wills. You’re quite right that people often don’t stay in touch with the attorneys who create their documents, even though estate plans should be reviewed and updated regularly. The risk of losing a will may not be as high if the attorney is part of a large firm, but even those can go out of business.
Some states allow you to file your will in advance with the probate court or a registrar of wills, so that’s another avenue to consider.