Ask Liz Weston

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Liz Weston

Q&A: U.S. is best when picking a trustee

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Dear Liz: My wife and I have a revocable living trust and we would like to change our primary successor trustee to someone who lives in the United Kingdom. The new trustee is not related to us nor is he a U.S. citizen. Can this be done and would our trust then become a foreign trust subject to a lot of U.S. taxes? How can we avoid this becoming a foreign trust?

Answer: Please rethink your plan, and not just for the reason you suggest.

Naming a foreign trustee very well may change the trust to a foreign trust for federal or state tax purposes when you die, said Jennifer Sawday, an estate planning attorney in Long Beach.

But settling an estate is difficult enough when the successor trustee lives nearby. Trying to manage the process from another country could qualify as cruel and unusual punishment.

If you really don’t have someone in the U.S. whom you trust, consider hiring a professional trustee. Some banks offer trust administration or settlement services as well as other fiduciary services, Sawday said. A licensed professional fiduciary could handle this role as well. Your estate planning attorney should be able to give you some referrals.

Hiring someone could cost more than naming a friend or family member, but often the money is well spent, Sawday said, because the professional is familiar with the work and is efficient compared to a layperson who may serve as a trustee once in a lifetime.

Tuesday’s need-to-know money news

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Today’s top story: What the new COVID relief package means for you and your money. Also in the news: Second relief bill and vaccine rollout attract fraudsters, taking advantage of student loan breaks before 2020 ends, and why a down payment is just the beginning of buying a new home.

What the New COVID Relief Package Means For Your Money
It includes $600 checks for millions of Americans and revives federal unemployment aid and loans for small businesses.

Scam Alert: Second Relief Bill, Vaccine Rollout Attract Fraudsters
Staying skeptical and reading up on common schemes can help you keep your money and personal financial info safe.

Take Advantage of Student Loan Breaks Before 2020 Ends
Consider making a lump-sum payment, addressing defaulted loans or refinancing private loans before the year ends.

Want to buy a home? A down payment is just the beginning
What can go wrong, will go wrong, and you’ll need cash to pay for repairs and everything else for your new home

Monday’s need-to-know money news

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Today’s top story: 5 holiday disasters that are covered by home insurance. Also in the news: How to get started on a post-pandemic budget recovery plan, a new episode of the Smart Money podcast on lessons listeners learned during the pandemic, and 3 mistakes to avoid when you buy a recreational vehicle.

5 Holiday Disasters That Are Covered by Home Insurance
Here’s how home insurance pays for fires, stolen gifts and other seasonal disasters.

How to Get Started on a Post-Pandemic Budget Recovery Plan
Rebuilding emergency funds, paying off debt and planning for the next crisis are top strategies for 2021.

Smart Money Podcast: Listeners Share Money Lessons From the Pandemic
Insights from our listeners.

Three mistakes to avoid when you buy a recreational vehicle

Q&A: Investing can be scary. How to overcome your anxiety

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Dear Liz: I’m 53 and a debt-free homeowner. I’m employed but don’t have a 401(k) and have only about $80,000 in savings. I realize I need to put that money to work somewhere but I just freeze when it comes to trusting myself or someone else to handle it. Markets lately scare me to death, as do fraudulent or self-serving money managers. But as time ticks away, I develop more and more anxiety about it. What would you suggest?

Answer: Many worthwhile endeavors are scary, and you haven’t got a moment to lose.

You don’t have to make yourself an investing expert. You do need to understand enough about how the markets work that you don’t panic at the first downturn and yank your money out. Consider reading a good book about investing, such as “Investing for Dummies” by Eric Tyson, “The Little Book of Common Sense Investing” by John Bogle or “The Broke Millennial Takes On Investing” by Erin Lowry.

While you can’t control the markets, you can control what’s much more important in the long run: how much you invest and how much you pay in fees. Try to maximize the former and minimize the latter. Consider opening an individual retirement account and contributing the maximum $7,000. (The usual limit is $6,000 per year but people 50 and older can contribute an additional $1,000.)

A discount brokerage, such as Vanguard, Fidelity, TD Ameritrade, ETrade or Charles Schwab, will have low-cost target date retirement funds that do the heavy lifting for you, such as choosing investments, rebalancing and getting more conservative as your retirement date approaches.

If you still want help with investing, seek out an advisor willing to be a fiduciary, which means they’re committed to putting your best interests first.

Q&A: Weighing portfolio rebalancing costs

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Dear Liz: I constantly read about the need to “rebalance” portfolios each year or more often to make sure you have a specific distribution of stocks, bonds and cash. However, selling stocks can create capital gains that will be taxed. An advisor rebalanced my portfolio and the result for me was an increase in capital gains taxes and an increase in my Medicare premiums. The extra taxes and costs to me seem to outweigh the benefit of hitting an exact asset target. Can extra taxes and Medicare costs be avoided while rebalancing?

Answer: Most of the advice about rebalancing is focused on people whose primary savings are in retirement accounts, where capital gains aren’t taxed.

Outside of retirement accounts, the costs of rebalancing must be weighed carefully. There often are ways to minimize capital gains taxes, such as selling losing stocks to offset winners, but in many cases the rebalancing should be done slowly, over time, to manage the fallout.

If your advisor didn’t discuss the tax and Medicare implications with you before taking this action, then it’s time to find another advisor.

Q&A: What to do with sudden savings

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Dear Liz: A few months ago we took out a jumbo loan on our residence, using the excess to pay off the mortgage on an investment property. The interest savings is substantial and our monthly payment is much less than the combined two payments we had before. We never had any problem making the two payments. Is it a good idea to put the monthly savings toward the principal? Our daughter will inherit the residence and all our income-producing properties. She has a sporadic employment history and I’m concerned she would not qualify to assume the jumbo loan if she wants to keep the residence.

Answer: Most people have better uses for their money than paying down a low-rate, potentially tax deductible debt. Your case may be one of the exceptions, or it may not.

The first step may be to ask whether she’s planning to keep the home. If she isn’t, then you needn’t worry about the loan — it will be paid off when she sells the property.

If she is planning to keep it, she could sell one or more of the other properties to pay off the loan. (These sales typically wouldn’t generate much if any taxable gains, since the properties get new fair market values when she inherits them.)

If you want to avoid her having to sell anything, then making extra principal payments can be a good plan as long as you don’t have any other debt and have an adequate emergency fund. You may want to consider a backup plan in case you die before the loan is paid off, such as a term life insurance policy (assuming you can qualify).