March 18, 2024 By

Q&A: Property transfers trigger tax problem

Dear Liz: I’m considering giving property (a condo) to my child through a quitclaim deed while I am still living. If she continues to live in the condo for two years after gaining possession, doesn’t she get a $250,000 capital gains exemption when she sells the property?

Answer: Yes, if she owns and lives in the home for at least two of the previous five years, she can exclude up to $250,000 of home sale profits from her income. However, her taxable gain would be based on your tax basis in the property: basically what you paid for the home, plus any qualifying improvements. Only if she inherits the home would the tax basis be updated to reflect its fair market value on the date of your death. Although taxes should never be the sole consideration for property transfers, the favorable step-up in basis may be a powerful incentive to hold off. Consider discussing your options with a tax pro.

Filed Under: Inheritance, Q&A, Taxes
March 18, 2024 By

Q&A: Can 529 college savings plan fund be used to study abroad?

Dear Liz: Can my daughter use her 529 funds for summer study abroad in Costa Rica? She will be taking two Spanish classes for credit through her university. She has a minor in Spanish. Could she use the 529 for tuition, living expenses and airfare? What if it is all part of a package deal paid to her university?

Answer: Yes, tax-free withdrawals from 529 college savings plans are allowed for study abroad as long as the classes are accepted for credit by the sponsoring university and the sponsoring university qualifies for federal financial aid (the vast majority of U.S. institutions do).

Qualifying expenses can include tuition, books and supplies, plus room and board if she’s enrolled at least half time. Other living expenses and transportation costs, including airfare, aren’t considered qualifying expenses.

Filed Under: College Savings, Q&A
March 18, 2024 By

Q&A: Update trusts after life changes

Dear Liz: My wife and I have a trust created in California to distribute our assets to our children after our deaths. In 2017, we moved to Texas and had the trust updated by a Texas attorney to reflect some changes and any differences between Texas and California rules. We moved back to California in 2020. Do we need to update our trust documents again because of the relocation? Do we need to do it any time we move? The terms in the document are generally fine. I just don’t know if the change in residency requires an update to the document.

Answer: Your last move required updates. Why wouldn’t this one?

Any major life change, including a move to another state, should prompt a review of your estate documents. Such a review is a good idea anyway every five years or so, even if you think nothing has changed in your personal circumstances. Laws can change, or you may have different ideas about who your beneficiaries should be, or whom you want to make decisions for you should you become incapacitated.

People often think (or hope) estate planning can be a one-time process. But life and the law aren’t static, so estate plans need to evolve too.

Filed Under: Legal Matters, Q&A
March 11, 2024 By

Worried about money? Ways to keep your kids from feeling your stress

When it comes to parents and children, money stress can be contagious.

That’s what Amy Weimer, director of the School of Family and Consumer Sciences at Texas State University, found when she and a colleague studied 60 children last year. They were more likely to report feeling worried if their parents were experiencing long-term financial stress.

“As a parent, if I know I’m in deep debt, I would want to do something to address that issue so it doesn’t trickle down and have an impact on my child’s mental well-being,” Weimer says. Parents may want to seek financial counseling to help with debt management, for example, if they are experiencing financial strain, she adds.

According to researchers and financial professionals, there are also other steps parents can take to help teach their children about money without sharing their financial worries with them. In Kimberly Palmer’s latest for the Seattle Times, learn ways to keep your kids from feeling your stress.

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March 11, 2024 By

This week’s money news

This week’s top story: When you want to leave your medicare advantage plan but feel stuck. In other news: How the SVB collapse still ripples through banking, 5 financial mistakes to avoid when you are self-employed, and what small-business owners need to know about NIL sponsorships.

When You Want to Leave Your Medicare Advantage Plan — But Feel Stuck
How to get out of your Medicare Advantage plan if it’s not right for you — and what to do if there are no good alternatives.

How the SVB Collapse Still Ripples Through Banking, 1 Year Later
Five banks failed last year, including Silicon Valley Bank. Keeping your money FDIC-insured goes a long way to prepare you for any future bank collapse.

5 Financial Mistakes to Avoid When You Are Self-Employed
Self-employment can be rewarding, but it can also be expensive when you make certain financial mistakes.

What Small-Business Owners Need to Know About NIL Sponsorships
Small-business owners can use name, image, likeness sponsorships, but should be intentional and avoid investing simply as fans.

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March 11, 2024 By

Q&A: Finding a fiduciary advisor

Dear Liz: I am having difficulty finding a fiduciary, fee-only financial advisor. I have inherited considerable investments from my parents’ trust and now that their house is sold, there will be a payout in excess of $1 million. I believe that my parents’ money manager has done an excellent job of investing and managing their money, so I want to stay with him. My IRA is with another money manager. Without any personal recommendations, I do not know how to go about selecting a financial advisor from a list of advisors on the internet. Interviewing and selecting one based on likability makes me uneasy.

Answer: If anything makes you uneasy, it should be that an advisor isn’t required to look after your best interests.

A fiduciary is someone who is committed to putting their clients’ interests ahead of their own. Most financial professionals are not fiduciaries and are typically held to a lower “suitability” standard. That means they’re allowed to recommend investments that are more expensive or that perform worse than available alternatives, simply because the recommended investments pay the advisor more.

You can start your search for fiduciary, fee-only advisors by getting referrals from the National Assn. of Personal Financial Advisors, the Alliance of Comprehensive Planners, the XY Planning Network or the Garrett Planning Network. LetsMakeAPlan.org has a list of questions to ask.

Filed Under: Financial Advisors, Q&A, Retirement Savings
March 11, 2024 By

Q&A: How to reduce the tax penalty from an IRA distribution goof

Dear Liz: I have missed three years of required minimum distributions from one of my IRAs although I have not heard from the IRS about this. What do you advise me to do now?

Answer: Did you include this account when calculating your required minimum distribution each year? If so, you won’t owe a penalty. You’re supposed to calculate RMDs for each of your IRAs, but you don’t have to withdraw money from each account. Instead, you can take the year total from any of your IRA accounts.

If you forgot to include this account in your calculations, however, then you would typically owe a penalty.

In the past, people who failed to take their RMDs faced a 50% penalty on the amount they should have withdrawn but didn’t. Starting in 2023, the penalty has been reduced to 25%, or 10% if the oversight is corrected within two years of the RMD’s due date, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

You can request a complete waiver of the penalty if you can show the failure was due to reasonable cause and that you are taking steps to correct the oversight, Luscombe said. You’ll need to file Form 5329 and attach a letter explaining why you failed to withdraw the proper amount.

Filed Under: Q&A, Retirement Savings, Taxes
March 11, 2024 By

Q&A: Card closure reasons don’t matter

Dear Liz: Does the reason for a credit card closure affect credit scores? I’ve had retailers close a card simply because it hasn’t been used for a period of time, not because I mishandled the account.

Answer: Credit score formulas don’t distinguish between accounts closed by the consumer and accounts closed by the issuer. The closed account can still ding your scores, but you won’t suffer an extra blow because the decision to close wasn’t your own.

Filed Under: Credit Cards, Credit Scoring, Q&A
March 11, 2024 By

Q&A: Don’t make handwritten will changes

Dear Liz: I have a question about wills. Since circumstances change over time, is it permissible to make “pen and ink” changes to a will? For example, can I cross out a beneficiary that no longer applies and date and initial the cross out?

Answer: Think about how easy it would be for someone else to alter your will with a pen and a reasonable facsimile of your initials. Then you’ll understand why states typically require people to be a little more deliberate about changing their estate documents. Even when handwritten changes are allowed, they’re usually not advisable. Any money you save by not seeing an attorney could be spent many times over in legal fees, since handwritten changes would be susceptible to challenges in court. Is that what you really want for your heirs?

Small alterations to estate plans can be handled with properly drafted and witnessed documents known as codicils. But you’re often better off creating a new document and revoking the old one, especially when changing beneficiaries.

Filed Under: Inheritance, Legal Matters, Q&A
March 4, 2024 By

This week’s money news

This week’s top story: Mortgage rates will not fall in March. In other news: Rental housing prices 2024, why some millennials don’t want kids, and managing credit cards when you grew up in a cash-only household.

When Will Mortgage Rates Fall? Probably Not in March
Mortgage rates are expected to go down sometime in 2024, but the decline probably won’t start in March.

Will Rental Housing Prices Drop in 2024?
Rental inflation is slowing down, but prices are expected to stay elevated in 2024.

Why Don’t Some Millennials Want Kids? They Say It’s Too Expensive
A new NerdWallet survey finds that just 25% of millennials who don’t have kids plan to have them. A major reason why? The high cost of raising children.

Managing Credit Cards When You Grew Up in a Cash-Only Household
Debt-averse relatives may not understand your choices, but it’s OK to forge your own financial path.

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