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Liz Weston

Retiring? If you need a home loan, get one first

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Retired engineers Kelly and Derek Barkey assumed they would be approved when they applied for a $50,000 home equity line of credit two years ago to fix up their new house.

The Barkeys, now 56 and 59, had just sold their longtime home in Southern California and paid cash for a house worth about $850,000 near St. Louis, Missouri. They had retirement accounts worth $3 million, $500,000 in a taxable brokerage account and excellent credit scores.

They were surprised when a national bank turned them down. They tried a local credit union, which also rejected them.

“We haven’t been turned down for credit since about 1987,” says Kelly Barkey, remembering when the couple applied for a rewards credit card while she was still a college student.

In my latest for the Associated Press, learn how to get a home loan in retirement.

This week’s money news

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This week’s top story: Smart Money podcast on making your big money reset. In other news: what do financial experts say about investing in AI stocks, if COVID costs will be covered when the health emergency is ended, and what to do when Medicare doesn’t cover your prescription drug.

Smart Money Podcast: Making Your Big Money Reset, With Jill Schlesinger
This week’s episode is dedicated to a conversation with Jill Schlesinger, CBS business analyst, host of the “Jill on Money” podcast and author of “The Great Money Reset.”

What Do Financial Experts Say About Investing in AI Stocks?
Several publicly traded companies have links to artificial intelligence. But do AI stocks have a place in investors’ portfolios? Here’s what the experts say.

The Health Emergency Is Ending. Will COVID Costs Be Covered?
The health emergency expires May 11, with different impacts for those with private insurance, Medicare and Medicaid.

What to Do When Medicare Doesn’t Cover Your Prescription Drug
You may need to request a formulary exception or switch plans during an enrollment period.

Q&A: They lent their friend a van. It’s getting awkward. Now what?

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Dear Liz: A friend of ours had a huge problem with car repairs last year. This friend got ripped off by a mechanic who took money for the work to repair his car and never repaired it. So my husband and I were kind enough to loan him our van for what we thought would be a short time. The loan has now lasted a year. He put a lot of repair work into it, but we need to ask for the vehicle back. It is not titled to him. I feel bad that he has spent money working on the van. Should we offer him any money or reimburse him for the work? I have a feeling it’s not going to go over very well. Any thoughts or advice on how to handle this would be appreciated.

Answer: As you probably know, the pandemic and a lingering microchip shortage have upended the car market, dramatically raising prices for both new and used cars. Interest rates have gone up as well, making car loans a lot more expensive. Your friend may well have made the calculation that repairing a borrowed vehicle made a lot more economic sense than trying to buy a replacement. He avoided lease or loan payments, plus he may have benefited from free insurance coverage if you continued to pay those premiums.

One approach would be to put a rough dollar value on those savings compared with what he spent on repairs and offer to reimburse him for the difference.

Should you ever again want to loan a potentially valuable asset to a friend, consider discussing in advance who will be responsible for maintenance and repairs as well as how long the loan is expected to last. Putting the details in writing could help both parties avoid awkward misunderstandings.

Q&A: Securities Investor Protection Corp. coverage

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Dear Liz: This is a follow-up question to your column concerning stock brokerage accounts and the coverage provided by Securities Investor Protection Corp. My husband and I are puzzled as to how the failure of a brokerage, which does not actually own our shares of stock, could cause us to lose that stock, leaving us to the limited protection the SIPC can provide. Can you explain what the sequence of events would be?

Answer: SIPC coverage kicks in when a brokerage fails and customer assets are missing. You’re correct that brokerages are required to keep customer assets separate from their own, so missing stocks and other investments would probably be due to fraud, which is rare. Most of the time when a brokerage fails, all customer assets are simply transferred to another firm.

SIPC protects up to $500,000, including a $250,000 limit for cash. Many brokerages also have private insurance in addition to SIPC coverage to protect against such losses.

Q&A: Another view of house bequest

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Dear Liz: You recently answered a question about a mother who gave her home to her two children shortly before she died. You wrote that when a home is gifted, the recipients also get the original owner’s tax basis and thus there is no step up in tax basis at death. However, if the mother continued to live in the home and didn’t pay rent, an argument could be made that it wasn’t a real gift and the home should be included in her estate at death. Then the children could get the step up in basis and not owe capital gains taxes when they sell.

Answer: The estate tax experts at Wolters Kluwer tax research firm agree that if the mother continued to live in the house, IRS Code Sec. 2036(a)(1) could apply, “assuming that there was an express or implied agreement between the mother and the children that she would live in the home rent-free until her death.” Then the fair market value of the home could be included in the gross estate and the children would receive a step up in basis at the mother’s death.

A similar argument could be made if the mother had added the children as joint tenants and continued to live rent-free in the home until death.

Making such arguments to the IRS might require hiring knowledgeable tax and legal help, however. Plus, adding children to home deeds can create other problems. The children’s creditors could go after the house, for example, and transfers of home ownership can complicate Medicaid eligibility.

It would probably be much more cost effective to get tax and legal advice before changing a home’s deed than to hope your heirs prevail against the IRS afterward.

This week’s money news

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This week’s top story: Smart Money podcast on recession anxiety, and retirement savings vs. mortgage payoff. In other news:  5 tax tips for older adults, paying taxes for a bank bonus or interest, and how a tax extension can delay your business loan application.

Smart Money Podcast: Recession Anxiety, and Retirement Savings vs. Mortgage Payoff
This week’s episode starts with a discussion about recession-proofing your finances.

5 Tax Tips for Older Adults
From Medicare premiums to state tax breaks, here are some items to keep in mind during tax season.

Earned a Bank Bonus or Interest? Don’t Forget to Pay Taxes
If you’ve received an account bonus or you’ve earned interest on a bank account, Uncle Sam would like his cut.

How a Tax Extension Can Delay Your Business Loan Application
A tax extension can delay or disqualify your business loan application because lenders need your most recent business and personal financial information when underwriting a loan.