Ask Liz Weston

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Liz Weston

Q&A: The Ins and Outs of Trusts

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Dear Liz: I liked your answer to the person who wanted to ensure a son from a prior marriage got an inheritance. You mentioned creating a trust so the surviving spouse can get income from the assets but then the son would inherit when that spouse dies. However, what’s to prevent the surviving spouse from using up all the funds so that the son is left with nothing after all?

Answer: These trusts typically put restrictions on how much the surviving spouse would be able to access and in what circumstances. If the surviving spouse is the sole trustee, of course, the temptation to ignore the rules could be great. Alternatively, the ultimate inheritor or a third party can be named as trustee or co-trustee.

But there’s no getting around the fact that the trusts create a conflict between the survivor and the ultimate inheritor. The survivor typically wants as much income as possible from the trust while the inheritor wants the trust to be left alone to grow.

Another issue is taxes. Assets in the trust will get a step-up in tax basis when the first spouse dies, but not when the surviving spouse dies.

Often, the best way to make sure someone gets an inheritance is to make an outright bequest rather than putting the money in a trust. If a surviving spouse needs income from the assets to make ends meet, though, a trust with a responsible trustee can help ensure the ultimate inheritor gets the inheritance that was intended.

An experienced estate planning attorney can help you sort through the available options and make the best plan for your loved ones.

Q&A: How to get out from under a crushing reverse-mortgage debt

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Dear Liz: Our elderly father took out a reverse mortgage in 2010 with the goal of getting a $1,000 monthly income stream. Fast forward to today: Dad has passed away, and our mom is still alive at 97. The payback amount of the mortgage has ballooned to $360,000. Because it’s an adjustable rate mortgage, the rate is increasing with the inflation rate. We’re being told that this is all legal, but it seems like usury to me. None of us children have enough cash to pay off the reverse mortgage, so it will continue to go up stratospherically each and every month. The entire balance will become due if she leaves her home or passes away. Do you have any suggestions?

Answer: Reverse mortgages allow borrowers to tap their equity without having to make payments while they remain in the home. But the amounts they borrow accrue interest and, as you’ve seen, the debt can grow substantially over time.

If your mother dies or moves out, the lender will demand payment within 30 days. It may be possible to extend the deadline for up to six months, according to the Consumer Financial Protection Bureau. If you don’t have the cash to pay off the loan, you could try to get a mortgage or to sell the home to pay the debt. If you sell it, you would need to clear enough to pay off the debt or at least get 95% of the home’s appraised value. Another option — especially if there’s little or no equity left — is to simply turn the house over to the lender. You won’t be on the hook if the mortgage balance exceeds what the home is worth.

Creative ways to cut your energy costs this summer

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Blasting the air conditioning to counteract stifling heat can provide much-needed relief this summer, but the utility bills that follow might not be as pleasant. According to the Bureau of Labor Statistics, the price of electricity has been steadily climbing over the past two years.

“Most U.S. households will continue to pay high costs for energy throughout the summer because of high energy prices and the anticipated hot temperatures,” says Courtney Klosterman, home insights expert at insurer Hippo.

The good news is you might have more control over your energy usage than you think. Paula Glover, president of the Alliance to Save Energy, a nonprofit that advocates for energy efficiency policy, estimates that based on numbers from the Energy Department, consumers could save 10% to 20% a year on energy bills just by shifting habits and making some energy-efficient investments. But, she adds, “You have to be diligent.”

In Kimberly Palmer’s latest for the Washington Post, learn creative ways to cut your energy costs this summer.

This week’s money news

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This week’s top story: Smart Money podcast on the price of parenthood. In other news: 4 tips on avoiding financial regrets in retirement, opening a Roth IRA with a summer job, and Supreme Court strikes down student debt cancellation.

Smart Money Podcast: The Price of Parenthood: In Vitro Fertilization and the Future of Parenthood
This week’s episode continues our Nerdy Deep Dive into the price of parenthood.

Experts Offer 4 Tips on Avoiding Financial Regrets in Retirement
Even if you’re already retired, you can take action to improve your retirement finances.

Got a Summer Job? Consider Opening a Roth IRA
You don’t have to wait until your first full-time job out of college to start saving for retirement.

Supreme Court Strikes Down Student Debt Cancellation. Now What?
Get in touch with your servicer and prepare for payments to resume in October.

Q&A: How to keep your spouse’s next spouse from spending your money after you die

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Dear Liz: I want to make sure that I leave an inheritance for my son from my first marriage. I remarried 12 years ago. My husband has no children. I do have a prenuptial agreement. My husband and I are financially fine. We own our own home and have adequate investments. I wouldn’t want to leave my husband without necessary funds, and he says he’ll make sure that my son gets an inheritance. But my husband’s father had dementia, and I am concerned that if my husband develops it, he may spend all the money on impulsive purchases. He has a tendency to make impulsive purchases now that we can afford them. What might I set up to ensure that my son receives an inheritance?

Answer: If you don’t make specific plans to leave money for your son, he may not get an inheritance even if your husband doesn’t develop dementia.

To put it another way: if you don’t want your spouse’s next spouse to spend your money, then talk to an estate planning attorney about your options.

You could, for example, leave part of your estate to your son and the rest to your spouse. Another possibility is to create a trust that gives your spouse income from your assets while he’s alive and then transfers the assets to your son when your spouse dies. Yet another is to name your son as the beneficiary to certain accounts, such as life insurance or retirement funds, while leaving other accounts to your spouse.

All of these options have advantages and disadvantages. An estate planning attorney can help you evaluate the best approach for your situation and draw up the needed paperwork.

Q&A: Taxes and Social Security

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Dear Liz: You wrote in a column about retirement plan distributions and the effect that those have on taxation of one’s Social Security benefits. Your example was if someone made over $44,000 in combined earnings then their benefits would be taxed at 85%. Does this apply if one waits until full retirement age to start drawing Social Security? My husband also will be required to start making required minimum distributions in 2023. Are those distributions taxed differently from the rest of our income, since we are both still working? Or does it matter whether we are working or not?

Answer: The taxation of Social Security is complicated and often misunderstood, but rest reassured that you won’t lose 85% of your benefits. If you have income in addition to Social Security — whether it’s from work, retirement plan distributions or other sources — then up to 85% of your benefit might be subject to tax at your ordinary income tax rate.

The earlier column mentioned that taxes on Social Security are based on your “combined income,” which is your adjusted gross income — the figure you report on Line 11 of your 1040 tax returns — plus any nontaxable interest and half your Social Security benefits. Single filers who have combined income between $25,000 and $34,000 may have to pay income tax on up to 50% of their benefits while those with combined income over $34,000 may pay tax on up to 85% of their benefits. Married couples filing jointly may have to pay income tax on up to 50% of benefits if their combined income is between $32,000 and $44,000. If their combined income is more than $44,000, they could owe tax on up to 85% of their benefits. You can read more about how Social Security benefits are taxed on the agency’s website.

Your benefits can be taxable regardless of when you start. However, researchers have found that many middle-income people pay less taxes overall if they delay Social Security and tap their retirement funds instead. You can read more about the “tax torpedo” on the Financial Planning Assn. website.

Your husband’s required minimum distributions will be taxed as income unless he made nondeductible contributions to those retirement plans. If he did make after-tax contributions, then a portion of his withdrawals would not be taxed. Most people got a tax break for all their contributions, however, which means all their withdrawals are taxable.

A tax pro can look over the specifics of your situation, help you estimate your tax bill and make sure you have sufficient withholding to avoid penalties.