Q&A

Q&A: Mom’s 94; one son handles her money, another wants more access to it

February 25, 2019 By Liz Weston

Dear Liz: I have two younger brothers, and the youngest was chosen as the executor of our widowed mother’s estate. The problem is that he doesn’t understand financials. Mom is 94. Her entire estate is invested in blue-chip stocks. The portfolio was carefully planned by our uncle and closely tracks the Dow Jones industrial average. With her present holdings, she has enough to live indefinitely in her nursing home.

Her portfolio is up 40% in the last two years, but my brother is worried that the stock market is going to crash. She could give me up to $15,000 a year, but he’s telling her $500 a month for each brother is good. I’m a retired electrical engineer and have managed contracts for the military worth many millions of dollars. Can I challenge my brother’s ability to manage our mother’s finances?

Answer: Sure, if you want to open up an all-out family war at this stage of your life. A better approach might be a collaborative one, in which the three brothers seek outside, expert advice to handle Mom’s affairs.

You might have been terrific at managing military contracts, but that doesn’t give you the background in taxes, estate planning and investment management that’s required in this situation. You may be overestimating how much her portfolio has grown — the Dow is up about 25% in the last two years, not 40% — while underestimating both the risk of a downturn and the effect of larger withdrawals.

Your brother, meanwhile, is understandably concerned about a portfolio that’s 100% invested in stocks. That would be a lot of risk, even if your mom had decades to ride out any downturn (which, obviously, she doesn’t). Remember that the stock market lost roughly half its value a decade ago and lost about 90% during the Great Depression.

If your mom’s portfolio could take such a hit and still produce enough for her to live on, then larger distributions might make sense. Maximizing the annual gift tax exclusion, which allows her to give away $15,000 a person without filing gift tax returns, may be desirable if her estate is worth more than $11 million and could be subject to estate taxes. If she’s not wealthy, though, distributing $45,000 each year to three of you could increase her risk of running out of money.

A fee-only financial planner could analyze that risk and recommend a prudent course of action. The planner also could help arrange the necessary documents that would allow your brother to manage your mom’s financial affairs. Right now, it’s not clear whether those are in place.

Your brother is not yet the executor, because your mother is still alive and executors are in charge of distributing an estate after someone dies. If she wants him to make decisions for her should she become incapacitated, she should give him her power of attorney or name him as the successor trustee of her living trust. Otherwise, he probably would need to go to court to be named conservator.

It may rankle that your mom put him in charge of her estate, rather than you. If he’s trustworthy, though, you should put aside the idea of challenging him for control, especially if your main motivation is to get your inheritance early. Instead, offer to assist him in finding the professional advice he needs to help your mother and work together to make sure her remaining years are as free of family drama as possible.

Q&A: Take a look behind the credit-score numbers game

February 18, 2019 By Liz Weston

Dear Liz: I recently got an email from my credit card issuer stating my credit score had just dropped 21 points. Having a good credit score and not aware of any recent adverse actions, my first reaction was alarm.

Checking with the issuer online, I saw only advertisements for “protect your credit” services, so I phoned. I was informed the numbers came from Equifax credit bureau. I contacted Equifax as well as TransUnion and Experian, which resulted only in more offers of products to protect my credit. I downloaded my free credit reports from AnnualCreditReport.com and found nothing suspicious. I was finally directed to FICO, but an email sent more than a month ago remains unanswered.

Is it legal for these companies to market their products through presumably fictitious or even fraudulent means? What is the best way to find out my true credit score? Can my credit score suffer because I ask these questions in a public forum?

Answer: Knowing a little more about how credit scoring works may put your mind at ease.

There is no one “true” credit score. Lenders and other companies use many different kinds. FICO is the leading credit scoring company and the FICO 8 is the most commonly used score, but many companies use older versions or ones modified for their specific industry (such as the FICO Auto Score 5, for example). Plus, your FICO 8 from Experian may be different from your FICO 8 from TransUnion or Equifax because the scores are based on the information in your credit bureau files and the bureaus are separate, competing businesses that don’t always have the same information.

Then there’s the VantageScore, a rival to the FICO, which is used by some lenders and by many sites that offer people their credit scores for free. The VantageScore formula is different from the FICO formula, so your numbers could be different as well.

All these credit scores, however, are created solely using the information in your credit reports. Your income, gender, address, political opinions, computer operating system and online comments are not included in credit score calculations.

Some people are understandably confused about that. Various start-ups and researchers have suggested that non-credit information — such as information gleaned from someone’s social media postings or online surveys — could replace credit information in loan decisions. But the U.S. has fair credit reporting laws that probably would make such alternatives unworkable. (It would be nice if start-ups checked to see what regulations apply to their industry before sending out press releases, but that doesn’t always happen.)

Given that you didn’t see anything obviously wrong on your credit reports, you don’t need to worry too much. The credit score drop you describe might be because you charged more on a credit card than usual, had a credit limit lowered or applied for a bunch of credit in a short period of time. It probably will reverse itself over time.

Alerting you to credit score changes isn’t an illegal practice, even if the company’s primary purpose in keeping you up to date is to market credit-monitoring services to you. (Credit protection is a misnomer because these services can’t prevent identity theft. They can only alert you if it’s already happened.)

You did exactly what you should have done when you were alerted to the point drop — you went to AnnualCreditReport.com and checked your credit reports. If you want to put your mind further at ease, consider freezing your credit, a process that could prevent identity thieves from opening new accounts in your name.

Q&A: Heirs need a pro to sort our tax issues

February 18, 2019 By Liz Weston

Dear Liz: I know that when a person dies, their beneficiaries typically will inherit a home or other real estate at the current market value with no taxes owed on the appreciation that happened during the person’s lifetime. Does that hold true for stocks as well?

Answer: Usually, yes, but there are some exceptions.

If the stock is held inside a retirement account such as a 401(k) or IRA, and that retirement account is bequeathed to heirs, withdrawals will be subject to income tax. The same is true for investments held within variable annuities.

Inheritors also may owe capital gains taxes on a stock’s appreciation if the stock is held in certain trusts, such as a generation-skipping trust.

And even when no taxes are owed on the gain that happened during someone’s lifetime, there may be taxes due on the gain that happens after someone inherits the stock or other property, said Los Angeles estate planning attorney Burton Mitchell.

If you’re expecting an inheritance, you’d be smart to consult a tax pro so you understand the tax bill that may be attached.

Q&A: Who is an independent contractor?

February 11, 2019 By Liz Weston

Dear Liz: You answered a question from a mother who was concerned that her son didn’t understand the financial implications of being an independent contractor rather than an employee. From what she wrote, the company employing him may not be following the law. The IRS has criteria to determine whether the worker qualifies as a contractor. I have been in that situation on at least two occasions. In one of those, the IRS went after the employer for all the taxes it should have paid even though I had paid all the Social Security and Medicare taxes. This could put the worker in a difficult position if the employer is found to be violating the law.

Answer: Thank you for bringing that up. There’s something called the “ABC test” that many states use to determine whether someone can be classified as an independent contractor. Many of the states use just the first and third test (A and C), but a few states, including California, require all three:

The worker is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact;

The worker performs work that is outside the usual course of the hirer’s business; and

The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hirer.

The second prong is what will trip up a lot of businesses hoping to reduce their costs by classifying workers as independent contractors rather than W-2 employees.

Q&A: Nearing retirement and in debt? Now isn’t the time to tap retirement savings

February 11, 2019 By Liz Weston

Dear Liz: I’m 60 and owe about $12,000 on a home equity line of credit at a variable interest rate now at 7%. I won’t start paying that down until my other, lower-interest balances are paid off in about two years. I have about $130,000, or about 20%, of my qualified savings sitting in cash right now as a hedge against a falling stock market. Should I use some of that money to pay off the HELOC? I know I would pay tax on what I pull out of savings, but I’m not sure what the driving determinant is: the tax rate now while I’m working versus tax rate later after retirement? I don’t think there’s going to be a 7% difference in that calculus but please provide your recommendation.

Answer: There are enough moving parts to this situation, and you’re close enough to retirement, that you really should hire a fee-only financial planner.

Getting a second opinion is especially important when you’re five to 10 years from retirement because the decisions you make from this point on may be irreversible and have a lifelong effect on your ability to live comfortably.

In general, it’s best to pay off debt out of your current income rather than tapping retirement savings to do so. You’re old enough to avoid the 10% federal penalty on premature withdrawal, but the decision involves more than just tax rates. Many people who tap retirement savings haven’t addressed what caused them to incur debt in the first place and wind up with more debt, and less savings, a few years down the road.

That might not describe you, as you seem to be on track paying off other debt. But it’s usually best to tackle the highest-rate debts first, which you don’t seem to be doing. It’s also not clear if you’re saving enough for retirement. That will depend in large part on when you plan to retire, when you plan to claim Social Security, how much your benefit will be and how much you plan to spend.

A fee-only financial planner could review your circumstances and give you the personalized advice you need to feel confident you’re making the right choices. You can get referrals from a number of sources, including the National Assn. of Personal Financial Advisors, Garrett Planning Network and XY Planning Network.