Ask Liz Weston

Get smart with your money

Q&A

Q&A: These major financial decisions shouldn’t be DIY projects. Talk to an expert!

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Dear Liz: I anticipate being dead soon (cancer). I have established an irrevocable trust for my 8-year-old child, with my 47-year-old wife as the trustee. With respect to taxes and other issues and naming beneficiaries, what is the optimal strategy regarding my child for life insurance and traditional and Roth IRAs? My wife will get the 401(k).

Answer: The best person to answer those questions is the estate planning attorney you (presumably) used to create the irrevocable trust. Estate planning should not be a do-it-yourself activity, particularly when minor children are involved. The wrong plan could give too much too soon to your child, or tie up the money too long. You also don’t want to unreasonably stint your wife in your efforts to preserve money for your child. Also, the optimal strategies for tax purposes may not be the best for your family’s situation.

For example, the best way to minimize taxes may be to leave all the retirement money to your wife. Spouses who inherit retirement funds have the option of treating the accounts as their own. That means your wife wouldn’t have to begin required minimum distributions from the 401(k) or the traditional IRA until she’s 75. (The current RMD age is 73, but it rises to 75 for people born in 1960 and later.) She would not have to take distributions from a Roth IRA she inherits from you.

Non-spouse heirs generally have to drain retirement accounts within 10 years. Minors who inherit retirement funds don’t have to take the first distribution until they turn 21, but then the accounts must be emptied within 10 years.

Life insurance proceeds typically aren’t taxable, or payable to a minor child. But you can create a trust to receive and dole out the proceeds to your child. Your estate planning attorney can help you set this up.

Q&A: After her husband died, a widow’s credit limit plummeted

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Dear Liz: You’ve mentioned how important it is for spouses to each have credit cards on which they are the primary account holder. My husband died last year. We had a credit card with statements that showed the charges we each had made on our separately numbered credit cards. I found the account was in his name only. I had to get a new credit card in my own name, and the credit limit dropped from $75,000 to $7,000. Hope this warns others.

Answer: It bears repeating that most credit cards these days are not joint accounts. If two of you are using a card, one is probably the primary account holder and the other the authorized user.

After a primary account holder dies, credit card companies are often willing to work with surviving spouses who were authorized users to establish new accounts. But as you experienced, the credit limits for these new accounts may be much lower than those of the original.

Q&A: Beware the insurance salesperson in financial planner’s clothing

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Dear Liz: Do you have any general advice for choosing a tax preparer? My financial advisor has recommended switching my 403(b) contributions over to Roth 403(b) with the same investment plan. I am worried that this could put us at risk for a higher tax bracket currently.

Answer: Ideally, a financial advisor wouldn’t recommend switching to a Roth option without knowing a fair amount about your current and future tax situations. Otherwise, the advisor wouldn’t be qualified to determine whether giving up the current tax break is likely to pay off later.

Unfortunately, not all financial advisors are truly qualified to give the advice they do. Some, particularly those advising people about 403(b) investments, are insurance salespeople rather than fiduciary financial planners.

You can get referrals to tax pros from the National Assn. of Enrolled Agents and your state’s chapter of certified public accountants. (The American Institute of CPAs has compiled a list of those at its website.) Both enrolled agents and CPAs are fiduciaries who promise to put your best interests first.

For broader financial advice, consider getting referrals from one of the organizations representing fee-only fiduciary planners such as the Garrett Planning Network, the XY Planning Network, the National Assn. of Personal Financial Advisors and the Alliance of Comprehensive Planners.

Also, teachers should consider spending some time on the nonprofit 403bwise website, which grades school districts’ retirement plans and seeks to educate teachers about the costs of trusting the wrong people.

Q&A: A parent had life insurance, but the companies are gone. What to do?

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Dear Liz: My mother died last year. I discovered she had two old life insurance policies written by companies that no longer exist. How can I determine which modern insurance company is responsible for policies written by these old companies? How can I submit a claim? My mother was born in 1932. The first policy began 1939 for $350. The second began in 1943 for $600.

Answer: It’s not a given that a modern insurer still has these policies, but it’s possible. You can start by entering the old companies’ names in an internet search engine to see whether new owners are mentioned in the results. If that doesn’t work, contact the insurance department in the state where the old company was headquartered because it will have records of mergers or other changes.

If the company went bankrupt, you’ll need to consult the guaranty association in the state where your mother lived. State guaranty associations protect policyholders when an insurer defaults or becomes insolvent. The National Organization of Life and Health Insurance Guaranty Assns. has a search tool you can use to find the correct association.

Another option is to check the life insurance policy locator service offered by the National Assn. of Insurance Commissioners at https://eapps.naic.org/life-policy-locator/#/welcome. You’ll need to input your mother’s Social Security number as well as her dates of birth and death.

Also check the unclaimed property offices of any states where she lived. You’ll find links at unclaimed.org.

Are two savings accounts safer than one?

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Dear Liz: My wife and I will be receiving a sizable amount of money. We want to put the money into a high-yield joint savings account. We don’t want to exceed the FDIC protection. Can we each open joint accounts at the same bank and have each account covered up to the $250,000 limit?

Answer: That’s not quite how it works.

FDIC insurance is per depositor, per ownership category. Ownership categories include single accounts, joint accounts, certain retirement accounts such as IRAs and trust accounts, among others.

A joint account for the two of you would be covered up to $500,000, or $250,000 for each owner. A second joint account at the same bank would not increase your insurance coverage. If you had one joint account plus two single accounts, then your total coverage at the bank would be $1 million ($500,000 for the joint account, plus $250,000 for each individual account).

This assumes none of the accounts has beneficiaries. Naming one or more beneficiaries turns either joint or single accounts into trust accounts, for insurance purposes. Each owner of a trust account is covered up to $250,000 per beneficiary, to a maximum of $1.25 million for five or more beneficiaries.

Is your ex alive? It matters when calculating these Social Security benefits

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Dear Liz: You say that people can receive divorced survivor benefits while remarried but only if they married at 60 or later. I am 75 and getting married soon. I hoped to continue to receive my deceased ex-husband’s benefits. We were married for 30 years. When I finally connected with an actual live person in the Social Security office, I was told that is incorrect and I will lose his benefits.

Answer: Social Security rules for spousal and survivor benefits are complicated. Divorce adds another layer of complexity. It’s understandable that many people get confused, but you’d hope the Social Security reps could get this right.

Divorced spousal benefits — the benefits someone gets from an ex’s work record while the ex is still alive — are what end when someone remarries. If your ex is dead and you receive divorced survivor benefits, you can continue receiving those if you remarry at 60 or later.