Q&A

Q&A: A husband handles the investing. What happens when he’s gone?

December 16, 2024 By Liz Weston Leave a Comment

Dear Liz: My husband has always handled our investments. He doesn’t think it makes sense to pay someone 1% to do what he can do on his own. As we’re getting older, I’m starting to worry about what I would do if he dies first. We also have a friend who got scammed, and it’s made me wonder whether that could happen to us. I would like to talk to a fee-only advisor like you always recommend, but I’m not sure how to get him on board.

Answer: Start with your concerns about having to take over the finances should he die or become incapacitated. Having someone trustworthy to help you through this process can be incredibly valuable, and it doesn’t need to be someone who charges 1% to manage your investments.

You can get referrals to fiduciary, fee-only planners who charge by the hour at Garrett Planning Network. The XY Planning Network and the Alliance for Comprehensive Planners represent fiduciary, fee-only planners who charge retainer fees. (Fiduciary means the planner is committed to putting your best interests first. Most advisors are held to a lower suitability standard, which means they don’t have to put your interests ahead of their own.)

Researchers have found that our financial decision-making abilities peak at age 53. Unfortunately, our confidence in our financial acumen remains high even as our cognition declines. The growing gap between our self-regard and reality can leave us vulnerable to bad investments, bad decisions and bad people.

An advisor could take a look at your portfolio and recommend ways to make it easier to manage as you age. The advisor also could discuss strategies and safeguards to protect you from mistakes and predators. Once you have established the relationship, you should be able to get more help down the road if you need it. (Consider the advisor’s age and status, though; a younger advisor or one who’s part of a large practice might be a better idea in this scenario than a solo practitioner who is approaching retirement age.)

Q&A: Giving your money away? The IRS wants to know about it.

December 16, 2024 By Liz Weston Leave a Comment

Dear Liz: You recently wrote that “the only givers who have to pay taxes are those who have given away millions in their lifetimes.” I tend to be generous with my offspring who are the beneficiaries of my trust. For example, I gave a down payment on a house to my son last year. Because of long-held rental property investments, my estate is probably close to the $13-million lifetime limit. Since lifetimes don’t expire until we die, and I plan to live to 120, does this mean that until I give away over $13 million in cash, I don’t have to report or pay taxes in any given year on gifts?

Answer: Not quite.

You have to file a gift tax return to report any gift over the annual limit, which in 2024 is $18,000 per recipient. Gifts don’t have to be in cash to be reportable. If you’d given your son a house instead of a down payment, you’d still need to file a gift tax return.

Reportable gifts are deducted from your lifetime gift and estate exemption, which is $13,610,000. Once you deplete that exemption, you would have to pay gift taxes on any gifts above the annual limits. Even if you don’t deplete the exemption, reportable gifts will reduce the amount of your estate that can avoid estate taxes. You’d be wise to get advice from an estate planning attorney about how to handle gifts.

Q&A: When giving cash gifts, does anyone need to pay taxes?

December 10, 2024 By Liz Weston 2 Comments

Dear Liz: I am a widow age 95. I would like to give my three kids, who are in their 60s, $5,000 each this year. What are the taxes, and who pays them?

Answer: Gifts aren’t taxable to the recipients, and the only givers who have to pay taxes are those who have given away millions of dollars during their lifetimes.

Let’s start with the basics. You only have to file a gift tax return, which notifies the IRS of your generosity, when you give someone more than the annual exemption limit, which is $18,000 in 2024. So you could give your kids $54,000 before the end of the year and not have to tell the IRS.

You wouldn’t actually owe taxes on your gifts until the amounts you give away above that annual limit exceed your lifetime gift and estate limit, which is currently $13.61 million.

A taxable gift is typically deducted from the amount that avoids estate taxes at your death. But if you have enough money to worry about that, you should have an estate planning attorney who can advise you about how to proceed.

Q&A: The new roof is done. Now, what’s the smart way to pay for it?

December 10, 2024 By Liz Weston Leave a Comment

Dear Liz: I borrowed $35,000 from my home equity account a couple of years ago to pay for a new roof. The house is paid for; there is no mortgage. My wife thinks I should pay off the balance, which is $29,000. This would create a significant gap in our liquid assets. The current payment is affordable and convenient, so I’m content to leave things the way they are. Am I missing something?

Answer: That depends on what you mean by “home equity account.”

When you borrow against your home’s equity, you typically use either a home equity line of credit or a home equity loan. Home equity loans usually have fixed interest rates, fixed payments and a defined payback period, such as 10 or 20 years. Home equity lines of credit are more like credit cards: They have variable interest rates, and you can draw down and pay back what you owe more flexibly.

However, HELOCs have a bit of a built-in trap. In the initial draw period, usually the first 10 years, you often don’t have to pay down what you owe. You’re typically required to pay only interest. When this draw period ends, you must begin making principal payments on any outstanding balance, so what you owe each month can shoot up dramatically.

That’s why HELOCs are often best used for expenses that can be paid off relatively quickly. If you need a decade or more to pay back what you owe, a fixed-rate home equity loan may be a better option. Some lenders offer a fixed-rate option as part of their HELOCs, which could allow you to lock in a steady rate on some or all of your balance and pay it off with fixed payments over time.

Regardless of what type of loan you have, the interest you’re paying probably exceeds what you’re earning, after tax, on your savings. Paying off a HELOC balance would allow you to tap that credit again in an emergency, if necessary. Paying off a fixed-rate loan wouldn’t free up credit immediately, but you could redirect the monthly payments into your savings to rebuild your cushion. If that makes you nervous, you could consider making larger monthly payments to pay back the loan sooner while keeping the bulk of your savings intact.