Ask Liz Weston

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Q&A

Q&A: Financial institutions reject powers of attorney

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Dear Liz: I read your column about the parent who unexpectedly had to take over for their incapacitated son. You suggested every adult have a power of attorney and healthcare proxy. Excellent advice! However, as I discovered in dealing with my father’s illness and estate, these general documents are not always recognized by the very institutions they were designed for. His bank, mortgage company and health insurance company would only recognize their versions of these documents.

Fortunately, while he was still able to, I was able to procure each of these documents with his signatures on them but it was very stressful at a difficult time for all of us. I would suggest you amend your advice to people to check to see if their banks and so on also require their specific forms.

Answer: Financial institutions are supposed to accept properly drafted powers of attorney, but some of them insist on their own forms, agrees Burton Mitchell, an estate planning attorney in Los Angeles.

“Sometimes one can get around these rules by appealing to higher ups in the organization, but it is unnecessarily difficult, time-consuming and complicated,” Mitchell says.

Checking with your financial institutions now could avoid hassles later.

Q&A: When money disappears from a mother’s estate

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Dear Liz: My mother recently passed and my sister is handling all the legalities. At one point, my sister mentioned our mother had a sizable savings account plus two retirement accounts valued at $400,000, and that I would receive something. Now she is simply saying, “I don’t know where the money has gone.” She handled all my mother’s finances for years before her death. How is this possible? I can’t hire an attorney, nor do I want to alienate my sister or seem greedy. What should I do?

Answer: If your sister handled your mother’s finances for years and she’s settling the estate, then she almost certainly knows where the money went. Why she won’t tell you is the mystery.

Your mother’s money may have been eaten up by long-term care expenses, which can be breathtakingly expensive. That’s especially true if there was a long gap between your sister’s disclosure about the accounts and your mother’s death.

If that were the case, though, your sister could just say so.

There are many other possibilities. Your mother could have been scammed, or gambled away the money, or been the victim of financial elder abuse. Abusers are often people the elders know, including relatives and caregivers.

Perhaps your sister didn’t help herself during your mother’s lifetime, but arranged to be the beneficiary of all the accounts, either with or without your mother’s consent.

You don’t have many options if you aren’t willing or able to consult an attorney, but you wouldn’t be greedy to ask for some clarity from your sister.

Q&A: Counting freeloading relatives as a hardship? Not so fast, the IRS says

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Dear Liz: I lived in a house for 45 years. During that time, my daughter and her family moved in due to the 2008 financial crisis. I have not charged her rent. However, I moved out five years ago, and her family is still there rent-free. I understand that when I sell, I will owe capital gains tax because it is no longer my primary residence. Are there any hardship rules that may help me?

Answer: Unfortunately, the IRS doesn’t consider freeloading relatives as one of the hardships that can modify the home sales exclusion rules.

Your capital gain will be calculated by subtracting your tax basis in the home from the sales proceeds, minus selling costs. Your tax basis is generally what you paid for the house, plus the cost of qualifying upgrades.

You can exclude up to $250,000 of home sale capital gains (or $500,000 if married filing jointly), but only if you’ve owned and lived in the property as your primary residence for at least two of the past five years. There is a partial exclusion for people who fall short of the two-year mark because of certain reasons, such as a work- or health-related move.

Q&A: Spousal and survivor benefits operate by different rules

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Dear Liz: I believe you provided bad information to the woman inquiring about Social Security spousal benefits for her husband.

You suggested to her that since she was the higher income spouse, that she wait until age 70 to maximize the benefit her husband could receive. I used to think that was the case as well, and was planning my Social Security start date accordingly.

However, a few months ago I found out that this is not true. The maximum spousal support is based on the full retirement age of the spouse or deceased spouse, not the maximum amount received if the deceased spouse waits longer to take Social Security. This is true for both spousal benefits when the higher wage earner is alive and for survivor benefits. After finding this information out, I filed to start receiving immediately, since I’m at my full retirement age.

Answer: Many people confuse the rules for spousal and survivor benefits, as you’ve done. This is why it can be so important to discuss your claiming strategy with an expert before you make a decision that stunts the survivor’s future income.

Spousal benefits are available when the higher earner is still alive. Spousal benefits can be up to 50% of the higher earner’s benefit at full retirement age. Spousal benefits don’t get bigger if the higher earner delays filing beyond his or her full retirement age, and they don’t shrink if the higher earner applies before full retirement age. (If the spouse applies before his or her own retirement age, however, the spousal benefit typically will be reduced because of the early start.)

Survivor benefits are a different story. These are the benefits that kick in once the higher earner has died. Survivor benefits are up to 100% of what the higher earner was actually receiving. In other words, survivor benefits can be stunted if the higher earner starts a retirement benefit early and will get bigger if the higher earner delays applying.

This is why financial advisors often recommend the higher earner wait to file until their benefit maxes out at age 70. Not only is the higher earner likely to maximize their lifetime benefit by waiting, but the delay also increases the checks the survivor will receive.

If you regret your decision to start benefits, you could opt to suspend your application. You wouldn’t get back the delayed retirement credits you lost after starting your benefit, but those credits would be applied going forward so your benefit amount could continue to grow.

Another option, if it’s been less than 12 months since you applied, is to withdraw your application. This would require paying back all the benefits you’ve received so far, but it would reset the clock so that you could earn all the delayed retirement credits you missed.

Q&A: Planning for retirement in a volatile market

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Dear Liz: I have a retirement account at work and a stock portfolio. Both are down significantly this year and I’m tired of losing money. What are the safest options now?

Answer: Before the “what” you need to think about the “why” and the “when.” Why are you investing in the first place? And when will you need this money?

If you’re investing for retirement, you may not need the money for years or decades. Even when you’re retired, you’ll likely need to keep a portion of your money in stocks if you want to keep ahead of inflation. The price for that inflation-beating power is suffering through occasional downturns.

You won’t suffer those downturns in “safer” investments such as U.S. Treasuries or FDIC-insured savings accounts, but you also won’t achieve the growth you likely need to meet your retirement goals. In fact, you may be losing money after inflation and taxes are factored in.

Also keep in mind that if you sell during downturns, you’ve locked in your losses. Any money that’s not invested won’t be able to participate in the inevitable rebounds after downturns. Plus, you may be generating a tax bill, since a stock that’s down for the year may still be worth more than when you bought it. (You don’t have to worry about taxes with most retirement accounts until you withdraw the money, but selling stocks in other accounts can generate capital gains.)

The exception to all this is if you have money in stocks that you’re likely to need within five years. If that’s the case, the money should be moved to investments that preserve principal so the cash will be there when you need it.