Q&A: How an unexpected credit score drop could signal a serious problem

Dear Liz: I pay off each of my credit card purchases online, usually within a few days. My monthly statement balance is usually $0 even though I use the card frequently. The card is my only open credit account. I saw my credit score recently and it has dipped below 650. It used to be over 800 several years ago. Is my diligence hurting my score? Should I wait to pay off my card until the statement posts? Is there another way to improve my credit?

Answer: A drop that drastic may indicate a more serious problem, such as a late payment or a collection account. Please check your credit reports at all three credit bureaus at AnnualCreditReport.com. (Enter the exact name in your browser as there are many look-alike sites that will try to charge you for what should be free access to your reports. If you’re asked for a credit card number, you’re on the wrong site.) Unexpected credit score drops can be an indication of fraud, so do this as soon as possible.

If you don’t see anything suspicious, then you probably can blame your habit of leaving a zero balance and having only one card. You don’t have to carry credit card debt to have good scores, but a small balance on the statement closing date helps indicate to credit scoring formulas that you are actively using your account. You can and should pay the balance off in full before the due date to avoid interest charges. Adding another credit account or two should further strengthen your scores.

You didn’t mention which score you saw (you have many) or where you got it, but consider monitoring at least one of your scores so you can gauge your progress. Banks and credit card companies often offer free scores. If yours don’t, consider signing up for another service that offers free scores. Discover, for example, offers free FICO scores to everyone, not just its own customers.

Q&A: Living trust setup costs

Dear Liz: A friend of mine contacted an estate planning attorney to do a living trust. The attorney gave her an estimate of $5,900 for this job. My friend is single, never married, no children, does not own property or a business. She has no complex financial situations. She does have a financial planner, who she works with on her investments and retirement funds. I am also thinking of doing a living trust with an attorney, and my situation is similar to my friend’s — very simple. However, I can’t afford $6,000 to do a trust or will. Is this a reasonable cost for a simple estate? It seems high to me; should it be more in the range of $2,500?

Answer: Your friend’s experience is why many people put off estate planning or opt for do-it-yourself solutions when they would really benefit from an experienced attorney’s advice.

Let’s start with this: Not everyone needs a living trust. Living trusts are designed to avoid probate, the court process used to settle estates. But probate isn’t a huge hassle in many states. Even in states where probate is notoriously slow and expensive, such as California, there are simplified processes for smaller estates. Plus, there are a number of ways other than a living trust to avoid probate, including pay-on-death designations for financial accounts and, in many states, transfer-on-death options for vehicles and real estate.

Living trusts have other advantages: They’re typically private, whereas wills must be made public after death. And living trusts usually include a relatively easy way to have someone else make decisions for you if you’re incapacitated. But you can set up something similar by creating powers of attorney for healthcare and finances. Those documents, plus a will, typically cost less than $1,000.

There are self-help legal options online that allow you to create estate plans yourself, and some give you access to attorneys for help. Ideally, though, you would find a lawyer who would charge a reasonable fee to review your situation, offer you personalized advice and draft the necessary documents for you. If you’re having trouble finding someone, ask a tax pro or financial planner for recommendations. If finances are a consideration, avoid law firms with big fancy offices in expensive urban centers and look for those with more modest overhead in outlying areas.

All that said, the amount your friend was quoted could make sense if she has a lot of money. Even without real estate investments, substantial wealth will require substantial estate planning, and that comes with a substantial price tag.

Q&A: How to get started managing your retirement assets

Dear Liz: I’m 72 and still employed with a salary of $80,000. My wife and I have a home with about $1.6 million in equity. We have almost $4 million in real estate investments, $200,000 in stocks, IRAs worth about $250,000 and about $175,000 in cash. Although it may seem like we have a lot, I really have no clue what to do at this time. I worry about the need for long-term care in future for me or my wife, or what would happen if I stopped working and lost that income. I don’t know how to manage the stocks and cash I do have or how to plan for the future. I tried contacting quite a few fee-only financial planners and they all told me they wouldn’t work with me unless I had $500,000 to give them to invest. Any suggestions on where I can get some real advice without giving someone complete control of money that I don’t have anyway?

Answer: You’re describing the “assets under management” model, in which advisors charge a percentage of the assets they manage for clients and often require the clients to have a minimum level of investable assets such as stocks, bonds and cash. This model evolved in part because many people balked at paying directly for comprehensive financial planning, which is time- and labor-intensive.

But this model often isn’t a great fit for people who are just starting out, who don’t want asset management or who, like you, have most of their money in less liquid investments.

Fortunately there are other ways fee-only planners get paid. Some, including those represented by the Garrett Planning Network, charge by the hour. Others, represented by the XY Planning Network and the Alliance of Comprehensive Planners, use the retainer model, in which clients pay monthly or quarterly fees. Interview a few planners from these organizations to find a good fit.

Q&A: Giving a gift without strings

Dear Liz: My brother and his wife are living modestly on Social Security and delivering for a food service. Occasionally, I send him some money when I can. I have some money put aside and am able to send him about $5,000 now instead of leaving it to him in my will. (He is six years older.) I am afraid that he and his wife may spend it on a trip or frivolity and will not put it aside for home health or nursing care when they need it. Your thoughts?

Answer: Please make the gift and hope that they do spend it on a trip or something else fun.

According to the U.S. Department of Health and Human Services, someone turning 65 today has about a 70% chance of needing long-term care services. Women typically need care for 3.7 years on average while men need 2.2 years of care.

Medicare, the government healthcare program for people 65 and older, typically doesn’t pay for nursing home and other custodial care expenses. However, Medicaid — the government health insurance program for the poor — does. If your brother and his wife do need custodial care, chances are good they will quickly run through their assets and wind up poor enough that Medicaid will pick up the bills.

The amount you can give them wouldn’t make much of a dent in the bill if they need potentially expensive custodial care someday. Your $5,000 gift would pay for about a month of an in-home health aid, and a couple of weeks in a typical nursing home.

But $5,000 could go a long way in delivering a memorable experience while they still have the health and energy to enjoy it.

Q&A: Social Security survivor benefits can be confusing. Here’s how they work

Dear Liz: My husband passed away, and I am 59 years old and no longer working. Social Security’s site says that once I turn 60, I can get 71.5% to 99% of what he would have received at his full retirement age. What determines whether I get 71.5% or 99% or something in between?

Answer: The range you mention applies when you start survivor benefits before your own full retirement age for such benefits. For people born in 1962 and later, the full retirement age for survivor benefits is 67.

(This is different from the full retirement age for retirement benefits, which is 67 for people born in 1960 and later. Just in case you thought Social Security benefits weren’t quite complicated enough.)

It also matters if your husband was receiving Social Security benefits when he died. If so, the survivor benefit would be based on that check. If not, the survivor benefit would be based on the amount he would have gotten at his full retirement age (if he died at or before that age) or the benefit he earned (if he died after full retirement age).

In general, though, the earlier you start Social Security benefits, the less you get. If you start survivor benefits at 60, then you’d get 71.5% of your husband’s benefit. If you wait until right before you turn 67, you could get 99%. If you wait until you turn 67, you get 100%.

Your check also could be reduced if you start survivor benefits early and then go back to work. The earnings test would reduce your check by $1 for every $2 you earned over a certain limit, which in 2023 is $21,240. The earnings test would apply until you turned 67.

Something else you should consider is the Social Security benefit you’ve earned based on your own work record. This benefit can continue to grow if you put off claiming it until the amount maxes out at age 70.

You’re also allowed to switch between survivor benefits and your own, or vice versa. (Switching is something that’s not typically allowed with other benefits, such as spousal benefits.)

You could start receiving reduced survivor benefits at 60 and switch to your own maxed-out benefit at 70 — or start your own reduced benefit at 62 and switch to the unreduced survivor benefit at 67, for example. The right course will depend on the amounts involved and the math can be complicated, so consider consulting a financial planner or Social Security claiming strategy sites such as Social Security Solutions or Maximize My Social Security.

Q&A: Delaying Social Security benefits

Dear Liz: I get conflicting answers on whether my wife, who turns 62 in April, should take her Social Security now. I am 68 and am holding off taking my benefits until 70. Will her survivor benefits include the 8% annual increase I will receive when I start benefits in September 2024? And should she take her benefits now at age 62 (especially since we both plan to retire this year)?

Answer: Your wife’s survivor benefit would include the delayed retirement credits you’re earning by putting off your application. In other words, if you died tomorrow, her survivor check would be about 20% larger because you waited. (That assumes you turned your full retirement age of 66 in September 2020, and have earned about 2.5 years’ worth of 8% annual increases.)

If you make it to 70, she would receive all four years’ worth of 8% annual increases (plus, of course, all the cost-of-living increases your benefit earned in the meantime).

Because your benefit determines the survivor’s benefit, it’s more important for you to delay than for her to put off her application. Still, she most likely will maximize her lifetime benefit by delaying if she can.

The right strategy depends on the details of your financial situation, so consider consulting a fee-only financial planner for personalized advice.

Q&A: Retirees and disability benefits

Dear Liz: I have a few simple questions about disability, but have been getting different answers from different advisors. Even the Social Security site has different answers. My wife, a nurse, is 71 and has been working for more than 45 years. She is receiving Social Security benefits, starting when she was 70. She has been working in the office, with little patient contact, for 2½ days weekly for a few years with a salary of just over $50,000. She has progressive neuromuscular pain, with significant pain and discomfort in the right upper leg with radiation. It affects her most when she is sitting, which is how she performs her job. She has seen multiple specialists. She does have various meds for pain, but they cloud her thinking, and she doesn’t want that to affect her work. She is missing more and more time. Is she eligible for disability? If so, can she apply while she is still working, or does she need to have stopped completely? Will her Social Security affect or be affected by her disability? Is there a rough estimate as to the disability payments she may get if she is eligible?

Answer: There is nothing simple about Social Security’s disability benefit program. In general, though, it’s meant to provide a subsistence level of income for people younger than retirement age who can’t work. The average monthly Social Security disability payment is less than $1,500 a month. Benefits are granted only to people who are totally disabled, meaning they can’t work and their condition has lasted or is expected to last at least a year or result in death.

Social Security disability payments aren’t designed to supplement retirement benefits. Once a disabled person reaches their full retirement age, which is currently between 66 and 67, a Social Security disability benefit converts to a retirement benefit, says Christopher Lanfranca, a senior retirement analyst with Social Security Solutions, a claiming strategies site. Someone who applies for disability benefits past full retirement age probably would be given retirement benefits instead.

Adjusting to a $50,000 drop in income could be tough. Consider consulting a fee-only financial planner or accredited financial counselor who can review your financial situation and offer suggestions.

Q&A: Lost retirement accounts are a growing problem. How to track down yours

Dear Liz: I applied for and received Social Security widow’s benefits from my deceased ex-husband. Social Security notified me that my ex-husband had a profit-sharing plan that could have beneficiary money. I have tried to find out the correct people to talk to, but the original employer has changed hands a few times. I spoke to the financial services company that handles retirement plans for the current iteration, but they had no record of my ex-husband’s account. Do you have any ideas of people to talk to [in order to] find out if there is a beneficiary for his account?

Answer: Lost retirement accounts are unfortunately a common issue. Financial services company Capitalize estimated in 2021 that 24.3 million 401(k) accounts, with an average balance of $55,400, had been left behind by job changers, with the total rising year after year. Leaving an account with a former employer isn’t a guarantee the money will be forgotten, but it does increase the odds. Most people are better off rolling an old account into a new employer’s plan or an IRA.

There’s no national database for unclaimed retirement accounts, but there are a few places you can look. Companies with employee retirement plans are required to file a Form 5500 annually with the IRS, and these forms have contact information that may be helpful. You can try searching the U.S. Department of Labor’s site for the forms at efast.dol.gov. Another option is creating a free account at FreeErisa, which may help you find older plans. The Department of Labor also has an abandoned plan database at askebsa.dol.gov/AbandonedPlanSearch.

Your next step might be checking the National Registry of Unclaimed Retirement Benefits at unclaimedretirementbenefits.com. This database is run by a company that processes retirement plan distributions. Another place to try is the National Assn. of Unclaimed Property Administrators’ database at unclaimed.org.

Q&A: Capital gains on inherited property

Dear Liz: You recently advised the heir to a triplex that they’d have to pay capital gains tax if they sell the property, but if they keep it and bequeath to their children, there would be no capital gains for the children. How does that work?

Answer: The original letter writer inherited the property from a parent in 2007. The inherited property got a favorable “step up” in tax basis to the fair market value at the date of the parent’s death. As a result, all the appreciation that happened during the parent’s lifetime was never taxed.

If the heir sells the property, however, the heir will face capital gains taxes on appreciation since 2007. If the heir holds the property until death, the property will once again get a tax basis step up to the market value at that point. The appreciation that happened during the heir’s lifetime won’t be taxed.

Q&A: Tax consequences of a CD bequest

Dear Liz: I currently have a certificate of deposit with what I consider a reasonably high balance. I’ve named a beneficiary in the event something were to happen to me. Would there be tax consequences for the beneficiary upon receipt?

Answer: There’s no federal inheritance tax, but six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — do assess inheritance taxes. Spouses are typically exempt and the tax rate is generally lower for close relatives.