Ask Liz Weston

Get smart with your money

Banking

Q&A: Discontinuing automatic payments after death

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Dear Liz: I use auto-pay for bills in both my business and my personal life. What can we, as consumers, do to protect ourselves and our estates from companies taking advantage of the auto-pay when we die? Do our heirs have to cancel right away? They will have so many other things to deal with in those first months after a loved one dies.

Answer: You may have read about Pia Farrenkopf, the Michigan woman whose mortgage and utility bills continued on auto payment for five years after she died. It was only after her account ran dry, the bank foreclosed on her home and a contractor was sent to fix a hole in the roof that her mummified corpse was found in a Jeep parked in her garage.

The companies receiving the payments weren’t taking advantage of her — they had no way of knowing she was dead. And not all bills will or should stop getting paid at the moment of someone’s death. Even if Farrenkopf’s death had been noticed right away, the person settling her estate likely would have kept the utilities paid and the insurance in force until the home was sold.

If you’re concerned about auto-payments continuing for too long, make sure that your executor or successor trustee has access to your bank accounts. Your bank has a power of attorney form that you can use to grant instant access, or you can provide your login credentials, either now or in the estate planning documents this person will receive at your death.

Q&A: Friend erroneously declared deceased

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Dear Liz: I have an elderly friend who was recently erroneously declared deceased by the Social Security Administration. She received no notice of this declaration and her first awareness that something might be wrong was when her personal checks and automatic payments to utilities and others began to bounce. When she called her bank, she was informed that all of her accounts had been frozen by the Social Security Administration.

My friend is now faced with multiple returned check charges, threatening phone calls and cut-off services. Efforts to straighten things out with Social Security and her bank have been only moderately successful so far. Although they will probably clear things up eventually, this will take time and quite a bit of legwork on her part.

Under what authority does Social Security freeze someone’s assets? And is this common? Aren’t they required to at least notify someone of impending action? After all, when any one of us does in fact die, we still have financial obligations and such actions can only create headaches for survivors.

Answer: The Social Security Administration doesn’t freeze bank accounts, but it does erroneously declare people dead a few thousand times every year. Financial institutions check Social Security’s death notices and may freeze or close accounts as a result. It can take weeks or months to clear up the confusion.

People in this situation should visit their local Social Security office and bring some identification, such as a driver’s license or passport, to establish that they are, in fact, alive. Social Security will issue a letter called an “Erroneous Death Case — Third Party Contact” notice that can be shown to financial institutions, doctors and others who may have been misinformed of their deaths. Your friend should not only ask that services be restored but that bounced-check fees and other costs be waived. There’s no guarantee that they will be, but she should ask.

Your friend also might consider whether it’s time to ask for help in managing her finances. It sounds from your description as if she didn’t notice the problem for quite some time. Utilities don’t shut off service at the first missed payment. Threatening phone calls — presumably from collection agencies — typically don’t start until accounts are months overdue. She should consider adding a trusted person to her checking account or at least sharing online credentials so that another set of eyes is monitoring what’s going on with her money.

Q&A: Auto loan GAP coverage

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Dear Liz: In 2012, I financed a 2008 Honda at my credit union. The car was priced at $16,500. With a trade-in, the loan came to $22,000. GAP coverage was factored into the loan payments, which were $464 a month. Last year, the car was wrecked and deemed a total loss by the insurance company. They paid the “book value” of $8,860 to the credit union. However, $6,000 remained on the loan. The GAP coverage paid $3,000 and now the credit union is saying I owe the remaining $3,000. They said the GAP would only pay a percentage of the balance because the car was “over financed” back in 2012. This seems to be unfair, and I feel like the lender should get the money from the GAP provider (per the contract that was signed when the car was financed). Is it possible for the GAP provider to refuse to cover the whole balance left on the loan? I will be meeting with the loan officer next week to discuss payment options.

Answer: You’ve discovered one of the many reasons why you don’t want to roll debt from a previous vehicle into a car loan to purchase its replacement.

Many people do exactly that, though. When trading in a car for a new vehicle, nearly 1 in 3 people roll debt from the old loan into the new one, figures from car comparison site Edmunds.com show. The average amount of negative equity in January was $4,814.50. With used cars, 1 in 4 people with a trade-in roll debt from their old car into the replacement loan, with an average negative equity of $3,595.30.

GAP (Guaranteed Auto Protection) coverage would seem to be the solution, since it’s designed to pay the lender the difference between the loan on the car and what the car is worth. Most GAP policies, though, won’t cover the debt you brought over from the previous vehicle. That leaves you in exactly the position you thought you would avoid, which is having no car but a pile of debt to pay off.

A better approach to car buying is to make a significant down payment, such as 20% of the purchase price, and keep loan terms to no more than four years. You can’t buy as much car that way, but you won’t end up owing far more than the car is worth.

Q&A: Best savings vehicle for a baby

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Dear Liz: I recently gave birth to a little boy. I am wondering about the best savings vehicle that would offer flexibility for when family gives him money. I don’t want to tie it up in a 529 college savings plan in case he doesn’t want to go to college or has other needs.

Answer: If you want your child to have a reasonable shot at a middle-class lifestyle in the future, some kind of post-secondary education will be necessary. It may not be a four-year degree; it could be a one- or two-year training program, and a 529 college savings plan can help pay for that. Money contributed to a 529 plan grows tax-deferred and can be used tax-free at nearly all colleges, universities and community colleges as well as many career and technical schools.

You will remain in control of the account and can withdraw money for other purposes if necessary, although you would owe income taxes and a 10% federal penalty on any gains.

If you really can’t accept any limitations on how the money is used, then you can open a brokerage account in your own name and invest the money there. Putting the money in his name could hurt his chances for financial aid if he does decide to go to college.

Q&A: IRA maintenance fees

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Dear Liz: My son has an IRA at his credit union. He puts in small amounts when he can. Recently they lowered the interest rate and started charging a $25 yearly maintenance fee, which now is taking all the interest back. Is this legal?

Answer: Yes. It’s also a good reason to move the account elsewhere.

Your son’s retirement account was shrinking in real terms even before the fee ate up all his interest. Even though rates are now on the rise, they’re still lower than inflation, which means the money’s buying power is being eroded every day.

Your son needs to invest in stocks if he wants his savings to grow faster than inflation. A few discount brokerages, including ETrade, Fidelity and TD Ameritrade, have no account minimums or annual fees.

Your son also should consider making automatic contributions to his retirement account. This is known as “paying yourself first,” and it ensures that those contributions actually get made. Waiting until he sees what’s left over is paying himself last, and the result will be a much smaller retirement fund than he’s likely to need.

Q&A: Brokerage accounts

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Dear Liz: I have some questions regarding my brokerage accounts. What happens to my investments there if the brokerage company goes out of business? How much of my investments will I be able to recover and how? Also, does it matter if my accounts are IRAs, Roth IRAs, or conventional brokerage accounts?

Answer: Most brokerages are covered by the Securities Investment Protection Corp., which protects up to $500,000 per eligible account, which includes a $250,000 limit for cash.

Different types of accounts held by the same person can get the full amount of coverage. IRAs, Roth IRAs, individual brokerage accounts, joint brokerage accounts and custodial accounts could each have $500,000 of coverage.

So with an IRA, a Roth and a regular brokerage account, you would have up to $1.5 million in coverage.

If you have a few traditional IRAs at the brokerage, though — say, one to which you contributed and one that’s a rollover from a 401(k) — those two would be combined for insurance purposes and covered as one, with a $500,000 limit.

In addition to SIPC coverage, many brokerages buy additional insurance through insurers such as Lloyds of London to cover larger accounts.

It’s important to understand that SIPC doesn’t cover losses from market downturns. The coverage kicks in when a brokerage goes out of business and client funds are missing.

SIPC is commonly compared to the Federal Deposit Insurance Corp., which protects bank accounts, but there’s an important difference between the two.

The FDIC is backed by the full faith and credit of the U.S. government. SIPC has no such implicit promise that if it’s overwhelmed by claims, the government will come to the rescue.