Ask Liz Weston

Get smart with your money

Q&A

Q&A: Social Security spousal benefits

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Dear Liz: My husband is 78 and receives a large Social Security check every month. I will be 66 in two years. Should I take my benefit then — we may need it — and then switch to his benefit if he dies before I do? His benefit will be much higher than mine. I see that some of your older posted responses mention a spousal benefit. I think this is no longer offered as of a few years ago — is that correct?

Answer: Spousal benefits, which can be up to 50% of the primary earner’s benefit, are still very much available. What was eliminated for people born on or after Jan. 2, 1954, was the option of filing a restricted application for spousal benefits only, and then switching to one’s own retirement benefit later.

When you apply for Social Security, your spousal benefit is compared to your own benefit and you’ll get the larger of the two. When one of you dies, the survivor will get only one check, which will be the larger of the two you received as a couple.

Q&A: Rules for inherited property

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Dear Liz: If someone owns an asset, such as a home or stocks, and passes away, the heirs can get a stepped-up cost basis. What if that same person also owned a second home, vacation property and rentals? Do those properties also get a stepped-up cost basis for the heirs?

Answer: Typically, yes. A step-up in cost basis means that the increase in value that happened during a person’s lifetime isn’t subject to capital gains taxes. Let’s say your mom bought a stock for $2 and it was worth $10 at her death. If she had sold it herself just before she died, or given it to you to sell, taxes would be owed on the $8 gain. If she bequeathed the stock to you in her will instead, you could sell it for $10 and owe no tax. If the price went up to $11 before you sold, you would owe tax on the $1 gain since her death.

The step up in basis also wipes out the need to recapture depreciation taken for rental and commercial properties, says tax expert Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. (Depreciation is the loss in value over time due to age and wear and tear. Depreciation write-offs allow owners to deduct over several years the costs of buying and improving a rental or commercial property.) If your mom owned an apartment building and wrote off the depreciation, she would need to pay depreciation recapture taxes if she sold it. If you inherit the building, by contrast, you not only don’t owe taxes on the depreciation she took, but you can start depreciating the building all over again.

There’s an important exception to these general rules, however. If your mom placed the asset in an irrevocable trust before her death, it would be treated the same as a gift when you inherit it after her death, Luscombe says. You would get her basis, which means you would owe taxes on all the gain that happened during her lifetime plus any depreciation recapture taxes when you sold the asset.

Irrevocable trusts aren’t the same as the revocable living trusts people use to avoid probate, but are sometimes used when people are trying to get assets out of their estates to reduce future estate taxes. For the vast majority, though, estate taxes are no longer an issue, so irrevocable trusts can cause potentially unnecessary tax issues.

Q&A: Ask yourself these questions before using savings to pay off student debt

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Dear Liz: I’m wondering whether I should use part of my emergency fund to pay off student loans. I currently have $15,000 in an emergency fund to cover three to six months of my living expenses and owe $18,000 in federal student loans. I’ve been feeling the itch to pay off a chunk of my student loans to reduce the years (and interest) I have to keep paying. I’d like to use $5,000 to $6,000 of my emergency fund to put toward the loan. For context, I’m already contributing 15% to my 401(k) and have no other debt.

Answer: First of all, well done. The fact that you have any emergency fund puts you ahead of the game, plus it’s great that you’re also saving for your retirement and avoiding credit card debt.

There are a few things to consider before using savings to pay down your loan. “Prepaying” a student loan is different from paying down credit cards. Reducing credit card debt typically frees up additional credit that you could use in an emergency. Paying down credit card debt also can help your credit scores by reducing your “credit utilization,” or the amount of your available revolving credit that you’re using. Extra money sent to a student loan lender, by contrast, can’t be clawed back if you should need it and doesn’t help your scores as much.

Federal student loan debt has other advantages. Interest rates tend to be low, and up to $2,500 of interest can be subtracted from your income even if you don’t itemize. That is a valuable “above the line” adjustment that can help you qualify for other tax breaks.

You shouldn’t hang on to debt just because of the tax savings, of course, since the value of the tax break usually is much less than the interest you pay. But most people have better things to do with their money than pay down low-rate, tax-deductible debt, especially if they have other types of debt, haven’t maxed out their retirement savings and don’t have an adequate emergency fund.

Which brings us back to your situation. You’ve checked all those other boxes. If your job situation is reasonably stable, then using a chunk of your savings to pay down debt can make sense — particularly if you have access to credit or other funds, such as help from friends or family, as a backup while you rebuild those savings.

Q&A: Why co-signing a loan, especially a student loan, can be a costly move

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Dear Liz: I co-signed a student loan to help a 31-year-old woman complete her schooling to become a nurse. I know this was something I should not have done, but I just could not refuse her. I did not realize that because no payments had to be made until after the student’s graduation, the loan amount would double. I am looking into a life insurance policy on the student to protect my interest.

Is there any advice you can provide me other than paying off the loan? I know the student can complete a form to take me off this loan, but she will not qualify on her own.

Answer: She may not be able to take you off the loan now, but hopefully she can within a few years of graduation. Most private lenders will allow a co-signer to be removed from a student loan after a certain number of on-time monthly payments, typically 12 to 48. If she has good credit and a decent income, she also may be able to refinance this loan with another lender to get you off the note.

In the meantime, you’ll want to protect your credit, because a single missed payment can damage your credit scores. Contact the lender to find out what notice, if any, you’ll get if she falls behind on payments. Discuss with her the importance of making payments on time, every time, and ask her to contact you immediately if there’s any chance that won’t happen.

Just as many people don’t realize that they’re putting their good credit in the other person’s hands when they co-sign a loan, many also don’t realize what can happen if they take a lender up on its offer to defer payments until graduation.

The loan amount swelled because of something known as capitalization. Because payments aren’t being made, the unpaid interest is being added to the loan amount and dramatically increasing what the two of you owe.

If the loan were a subsidized federal loan, the government would pay the interest while the student was in school. With unsubsidized federal loans and private student loans like the one you signed, it’s smart to start making payments immediately to avoid capitalization and having to pay interest on interest.

Q&A: Social Security’s widespread benefits

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Dear Liz: I encourage you to educate your readers about the real intention of Social Security, as well as the real problem facing it. Social Security was designed as a safety net to keep the elderly, disabled and orphaned from abject poverty. It was not intended to provide decades of benefits to individuals who are not at risk of living in poverty. It does no good to further the inaccurate notion that everyone is entitled to “their share” from a social safety net meant for the poor.

Answer: You’ve misunderstood Social Security’s structure and its history.

Social Security was deliberately created as a social insurance program, not as welfare assistance. Workers fund the system themselves through payroll taxes. They have to pay into the system a certain number of years to qualify for benefits. In return, they receive inflation-adjusted income that they can’t outlive and that isn’t vulnerable to market downturns.

Social Security benefits are progressive, which means they’re designed to replace more income for a lower-paid worker than a higher-paid one. But people who pay more into the system get larger benefits than those who pay less, and benefits are not means-tested.

Programs for the poor tend to be easy targets for politicians, but Social Security’s universal nature contributes to its widespread support. More than 1 out of every 6 U.S. residents, or about 62 million people, collected Social Security benefits in June 2018.

Q&A: Stop judging that overspending friend

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Dear Liz: My friend is not good with money. He has always lived above his means. He lived in a fancy apartment, leases a BMW and goes out to eat often. To make matters worse, he lost his job a year ago and had to move in with a mutual friend. He continues to spend money he doesn’t have. I tried to help him with his finances and setting a budget, but he lost interest after one conversation. He’s 41 with no savings and more than $10,000 in credit card debt.

My question: Should I feel guilty about inviting him to things? When he was unemployed, I suggested doing things that don’t cost money, but he never seemed interested. I’m planning a trip for my 40th birthday and I’d like to invite him, but I don’t think he has the self-control to say, “No, I can’t go, I can’t afford it” because it will add $2,000 or more to his debt. How do you deal with someone when you’re more concerned with his financial well-being than he is?

Answer: You let go of the idea that you’re responsible for another person’s behavior.

Financial planners often encounter clients who, despite the planners’ best efforts, sail blissfully on toward economic disaster. And those clients paid for the advice that could save them. You’re not being paid. Your friend may not have even asked for your help. So you can stop offering it.

This will be hard for you. You understand how important it is to avoid credit card debt and save for the future. You may be thinking that if you could come up with the right words, you could persuade him to change his ways. Give up that fantasy, because he won’t change — if he ever does — one second before he’s ready.

There are a number of things you can do to prepare for that moment, if it ever comes. The first is to let go of any judgmental attitudes and feelings you might have about his situation. He may already feel a lot of shame about his circumstances. Even if he doesn’t, he’s unlikely to seek you out if he feels judged and blamed.

The next is to look for other resources that might help him, such as a financial counselor or coach. You can get referrals from the Assn. for Financial Counseling & Planning Education. He may find it easier to work with a professional than a friend.

Finally, resist the urge to offer opinions or observations about his situation. He knows you’re there to help if he ever wants it, so wait to be asked.