Q&A

Q&A: When generosity becomes a taxing issue

June 5, 2017 By Liz Weston

Dear Liz: I recently came into some money, and I would like to share it with my family. I understand that there are annual tax caps on how much you can give to someone ($14,000 per person per year). However, does this limit apply only to cash and cash equivalents or also to any other gifts? For instance, can I pay off a sibling’s student loan for more than $14,000 without running afoul of the limits?

Answer: There’s no cap on how much money you can give to another person. But if you give more than $14,000 to any one person, you have to file a gift tax return (IRSForm 709). You won’t actually owe gift taxes until the amount you give in excess of that limit totals more than $5 million. (The precise limit this year is $5.49 million and it’s scheduled to rise by the rate of inflation in coming years.)

Paying most bills, including student loans, on behalf of another person counts as part of that $14,000 limit. The only exceptions are if you pay someone’s tuition, medical expenses and health insurance. To avoid the limit, you would have to pay the bills directly to the provider (such as the school, doctor, hospital, insurance company and so on). If you give the money to the person to pay these expenses, it counts as part of the $14,000 exemption.

Some people keep rigidly to the $14,000 limit to avoid having the excess gifts reduce their estate tax exemption. (Gifts over the $14,000 limit are added back into a person’s estate at death, and the prevailing estate tax exemption — which is also currently $5.49 million — is deducted from that enhanced total.)

If you aren’t a multimillionaire, though, this probably isn’t something you need to worry about. If you go over the $14,000 per person limit, you just have to deal with a little paperwork.

Q&A: How one spouse’s bankruptcy filing affects the other spouse

June 5, 2017 By Liz Weston

Dear Liz: If one spouse files for bankruptcy, how does that affect the other spouse? What happens to the joint accounts?

Answer: How the nonfiling spouse is affected depends on whether they live in a community-property or a common-law state.

Most states are common-law states. Property and debts acquired during marriage can belong to only one spouse.

In these states, the filing spouse’s separate property and their share of any jointly owned property become part of the bankruptcy. Any property that isn’t protected under the state’s bankruptcy exemption laws can be taken and sold to pay creditors.

The bankruptcy trustee may try to partition any joint property so only the filing spouse’s share is sold, but if that’s not possible the whole property may be sold and the nonfiling spouse will be paid for his or her share. The bankruptcy erases the filing spouse’s separate debts and share of any joint debts, but the nonfiling spouse still has to pay his or her share of those joint debts.

In community-property states, property and debts acquired during marriage typically belong to both spouses, even if they’re in only one spouse’s name. So a bankruptcy filing by one spouse in a community property state can put more property at risk. (Community-property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.)

As in common-law states, a completed bankruptcy erases the filing spouse’s debts but leaves the other spouse on the hook for his or her share of any joint debts.

In community-property states, though, the nonfiling spouse can get a benefit known as a “phantom discharge.” If the filing spouse gets debts wiped out and is able to protect community property under the state’s exemption laws, then that property stays protected. As long as the couple is married, creditors won’t be able to touch it.

Bankruptcy has gotten complicated enough that you’ll want to get good, solid advice from an experienced bankruptcy attorney before you proceed with any filing. Most such attorneys offer a free or low-cost initial consultation to discuss whether it’s the right solution for your situation. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org.

Q&A: Money in the bank isn’t safe from inflation

May 29, 2017 By Liz Weston

Dear Liz: I am 68 and not in very good health due to heart disease. I’m not sure what do with my savings of over $1 million, which sits in online bank accounts, earning 1.25% to 1.35% in 18-month certificates of deposit. (No account contains more than $250,000 to remain under the FDIC insurance limits.) The money will eventually go to my daughter, though I could use it for my retirement. I don’t have the appetite for market swings. What should I do with my money?

Answer: Your money currently is safe from just about everything except inflation. If you want to keep your nest egg away from market swings, you’ll have to accept that its buying power will shrink. There is no investment that can keep your principal safe while still offering inflation-beating growth.

If you do want a shot at some growth, you could keep most of your savings in cash but also invest a portion in stocks — preferably using low-cost index mutual funds or ultra-low-cost exchange-traded funds.

Before you know how to invest, though, you’ll need to think about your goals for this money. A fee-only financial planner could help you discuss the possibilities and come up with a plan. You can find fee-only planners who charge by the hour through the Garrett Planning Network, www.garrettplanningnetwork.com.

Q&A: Good reasons why one spouse’s inheritance doesn’t belong to the other

May 29, 2017 By Liz Weston

Dear Liz: You recently told a husband who wanted to spend his wife’s expected inheritance that the money would be her separate property. Is that true of all states or just community property states like California? Even if it can be kept legally separate, should it be? Isn’t it better for couples to share their money?

Answer: Inheritances and gifts are considered separate property in every state. Where community property and equitable distribution states differ is in how other assets and debts acquired during marriage are treated.

For inheritances and gifts to remain separate property, though, a recipient must be careful not to commingle them with joint funds. Recipients would need to keep such windfalls in separate bank or brokerage accounts in their names alone, for example, rather than storing the money in jointly held accounts, using it to improve a jointly owned asset such as a home or paying down a joint obligation such as a mortgage.

Why would people want to keep funds separate? There are good reasons, even in marriages where all other money is shared. The couple may divorce, or the wife could die before her husband. If she commingles her inheritance with joint funds, the money her mother intended her to have could ultimately get spent by her husband’s next wife.

The wife may well decide to share some or all of her windfall with her husband. But she shouldn’t be pressured or bullied into doing so, especially with the notion that it’s the “right” thing to do. She would be smart to talk — alone — to a fee-only financial planner who pledges to put her interests first before she makes any decisions about the money.

Q&A: Health savings accounts can supercharge retirement funds, but not for this guy

May 22, 2017 By Liz Weston

Dear Liz: Prior to retiring in 2015, I contributed to a health savings account. At the time my spouse and I were enrolled in my employer-provided high deductible health insurance plan. After I retired, I enrolled in an HMO plan my employer provided, which is not high deductible, and my wife enrolled in a Medicare supplemental plan. Can I make a one-time IRA rollover of $8,750 into the HSA? If not the $8,750, can I make any one-time contribution to the account while I am enrolled in the Kaiser health insurance plan? I have only $53 in the HSA. Are there any reasons to keep the account open or should I close it?

Answer: You did have the option, while you were enrolled in the high-deductible plan, to make a one-time rollover from your IRA to your HSA. The amount you could roll over is capped to the HSA contribution limit. The limit in 2015 would have been $7,650 ($6,650 for a family, plus a catch-up contribution of $1,000 for those 55 and over). You would have had to subtract from the rollover any amounts already contributed to the account that year.

Since you no longer have the high-deductible plan, though, rollovers and new contributions aren’t allowed. There’s no reason to keep open a plan with just $53 in it because most HSA providers charge monthly fees that will quickly eat up such a small balance. (Your employer may have paid these fees while you were working and covered by the high-deductible plan.)

That’s too bad, because a properly funded HSA can be an excellent way to save for medical expenses in retirement. HSAs offer a rare triple tax break: Contributions are pre-tax, the money can grow tax deferred and withdrawals are tax free when used for qualifying medical expenses. HSAs are meant to cover the considerable out-of-pocket expenses that come with high-deductible health insurance plans, but the money in the account can be rolled over from year to year and even invested so it can grow.