Ask Liz Weston

Get smart with your money

Q&A

Q&A: What to do with a drawer full of unused credit cards?

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Dear Liz: At 75 and 79, my husband and I have no plans to buy a new car or property. We own our home and cars. We have excellent credit ratings. We use one major credit card. I’m consolidating our financial life for our heirs. We have a drawer full of cards we never use. Is there any reason not to just cancel these cards and save our heirs the trouble? Should I care if my 850 credit score tanks?

Answer: At this point, simplifying your finances probably makes more sense than trying to keep your credit scores as high as they can possibly be.

Cards you aren’t using still need to be monitored for fraud, which is a hassle, plus you may be paying unnecessary annual fees. Reducing the number of accounts should make your life easier, but don’t go too far.

As explained in previous columns, each spouse should have at least one card on which they are the primary account holder. A spouse who is an authorized user often loses access to the card when the primary account holder dies and card issuers close the account. Few credit card issuers offer joint accounts these days, so you should determine who is the primary account holder and who is the authorized user on each of your cards before deciding which to close.

You can reduce the damage to your scores by trying to preserve as much of your current credit limits as possible. Ideally, the cards you keep will be the ones with the highest limits. If you’re closing other accounts at your chosen issuer, you can ask that the credit limits for the shuttered cards be transferred to the card you’re keeping.

Q&A: An update on the inheritor trying to stay below the poverty line

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Dear Liz: I have an update about a recent question in your column. A reader wrote that they had been low income but had recently inherited $175,000. You noted that Medicaid has strict asset limits. Actually, that is no longer the case in California, where Medicaid is known as Medi-Cal. I just received literature from it that says, “A new law means assets will not be counted during Medi-Cal renewals.”

Answer: Again, quite right! Some other states have increased asset limits for Medicaid, the government health program for the poor, but California is the first to remove asset limits entirely as of January 2024.

This column appears in different states, which can vary dramatically in their laws and policies. That’s why I constantly suggest getting personalized advice from attorneys, tax pros and financial planners. A column can dispense general education but can’t offer individualized advice tailored to the realities of where you live.

Q&A: He’s held stocks for decades. Should he sell before he dies?

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Dear Liz: My father-in-law, age 100, has more than $1 million in stocks and bonds purchased in the 1980s and 1990s. With the stock market so high, I have suggested that he might want to sell the investments, take the tax hit and consolidate into short-term certificates of deposit or similar. This would make it easier for his family to manage (in trust) upon his death. Does this make sense or do we leave it alone?

Answer: Selling now means your father-in-law would have to pay a substantial and perhaps unnecessary tax bill on the gains he’s incurred over the years. If he instead leaves those assets to his heirs at his death, most likely no tax would be owed on the gains.

There are some exceptions, such as if the investments are held in retirement accounts or an irrevocable trust. But investments held in revocable trusts, such as living trusts, should qualify for the favorable step-up in basis that would eliminate the taxable capital gain at his death.

Yes, there’s always a risk that the markets could drop — but they would have to drop pretty far to wipe out all his gains, assuming he’s got a reasonably diversified portfolio. A fee-only, fiduciary financial planner could review the portfolio and offer recommendations about any changes that might be needed, while a tax pro could discuss potential strategies for minimizing the tax bill.

Q&A: Closing the case on the couple moving into their rental property

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Dear Liz: You recently answered a question from a couple who wanted to move into their rental property, make it their primary residence and use the $500,000 home sale exclusion if they sold the property after living there for two years. You should have made it clearer that not all of the gains on the property would qualify for the exclusion.

Answer: Quite right. In 2008, Congress closed the loophole that allowed people to exclude all the gains when they turn rental property into their primary residence. So the couple would not be able to count the gain that occurred between 2009 and whenever they move in. They would, however, be allowed to include the gain from 1988, when they bought the property, through 2008, as well as any increase in value after they move in if they live in the house at least two years, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

In some parts of the country, there may not be enough gains from those two periods to qualify for the full $250,000-per-owner exclusion, especially after accounting for the depreciation recapture, which requires landlords to pay back the depreciation tax break when they sell a rental property.

In higher-cost areas, however, there still could be more than $500,000 of qualifying gains, Luscombe says.

Q&A: I need new wheels. What’s the best way to pay for them?

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Dear Liz: Is it better to buy a car with saved money or finance the $25,000 needed? In my case I will have to sell stocks. Maybe this is a good time to do that since things look like they are taking a turn in the stock market.

Answer: Borrowing money can make sense when the asset you’re buying is likely to increase in value. For example, a mortgage could allow you to purchase a home that will appreciate over time, and a student loan could help increase your earning power.

Borrowing money makes less sense when you’re buying something that’s all but guaranteed to lose value, such as a car. Many people don’t have enough cash to pay for a reliable vehicle, of course, so financing is their best option. If you do have a choice, however, cash is best.

Selling stocks can help you raise cash, of course, but probably will incur a tax bill. Also, stocks are meant to be a long-term investment, and you really can’t time the market. Yes, your shares may decline, but they could also rise, and historically they have done so over time.

If you don’t have cash savings but do have stocks that aren’t earmarked for another cause, such as retirement, then you might consider selling enough stocks to pay for the car and the tax bill. For your next car, though, consider saving up for the purchase in a high-yield savings account.

Q&A: Shake, rattle and … roll the dice without earthquake insurance?

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Dear Liz: I live in Southern California and my homeowners insurance renews at the end of August. Should I consider buying earthquake insurance?

Answer: Insurance is meant to protect against catastrophic losses that we couldn’t easily pay out of pocket.

If you don’t have much equity in your home, or you’re willing to walk away from the equity you do have, then you can forgo earthquake insurance. Otherwise, you need the coverage.

The same is true for flood insurance, which is also not covered by the typical homeowners policy.