Ask Liz Weston

Get smart with your money

Q&A

Q&A: Divorced, and in debt

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Dear Liz: I recently got divorced and found myself in about $50,000 of credit card debt. While I’m struggling to slowly pay off this debt, I do have some money saved in a tax-sheltered annuity as well as a small Roth IRA. Should I use those, take a personal loan or file for bankruptcy?

Answer: A good rule of thumb is to leave retirement money alone for retirement. Early withdrawals can trigger taxes and penalties that eat up one quarter to one half of what you take out. You can always withdraw your contributions tax free from a Roth, but any earnings can trigger taxes and penalties. The biggest cost, though, is the loss of future tax-deferred compounding that can equal 10 times or more of what you take out.

If your credit is good, low-rate balance transfer offers could help you lower the interest rate on your debt so you can pay it off faster. A personal loan from a credit union, your bank or an online lender could work if it offers a low, fixed rate and a repayment term of five years or less.

If you can’t pay this debt off within five years, then you should talk to both a credit counselor (visit the National Foundation for Credit Counseling at www.nfcc.org) and a bankruptcy attorney (referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org).

Q&A: How does a lottery winner find a financial advisor she can trust?

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Dear Liz: I’m a middle-aged, single, childless woman who won a very nice lottery prize. I took the “cash value” option and after paying federal tax, I was left with $1.2 million. I would like to pay cash for a home, have a tidy nest egg put aside and have money for travel and other occasional luxuries. I also receive a disability pension of $1,800 a month, which includes medical and dental benefits. Do I need a financial planner at this point? I was figuring I knew what to do, but may need an expert to help me go about doing it.

Answer: One of the things you’ll notice, if you haven’t already, is how people will come out of the woodwork to “help” you with your money. Some position themselves as advisors, while others will be offering “business opportunities” or just looking for handouts.

You would be smart to seek out a trustworthy fee-only financial advisor to help make the most of your money and to deal with all those who want to part you from it. The phrase “That sounds interesting — let me run it past my financial planner” can short-circuit a lot of importuning.

The planner can help you determine a safe spending rate for your windfall and discuss some issues you may not have considered, such as the need for more liability insurance (since you’re now a bigger lawsuit target) and a plan to pay for long-term care.

The advisor you want won’t be found at your doorstep or in your email box, begging for your business. The best planners are too busy advising to run after lottery winners. You can find referrals to fee-only planners at the National Assn. of Personal Financial Advisors (www.napfa.org) and the Garrett Planning Network (www.garrettplanningnetwork.com). Interview at least three and make sure they’re willing to sign a fiduciary oath to put your interests first.

Q&A: Clash over the state of their mother’s estate

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Dear Liz: My husband’s mother passed away in January. His younger sister was executor of the estate. His mother had investments of close to $1 million prior to 2008. She supposedly lost half her investments with the downturn. When she passed away, my husband’s sister said that there was nothing left in the estate. What documents can he ask to see in order to make sure the estate is totally depleted? There wasn’t even a will shown to him.

Answer: If your mother-in-law had a will, or if she died “intestate” — without any estate planning documents — the sister would be required to open a probate case to settle the estate. Probate proceedings are public so your husband would be able to see an accounting of what’s left.

If your mother-in-law had a living trust, the sister wouldn’t have to open a probate case but she may be required to provide trust documents and an accounting of the estate to beneficiaries and heirs. The exact rules depend on the state where your mother-in-law died.

If the sister balks at providing this information, your husband may need to take her to court. He’d be smart to consult an attorney familiar with the relevant state’s laws.

Q&A: Co-signing a grandchild’s student loan

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Dear Liz: My granddaughter, who will graduate college in a year, has asked me to co-sign her third private loan, which will bring her total debt to $30,000. She needs three people to co-sign. Her parents and the other grandparents have agreed and she wants me to be the third party. I love my granddaughter and trust her intentions, but I really don’t like co-signing a loan for anyone. If I refuse, I’ll really be in the doghouse. Is there any way I could guarantee that I would only be responsible for this loan if the others don’t pay?

Answer: Co-signers are equally responsible for paying a debt. There isn’t a hierarchy. If your granddaughter fails to pay a loan, it will affect the credit reports and credit scores of anyone who co-signed that loan.

It would be unusual for any student loan to require three co-signers. What she may have meant is that her parents co-signed her first loan, her other grandparents co-signed the second and now she wants you to co-sign the third.

In any case, there’s no way to get the guarantee you want. If you’re not comfortable co-signing, don’t. Your family members should be the ones in the doghouse if they pressure you in any way to go along with this scheme.

Q&A: How to make sure your money-distribution wishes are followed after you die

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Dear Liz: My first husband died when my oldest child was 1. I remarried and had another child (they’re 5 and 3 now). My husband and I prepared a trust in which I have him and my sister as beneficiaries of my assets. But my husband regrets that he is not the only beneficiary.

My argument is that if I pass away and he remarries, I want my oldest son (not his biological son, nor has my husband adopted him yet) to get what I saved for him, and that my sister will make sure this happens. What would you recommend? Should I have him as the only beneficiary?

Answer: No. But your sister probably shouldn’t be a beneficiary either, given your aims.

Any parent who wants to get money to a child should do so with a properly drafted trust, rather than trusting someone else — even another parent — to “do the right thing” by the child. All too often, they don’t. A new spouse, a change in financial circumstances, ill will or basic selfishness can tempt people to justify raiding funds intended for others.

A better way to benefit your children is to set up trusts to receive the money. You can name your husband as the trustee for the younger child and name your sister as the trustee for the elder. Trustees have the legal responsibility to act as fiduciaries, which means they have to put the beneficiaries’ interests first.

You can either create these trusts with your will or they can be part of your living trust if you live in a state with high probate costs, such as California. The advantage of probate is that the court can provide some oversight of the trustee, but that typically involves some additional costs. Your estate-planning attorney can offer guidance about which approach may be best for you.

Q&A: Are credit checks a scam?

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Dear Liz: In July last year, I accessed the website for my free credit report before applying for a car loan. I have also been in recovery from cancer treatment and haven’t been great about checking my Visa statement until now. For the past year, my credit card has been charged $19.95 each month for some kind of “credit check” service. I never authorized this, nor did I request this service. I contacted the site, and they will refund me only one month of billing. Is this some kind of scam? How do they get away with this, and what can I do?

Answer: It may not technically be a scam, but the site’s business model profits from people’s confusion about how to get free credit reports.

The site you used is not the federally mandated site for free credit reports. It’s likely one that you found by typing “free credit reports” into a search engine and then clicking on one of the first results, which was probably an ad. To find the real site, you need to type www.annualcreditreport.com into your browser. You won’t need to give your credit card number to get your reports.

You may be able to get another month’s fee refunded by contacting your credit-card issuer and disputing the charge. By federal law, you’re supposed to make such disputes within 60 days after the statement containing the disputed charge was sent to you. Write to the issuer at its address for billing inquiries (not the address where you send your payments) and send it certified mail, return receipt requested.