Q&A: How to freeze your credit

Dear Liz: A few months ago you mentioned creating credit freezes that can be simply turned on and off at the customer’s convenience at no cost. However, you didn’t leave a website or an avenue to pursue a credit freeze with all three credit bureaus. Please provide more information on the steps in this process to achieve a credit freeze. It sounds like something I would like to try.

Answer: A credit freeze restricts access to your credit report and can be a good way to deter new account fraud. If someone tries to open a new account in your name, the lender won’t be able to pull your credit and thus is unlikely to approve the application.

Credit freezes do not affect your ability to use your credit cards or other credit accounts. You can temporarily thaw or lift the freeze any time you want to apply for credit. Placing, lifting and removing credit freezes is now free.

Experian’s credit freeze center can be found at https://www.experian.com/freeze/center.html.

Equifax’s is at https://www.equifax.com/personal/credit-report-services/credit-freeze/.

You’ll find TransUnion’s version at https://www.transunion.com/credit-freeze.

Just be sure to follow the instructions carefully and keep track of any personal identification numbers or passwords.

Q&A: It’s not too late for Mom’s stocks

Dear Liz: My mother is 68. She has had a sizable amount of money in an old work 401(k) for several years now. Unfortunately, it has been stuck in the most conservative low-growth fund for more than 10 years during a time of great stock market growth. If she changed it to a more aggressive fund now, are there tax implications to consider, and would this be an unwise change at her age?

Answer: Ouch. The stock market as measured by the Standard & Poor’s 500 benchmark rose more than 250% in the last decade. Instead of more than tripling her money, her low-growth fund may have barely kept up with inflation.

She can’t get back those lost returns, but she could allocate her money more aggressively without having to worry about triggering taxes. Money in 401(k)s and most other retirement accounts is taxed only when it’s withdrawn.

Q&A: The perils of procrastination can be huge where finances are concerned

Dear Liz: My husband was killed in 2016 and was self-employed for the last three years of his life. I hadn’t gotten around to filing his taxes until earlier this year in June. At first the Social Security rep told me we were approved for survivor benefits but within the hour changed her decision. She said that since it’s been more than three years, the IRS won’t report his credits to Social Security and that is what ultimately disqualifies my children and me. I’m so confused and feel like my stomach just dropped to the floor.

Answer: Understandably. This appears to be one of those awful cases where putting something off has profound, irreversible consequences.

Survivor benefits are monthly checks paid to a worker’s minor children, typically until they turn 18. Surviving spouses normally can start benefits at age 60, but they can start at any age if they’re caring for the worker’s minor children. In that case, the caretaking spouse qualifies for benefits until the youngest child turns 16.

Limits vary, but what a family can receive is generally equal to between 150% and 180% of the worker’s basic benefit. The average survivor benefit for children is more than $800 a month, and the average for a caretaking mother or father is over $900 a month.

No worker needs more than 40 credits, which requires 10 years of work, to qualify a family for survivor benefits. The number of credits varies by age, so younger people need fewer credits.

Even if your husband didn’t have the required number of credits for his age, survivor benefits could have been paid if he had worked for at least 18 months in the previous three years.

But there is a deadline for self-employed taxpayers to have their incomes counted toward Social Security credits, which they do by filing their federal tax returns. The deadline is three years, three months and 15 days after the end of the calendar year in which the income is earned, said economist and Social Security expert Laurence Kotlikoff of MaximizeMySocialSecurity.com.

The deadline for reporting your husband’s 2016 income passed in March, while the deadlines for his 2014 and 2015 income passed in March 2018 and March 2019, respectively.

Appeal the decision because it’s possible that your husband earned enough other credits to qualify your family for benefits even without his last few years of work. But steel yourself for the likelihood that you’ve lost thousands and perhaps tens of thousands of dollars of potential benefits.

Q&A: U.S. is best when picking a trustee

Dear Liz: My wife and I have a revocable living trust and we would like to change our primary successor trustee to someone who lives in the United Kingdom. The new trustee is not related to us nor is he a U.S. citizen. Can this be done and would our trust then become a foreign trust subject to a lot of U.S. taxes? How can we avoid this becoming a foreign trust?

Answer: Please rethink your plan, and not just for the reason you suggest.

Naming a foreign trustee very well may change the trust to a foreign trust for federal or state tax purposes when you die, said Jennifer Sawday, an estate planning attorney in Long Beach.

But settling an estate is difficult enough when the successor trustee lives nearby. Trying to manage the process from another country could qualify as cruel and unusual punishment.

If you really don’t have someone in the U.S. whom you trust, consider hiring a professional trustee. Some banks offer trust administration or settlement services as well as other fiduciary services, Sawday said. A licensed professional fiduciary could handle this role as well. Your estate planning attorney should be able to give you some referrals.

Hiring someone could cost more than naming a friend or family member, but often the money is well spent, Sawday said, because the professional is familiar with the work and is efficient compared to a layperson who may serve as a trustee once in a lifetime.

Q&A: Investing can be scary. How to overcome your anxiety

Dear Liz: I’m 53 and a debt-free homeowner. I’m employed but don’t have a 401(k) and have only about $80,000 in savings. I realize I need to put that money to work somewhere but I just freeze when it comes to trusting myself or someone else to handle it. Markets lately scare me to death, as do fraudulent or self-serving money managers. But as time ticks away, I develop more and more anxiety about it. What would you suggest?

Answer: Many worthwhile endeavors are scary, and you haven’t got a moment to lose.

You don’t have to make yourself an investing expert. You do need to understand enough about how the markets work that you don’t panic at the first downturn and yank your money out. Consider reading a good book about investing, such as “Investing for Dummies” by Eric Tyson, “The Little Book of Common Sense Investing” by John Bogle or “The Broke Millennial Takes On Investing” by Erin Lowry.

While you can’t control the markets, you can control what’s much more important in the long run: how much you invest and how much you pay in fees. Try to maximize the former and minimize the latter. Consider opening an individual retirement account and contributing the maximum $7,000. (The usual limit is $6,000 per year but people 50 and older can contribute an additional $1,000.)

A discount brokerage, such as Vanguard, Fidelity, TD Ameritrade, ETrade or Charles Schwab, will have low-cost target date retirement funds that do the heavy lifting for you, such as choosing investments, rebalancing and getting more conservative as your retirement date approaches.

If you still want help with investing, seek out an advisor willing to be a fiduciary, which means they’re committed to putting your best interests first.

Q&A: Weighing portfolio rebalancing costs

Dear Liz: I constantly read about the need to “rebalance” portfolios each year or more often to make sure you have a specific distribution of stocks, bonds and cash. However, selling stocks can create capital gains that will be taxed. An advisor rebalanced my portfolio and the result for me was an increase in capital gains taxes and an increase in my Medicare premiums. The extra taxes and costs to me seem to outweigh the benefit of hitting an exact asset target. Can extra taxes and Medicare costs be avoided while rebalancing?

Answer: Most of the advice about rebalancing is focused on people whose primary savings are in retirement accounts, where capital gains aren’t taxed.

Outside of retirement accounts, the costs of rebalancing must be weighed carefully. There often are ways to minimize capital gains taxes, such as selling losing stocks to offset winners, but in many cases the rebalancing should be done slowly, over time, to manage the fallout.

If your advisor didn’t discuss the tax and Medicare implications with you before taking this action, then it’s time to find another advisor.

Q&A: What to do with sudden savings

Dear Liz: A few months ago we took out a jumbo loan on our residence, using the excess to pay off the mortgage on an investment property. The interest savings is substantial and our monthly payment is much less than the combined two payments we had before. We never had any problem making the two payments. Is it a good idea to put the monthly savings toward the principal? Our daughter will inherit the residence and all our income-producing properties. She has a sporadic employment history and I’m concerned she would not qualify to assume the jumbo loan if she wants to keep the residence.

Answer: Most people have better uses for their money than paying down a low-rate, potentially tax deductible debt. Your case may be one of the exceptions, or it may not.

The first step may be to ask whether she’s planning to keep the home. If she isn’t, then you needn’t worry about the loan — it will be paid off when she sells the property.

If she is planning to keep it, she could sell one or more of the other properties to pay off the loan. (These sales typically wouldn’t generate much if any taxable gains, since the properties get new fair market values when she inherits them.)

If you want to avoid her having to sell anything, then making extra principal payments can be a good plan as long as you don’t have any other debt and have an adequate emergency fund. You may want to consider a backup plan in case you die before the loan is paid off, such as a term life insurance policy (assuming you can qualify).

Q&A: Tax consequences of giving versus bequeathing

Dear Liz: Someone who expects to be an executor recently wrote to you about a plan to distribute individual pieces of art to family members. Your response addressed the executor’s responsibility to determine the art’s worth before doing so. You also suggested having the parent designate what was to go to whom. What would the consequences be of the parent giving the pieces of art to the intended recipient prior to death? My mother did both; i.e., gave some to me and some to my sister prior to her death, and designated others to be distributed following her death. She had personal rather than financial reasons for doing it this way.

Answer: Let’s say your mom bought a painting from a struggling artist for $500. Later, the artist became famous and the painting’s value rose to $500,000. If she gave you the painting and you sold it, you would have to use the amount she paid — her basis — to determine the taxable profit ($499,500).

If she bequeathed the painting to you instead, the artwork would get a new tax basis which is usually its value on the day she died. You could sell the painting for $500,000 and not owe a dime in taxes.

Few people have artworks that experience that kind of appreciation — or any appreciation, for that matter. The issue of basis most often comes up when people are transferring real estate, stocks or other assets in transactions that are reported to the IRS. If your mom did have valuable works, though, transferring them through bequests could be advisable.

Q&A: Windfall creates Medicare headache

Dear Liz: A couple of years ago, I was forced to receive a windfall by the sale of a company in which I held stock. Besides taking a huge tax hit, I just got my Social Security estimate for 2021 in which my Medicare bill went up by 47%. This year my income will go back down to normal levels. Is there any way to convince Social Security that this was a one-time event and it shouldn’t adjust my Medicare premiums?

Answer: There’s typically a two-year lag between receiving a windfall and potentially having your Medicare premiums raised because of IRMAA (Medicare’s income-related monthly adjustment amount). You can appeal the increase if your income dropped in the meantime because of one of the following life-changing events:

Marriage
Divorce or annulment
Death of a spouse
Work stoppage
Work reduction
Loss of income-producing property (because of a disaster or other event beyond your control, not due to a sale or transfer of the property)
Loss of pension income
Employer settlement payment (due to employer’s bankruptcy or reorganization)
If any of those circumstances apply, you can call Social Security at (800) 772-1213 to arrange an interview. Alternatively, you can download form SSA-44 from the web and mail it in. You will need to provide proof of the event, such as a death certificate, divorce decree or documents from an employer.

Q&A: How to help your adult kids build their own credit

Dear Liz: My first house is paid for, and my oldest daughter and her husband are living there now. I added her name to my credit card, which is paid in full every month, but otherwise she hasn’t established any credit. I have been paying the utilities up until now, but they are going to take them over. Will changing my name and direct debit bank information to theirs on the accounts help establish her credit?

Answer: Some alternative credit-scoring systems do use utility payments to supplement the information in people’s credit reports. Experian Boost, for example, allows people to add such payments and potentially increase their Experian credit scores. Still, your daughter would be smart to continue adding traditional credit accounts to her reports.

One way to do that is with something called a “credit builder loan,” which is offered by some credit unions and at least one online lender, called Self. Essentially, the applicant borrows a certain amount, which the lender puts in a savings account or certificate of deposit. The borrower can claim the money after making a certain number of payments. The payments are reported to the three credit bureaus, contributing to her scores.

She also could apply for a credit card on her own, to supplement the one you added her to. If her credit isn’t yet good enough to qualify for an unsecured card, she could consider getting a secured card that gives her a line of credit equal to the amount she deposits with the issuing bank.