Ask Liz Weston

Get smart with your money

Q&A

Q&A: Their variable-rate loan is out of control. What should they do now?

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Dear Liz: We paid a lot for our house, and a lot to renovate it seven years ago. My banker recommended taking a low-interest loan against our assets at the bank instead of selling investments to pay for the renovations, which cost $900,000. The bank offered a rate of prime plus half a point. Up until a year ago, this loan cost me about $1,200 to $1,600 per month. However, those payments have now jumped to about $5,000 per month. I’m selling stocks and bonds, on which I will have to pay taxes, to cover this amount. We have enough to pay off the loan, which is what my banker has suggested doing since interest rates have gone up so much. However, my wife and I are reluctant to liquidate so much in stocks and bonds. We would incur the tax consequences and it would not leave us as liquid as we would like to be. We love our house and neighborhood, and we are locked in a mortgage rate of 2.65% for another six years, so we are reluctant to sell. Any advice?

Answer: Your options aren’t great, but you already knew that.

As you’ve learned, variable-rate loans are inherently risky and better for short-term borrowing than for financing long-term debt. Interest rates stayed so low for so long that many people lost sight of the risk that affordable payments might not stay that way.

Interest rates are unlikely to plunge any time soon, but paying off the loan by selling investments could leave you house rich and cash poor. If interest rates do ease, you could regret having incurred unnecessary taxes — plus the investments you sell can’t earn you future returns.

Trying for a cash-out mortgage is another potential solution with significant disadvantages, given current high mortgage rates. Selling your home could be the best option if you can’t afford the property but may be an overreaction if you can.

The right solution will depend on the details of your financial situation. A fiduciary financial advisor — someone dedicated to putting your best interests first — could help you make a more informed decision about what to do next.

Q&A: Spousal and divorced spousal benefits are available only while the primary worker is still alive

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Dear Liz: You recently answered a question about divorced survivor benefits. Is the survivor benefit going to be 100% of what the deceased ex-spouse was receiving at death or 100% of the ex’s benefit at full retirement age? My ex-wife is 65, the marriage lasted 34 years, it’s been two years since our divorce and she’s planning to retire at her own full retirement age.

Answer: The last part of your question indicates you’re asking about divorced spousal benefits, not divorced survivor benefits … unless you’re reaching out from beyond the grave.

Here’s a quick primer. Spousal and divorced spousal benefits are available only while you, the primary worker, are still alive. Your ex could receive up to 50% of your benefit at full retirement age, assuming that benefit is greater than her own.

The rules change once you’re dead. Should you die before your ex, she may qualify for divorced survivor benefits. Divorced survivor benefits, like regular survivor benefits, are based on what you were actually receiving or had earned at the time of your death. If you died at 69 before beginning to claim Social Security, for example, your benefit would have earned at least a couple years’ worth of delayed retirement credits. Your ex could qualify for 100% of that enhanced benefit if she applied for it at her own full retirement age.

Your ex also would have the option of starting divorced survivor benefits and then switching to her own larger benefit later, or vice versa. She also could remarry at age 60 or later and not lose her benefit. By contrast, spousal and divorced spousal benefits end with remarriage, and people typically can’t switch between those benefits and their own.

Q&A: Delayed Social Security benefits

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Dear Liz: I know my spouse can get up to half of my Social Security benefit amount if it is greater than her benefit. I am planning to delay starting Social Security until age 70. Will my spouse get half of my benefit at my full retirement age (which is 66 and 2 months) or half of my (noticeably higher) benefit at age 70?

Answer: The former. Spousal benefits don’t earn the delayed retirement credits that will increase your own benefit by 8% annually between your full retirement age and age 70.

Survivor benefits are a different matter. Should you die first, your wife would be eligible for up to 100% of your benefit — including any delayed retirement credits you earned.

Q&A: Home equity in community property states

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Dear Liz: I live in California and have been married for 20 years. My spouse bought our home before our marriage and my name is not on the title as a co-owner. However, I contribute to most of our monthly financial obligations which include paying the mortgage, property taxes, etc. In the event of death or separation, how much of the current home equity am I entitled to? This is our only and primary residence.

Answer: Normally, an asset that was purchased before marriage is considered separate property even in community property states such as California. But if the mortgage is paid down with “community funds” — money earned by either spouse during the marriage — then the spouse who isn’t on the title may be entitled to some of the appreciation that occurs after the wedding.

That may not prevent you from being evicted if your spouse dies, however, or having to fight an expensive battle in court if you divorce. Consulting an attorney now could help you better prepare for either possibility.

Q&A: What happens to your HSA money when you die?

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Dear Liz: What designation or instructions should I make for assets (if any) which remain in my health savings account at the time of my death? Do any remaining funds go directly to my estate or am I allowed to name a beneficiary for this money? If “yes” to the beneficiary question, is the beneficiary subject to the same 10-year payout requirement that applies to most other retirement account beneficiaries? I assume that if the funds go to my estate, the estate would pay tax on the funds given I’ve never paid tax on that money.

Answer: Yes, you can name beneficiaries for health savings accounts. But the tax advantages of these plans often disappear at death.

HSAs, which are paired with high deductible health insurance plans, are known for their rare triple tax benefit. Contributions are tax-deductible and balances can grow tax-deferred, while withdrawals for qualifying medical expenses can be tax free. HSAs don’t have the “use it or lose it” clause that applies to flexible spending accounts; balances can be rolled over from year to year and invested for growth.

What’s more, the withdrawals needn’t happen in the same year you incur the medical costs. As long as you keep good records of unreimbursed medical expenses, you can use them to justify tax-free withdrawals years or even decades in the future.

As a result, many people who can afford to pay medical expenses with other funds use their HSAs as a kind of supplemental retirement fund. There are no required minimum withdrawals, and it can be tempting to leave balances in an HSA as long as possible.

If you’re married and name your spouse as your beneficiary, that may not be a problem. Spouses who inherit HSAs can opt to treat the account as their own, which means they can make tax-free withdrawals to pay for qualified medical expenses.

Other beneficiaries, though, will be required to empty the accounts and pay income tax on the withdrawals. These withdrawals won’t be penalized, but they also can’t be delayed. By contrast, non-spouse beneficiaries typically have 10 years to empty most inherited retirement plan accounts.

If you don’t name a beneficiary, any remaining funds in the account will be paid to your estate and taxed on your final income tax return.

Q&A: Watch out for probate triggers

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Dear Liz: My wife and I have a living trust that includes most of our assets. We have two bank accounts that are not in the trust totaling $130,000. Will these accounts be subject to probate? If it matters, she is in memory care and I handle all finances. Our executor son is a signer on one bank account to have ready access to cover final expenses in case I predecease my wife.

Answer: As you know, living trusts are designed to avoid probate, the court process that otherwise follows death to distribute someone’s estate. In some states, including California, probate can be expensive, prolonged and often worth avoiding. Assets typically must be titled in the name of the living trust or have a designated beneficiary to avoid probate. There are some exceptions, but you’d be smart to consult an estate planning attorney to make sure you don’t inadvertently trigger the probate you’re trying to avoid.