Ask Liz Weston

Get smart with your money

Q&A

Q&A: To shred or not to shred

By

Dear Liz: In a recent column, an attorney suggested that a veteran’s information can be shredded three years after death. However, surviving spouses of veterans can be eligible for benefits to cover the costs of assisted living and would need to provide that information.

Answer: That’s an excellent point. Many people aren’t aware of the “aid and attendance” benefit that can help veterans and their spouses pay for help with activities of daily living, including bathing, dressing and using the bathroom. These custodial care costs are typically not covered by Medicare.

Q&A: California is a community property state. How that affects your and your spouse’s need for a will

By

Dear Liz: Does a spouse automatically inherit everything if the other passes away without a will?

Answer: Not necessarily.

Anything that has a beneficiary designation, such as retirement accounts and life insurance, would typically pass to the person named as beneficiary even if that’s not the surviving spouse. Bank and investment accounts also may have “transfer on death” or “pay on death” beneficiaries. In many states, cars and even homes can be passed with beneficiary designations. In addition, jointly owned assets would pass to the other owner.

Other assets would pass to the deceased spouse’s survivors according to state law if there is no will or living trust. You can look up those laws by searching for the state’s name and the words “intestate succession.” If there are no children, the surviving spouse may inherit everything or may have to share with the deceased’s parents or siblings. If there are children, the surviving spouse inherits a portion of the estate with the children getting the remainder.

For example, in California — a community property state — the spouse would inherit all the community property and one half of the separate property if there is one child, and the child would inherit the rest. With two or more children, the spouse gets all of the community property and one-third of the separate property, with the children sharing the rest.

Q&A: Retirement benefits and taxes

By

Dear Liz: We are just getting to the age where mandatory distributions from our retirement accounts have to start. We don’t need the additional cash as we have great pensions. If we convert to Roth IRAs, will the amount in the Roth be subject to minimum deductions going forward? Will our heir have to pay any taxes on the money in the Roth account when inherited? Can we count the amount converted to the Roth account against the mandatory required distribution? I do understand that all the money will be taxed as income when coming out of the retirement accounts.

Answer: Required minimum distributions and Roth conversions have to be separate transactions. Conversions can’t count against your RMDs, and you’re not allowed to put an RMD into a Roth.

Any money you convert to a Roth would, however, reduce future RMDs, since Roths aren’t subject to mandatory distributions. Your heirs wouldn’t pay taxes on inherited Roth accounts, either, although they would be required to drain those accounts within 10 years.

Plus, you’re increasing your pool of tax-free money. This could be especially helpful for whichever of you survives the other, because after the year of death, the survivor probably won’t be able to file as “married filing jointly” anymore and would be subject to less favorable single taxpayer status.

Consult a tax pro, however. Roth conversions can push you into a higher tax bracket and increase your Medicare premiums. A “laddered” approach, or a series of partial Roth conversions over several years, may be advisable.

Q&A: Paying a grandchild’s student loans

By

Dear Liz: Regarding the grandparent who would like to pay off a grandchild’s student loans.

You wrote that paying off the loans would be considered a gift. However, if the grandparent paid the funds to the institution that originated the student loan, would it then not be a gift? This would exempt the grandparent from filing the gift tax return.

Answer: You may be thinking of the unlimited exception for a family member’s medical expenses or education. Unfortunately, payments made to a student lender aren’t included in this exception.

Normally, any gift that’s larger than the annual gift exclusion limit — which is currently $17,000 per recipient — would require filing a gift tax return. Gift taxes aren’t due, however, until the amount given away over the annual limits exceeds the lifetime gift and estate exemption limit (which is currently $12.92 million). Clearly, someone has to be quite wealthy, and quite generous, before gift taxes are a concern.

But even the necessity to file a gift tax return can be avoided for larger gifts if you’re paying someone else’s education or medical expenses. The unlimited exception for these expenses, however, applies only to tuition payments made directly to the educational institution and payments for medical care made directly to a healthcare provider. Payments to other parties, such as lenders or insurance companies, aren’t included in this exception.

Q&A: Pensions and Social Security benefits

By

Dear Liz: I am a teacher getting ready to retire. I have been collecting a spousal benefit from my husband’s Social Security. My understanding is that once I start collecting my pension, I will be subject to the windfall elimination provision. Is there a way to continue to collect against my husband’s Social Security, which is greater than my own Social Security benefit?

Answer: Because you will be receiving a pension from a job that didn’t pay into Social Security, you’re subject to two provisions: the windfall elimination provision, which can reduce but not eliminate your own Social Security benefit, and the government pension offset, which can reduce or eliminate any spousal or survivor benefit.

If the GPO wipes out your spousal benefit, you may still get at least a portion of your own benefit. Claiming strategy sites such as Maximize My Social Security and Social Security Solutions could help you estimate the effect of those provisions.

Q&A: How to dump your broker and invest your own money

By

Dear Liz: I have a mutual fund and a Roth IRA that are actively managed by a broker. The accounts have not done well. I would like to withdraw them from the broker and reinvest them on my own. How do I safely and securely withdraw them from the broker? What paperwork and fees should I expect?

Answer: Look through your records to find the agreement you signed with the brokerage when these accounts were opened. The agreement may include the steps for closing the account along with any fees. You also could try searching for the name of the brokerage and “account closure fees” to see what, if anything, you might owe.

The brokerage may give you the option to manage the account on your own, or you may want to set up accounts at a new, less expensive discount brokerage. Once the accounts have been opened, your new brokerage will help with the transfers. If any of your money is invested in “proprietary funds” — that is, investments offered only at the old brokerage — those investments probably would have to be sold first. Such a sale wouldn’t incur any tax consequences with your Roth IRA. If your mutual fund is proprietary, though, its sale may incur capital gains taxes.