Ask Liz Weston

Get smart with your money

Q&A

Q&A: How do I find out if an advisor is a fiduciary?

By

Dear Liz: You often emphasize the importance of using a financial planner or advisor who is a fiduciary. But how does one know whether a given planner or advisor is a fiduciary? Is it just the planner or advisor claiming to be one? Are there any licensing laws or professional organizations that grant such a designation?

Answer: Many people assume financial advisors are required to put their clients’ best interests first, but that’s typically not the case. Most advisors are held to a lower “suitability” standard, which means their recommendations must be suitable for the client’s situation but not necessarily the best choice. The advisor can recommend an investment that is more expensive or that doesn’t perform as well as available alternatives, simply because the recommended investment pays the advisor a higher commission.

Fiduciary advisors commit to putting their clients’ interests ahead of their own. Certified financial planners (CFPs), certified public accountants (CPAs) and attorneys all have fiduciary duties to their clients, as do registered investment advisors (RIAs).

The gold standard for fiduciary advice is the fee-only model, in which the advisor is compensated only by fees the client pays. Fee-only means the advisor does not accept commissions or other compensation paid by third parties. Fee-only compensation can take a number of forms, including hourly, retainer or flat fees or a percentage of assets the advisor manages for the client.

The first step in determining whether an advisor is a fiduciary is to simply ask. The answer should be yes, full stop, and the advisor should be willing to put that commitment in writing. Next, ask to see the advisor’s Form ADV, which details how the advisor is compensated.

Theoretically, a fiduciary advisor may be able to accept commissions, but they’re obligated to clearly disclose the compensation to clients and maintain the clients’ interests as their top priority.

The phrase “fee-based” is sometimes used by advisors who want to appear to be fiduciaries when they’re not. An ethical advisor is crystal clear about how they’re getting paid.

Before hiring any financial advisor, you should also use BrokerCheck at https://brokercheck.finra.org/ to research their backgrounds and look for any disciplinary history. Also, check with the organization that granted their credentials to verify that those credentials are current.

Q&A: How do I avoid a Medicare surcharge?

By

Dear Liz: I will be applying for Medicare next year. Last year I received an inheritance, and also sold a second home which increased our taxable income for the year. I once read that there is a form that needs to be completed to let Medicare know that this is only a one-time occurrence. However, my tax advisor said that there is no need to let Medicare know and he had not heard of any such form. I feel he does not understand that the higher income might affect our Medicare premiums. My understanding is that if I don’t submit the form, my Medicare payment will be a lot higher than expected. Can you suggest what I should do?

Answer: There is such a form, but it’s unlikely to help in your situation.

Medicare premiums are based on your income from two years earlier, as shown on your tax returns. People with higher incomes face “income related monthly adjustment amounts” (IRMAA) that can substantially increase their Medicare Part B and Part D premiums. (Part B covers doctor’s visits and Part D covers prescriptions.)

Form SSA-44 is designed to help people whose income has taken a hit because of major life changes, such as retirement, divorce or the death of a spouse. It’s not designed to spare people who had taxable windfalls, such as capital gains from a property sale.

Inheritances generally aren’t taxable events, however, with a few exceptions. If you inherit someone’s IRA, for example, you generally must start withdrawals which are typically taxable. Otherwise, inherited money and assets typically don’t show up on your tax returns or affect your Medicare premiums.

Q&A: Why tell the IRS if you sell gold coins?

By

Dear Liz: Regarding the inherited gold coins question, why would anybody tell the IRS they inherited coins and subject themselves to a 28% capital gains tax? That seems very illogical.

Answer: To clarify, the original reader was asking about selling gold coins which had risen dramatically in value since she inherited them. Coins are considered collectibles so the difference between the inherited value and the sale price would be subject to a 28% federal capital gains tax.

How would the IRS know if you’ve sold gold coins for a profit? A dealer who buys the coins might be required to file a form with the IRS that’s designed to thwart money laundering. Also, payments are typically made through bank transfers or checks, unless you’re planning to walk out with a bag of cash like a cartoon bank robber. Bank transactions could be examined if you’re ever audited.

Even if you calculate the odds of getting caught as low, the question remains: Do you only do the right and lawful thing when you have to?

Most people who aren’t sociopaths have a sense of integrity. Doing something they know to be wrong damages that integrity, even if no one else ever knows. You may be able to save a bit of money by cheating on your taxes, but you can’t put a price on a clear conscience.

Q&A: Is a spouse responsible for a cosigned loan?

By

Dear Liz: Before we were married, my spouse co-signed for two student loans for a relative. The loans have not been paid off. Occasionally the former student is late and my spouse is contacted. If I survive my spouse, who has end stage kidney disease, will I be responsible for the debts if the relative defaults?

Answer: Because your spouse co-signed the loans before marriage, the debt isn’t considered community debt. In other words, you can’t be held directly responsible if the relative defaults.

Unpaid student loan debt could become a claim against your husband’s estate, however. Some lenders might push to get reimbursement this way, while others won’t. Creditors typically have a limited period in which to make such claims (the period varies by state).

To complicate matters further: some older student loans have automatic default clauses that make the entire balance due if a co-signer dies. That means the lender could demand immediate repayment from the relative and from your spouse’s estate. It would be smart to check the promissory note to see if it contains such language. If it does, the relative can ask the lender or lenders about a “cosigner release,” which would remove your spouse’s name from the debt. Another and even better option would be for the relative to refinance the loans in their own name if possible.

An estate planning attorney can help answer your questions about the potential impact of these loans as well as other steps you can take now to protect your spouse’s estate.

Q&A: Should I get a home appraisal when my spouse dies?

By

Dear Liz: When one spouse dies, the couple’s primary residence gets a step-up value to the current market value (in California). So how is that value established for future reference? Is it necessary to get a formal appraisal or are current sales comparisons sufficient? Also, is that step-up value the basis for any future home sale or would the sale have to happen in a certain time frame?

Answer: It’s a good idea to get a formal appraisal after a spouse dies to establish the home’s value and potentially reduce future taxes. There’s no deadline for using this new tax basis, but surviving spouses who sell within two years of the death can get the full $500,000 capital gains exclusion available for couples. After the two-year mark, survivors would be limited to the individual $250,000 limit.

Here’s a quick primer on how step-up works. In every state, the deceased spouse’s half of jointly owned property gets a new value for tax purposes. This step-up in tax basis means that no capital gains taxes will be owed on the appreciation that happened during the deceased spouse’s ownership, at least on 50% of the property.

In community property states, both halves of the property typically get this valuable step-up in basis at the first spouse’s death. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

If an appraisal wasn’t ordered soon after a death, getting a formal valuation can be somewhat more complicated. Your estate planning attorney may be able to guide you to appraisers experienced in retrospective valuations.