November 20, 2023 By

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

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.

Filed Under: Divorce & Money, Q&A, Social Security
November 13, 2023 By

Q&A: Delayed Social Security benefits

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.

Filed Under: Couples & Money, Q&A, Social Security
November 13, 2023 By

Q&A: Home equity in community property states

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.

Filed Under: Couples & Money, Divorce & Money, Q&A
November 13, 2023 By

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

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.

Filed Under: Investing, Q&A, Taxes
November 6, 2023 By

Q&A: Watch out for probate triggers

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.

Filed Under: Banking, Investing, Legal Matters, Q&A
November 6, 2023 By

Q&A: Why those great deals banks are offering might be less lucrative than they appear

Dear Liz: I’m receiving numerous email offers from big banks offering significant incentives and bonuses to open checking and savings accounts. I usually don’t pay much attention to them but the latest one is offering $900 to open these accounts. I’ve read all the fine print and understand all the requirements, but I can’t help but think there is a mischievous motive on their part. How do I decide if these offers are a good financial alternative for me?

Answer: Banks offer these incentives to lure in new customers, but you’re wise to consider all the potential costs because the bonuses may be less lucrative than they appear.

For starters, you’ll pay income taxes on any sign-up bonus, which could substantially reduce what you net from the deal. Plus, many banks that offer sign-up incentives pay a paltry interest rate or no interest at all. You could be better off putting your money in a high-yield savings account. (Some online banks are paying around 5%.)

You typically must maintain a certain balance to avoid monthly account fees, and you may need to set up a direct deposit or make a set number of transactions per month as well. The bonus often isn’t paid until after your account has been open 90 days or more. If you close the account, you may face an account closure fee.

Filed Under: Banking, Q&A
November 6, 2023 By

Q&A: What’s a qualified charitable distribution?

Dear Liz: I have a suggestion for the couple who is facing the start of required minimum distributions from their retirement accounts but who do not need the money. They could consider making a qualified charitable distribution (QCD). A QCD allows you to donate to a charity directly from your IRA and satisfies your RMD requirement. The only caveat is that the money cannot pass through your hands. It must go directly from the IRA to the charity. You can’t take a deduction for the contribution, but the money won’t count as taxable income. Although the age of RMD has been rising in recent years, the age for a QCD remains at 70½. The maximum allowable is $100,000 per taxpayer a year. A husband and wife can each make a QCD if they have separate IRAs.

Answer: Qualified charitable distributions can be a great solution for people who have saved more in their retirement accounts than they need and who want to benefit good causes. The charity must be a 501(c)(3) organization that can receive tax-deductible contributions, and, as you note, the money needs to be transferred directly from the retirement account and the contribution made before the year’s RMD deadline, which is typically Dec. 31. There are a few other rules involved, so consider consulting a tax pro before arranging a QCD.

Filed Under: Couples & Money, Q&A, Taxes
October 30, 2023 By

Q&A: Helping beneficiaries find documents

Dear Liz: Not so much a question but a follow-up to previous advice in your column. I agree online statements are safe and reasonable but suggest keeping at least one printed statement a year from each account with important papers. Also, take time to place “transfer on death” beneficiaries on each account. My younger brother passed away without a will and most of his accounts were online. I have spent many months unraveling this mess. I had to prove I was next of kin to get at least enough money to be reimbursed for final expenses.

Answer: Your experience is far from unusual, unfortunately. With so much of our financial lives online, we’re just not creating the paper trails that can help executors settle our affairs. Often the executors can’t even open the laptops and phones that could help them track down accounts because those devices are password protected. Digital assets such as photos, frequent flier miles and cryptocurrency may become forever inaccessible.

People can make life easier for their loved ones by keeping an updated list of key passwords and account numbers in a safe place that’s accessible to the person or people who will be settling their estate. That could be an at-home safe or a locked filing cabinet, as long as your trusted person has the combination or key. Another option would be online services such as Everplans, which can allow you to organize documents and name trusted people who can get access to those documents after your death.

Filed Under: Follow Up, Legal Matters, Q&A
October 30, 2023 By

Q&A: Trusts and taxes

Dear Liz: My parents set up a family trust, which my brother and I have now inherited but not fully distributed. Included in that trust was the understanding that $130,000 would go to my daughter who is now 23. She has not received any of the money yet but would like to receive it within the next year for a down payment on a house. Would it be better to give her half the money this calendar year and half next year, or give her everything at once? I’m thinking there may be tax breaks for first-time home buyers that would offset the tax burden that a sudden increase in income from the inheritance would cause. She has been living on her own for several years and has a full-time job earning about $52,000 per year. She is already taking advantage of her company’s 401(k) match.

Answer: The inheritance won’t be considered income and isn’t taxable as such. Of course, any money the inheritance earns would be taxable. So if your daughter parks the money in a high-yield savings account while she looks for a home, she would pay income tax on any interest earned.

There also isn’t currently a first-time home buyer federal tax credit, although many states have various programs to help people buy homes. These typically do have income limits, although, again, the inheritance itself wouldn’t be considered part of her income.

Before you distribute the money, however, get clear on what exactly the “understanding” is about this money. If the trust clearly states this amount goes to your daughter, that’s one thing. If this money has been allocated to you, however, and you’re complying with your parents’ unwritten wish, you may have to file a gift tax return when the money is distributed. (Gift taxes won’t be due unless you give away millions in your lifetime.) An estate planning attorney can advise you.

Filed Under: Inheritance, Kids & Money, Q&A, Taxes
October 30, 2023 By

Q&A: Married more than once? Here’s what that means for Social Security survivor benefits

Dear Liz: I’m in a second marriage that’s lasted 10 years. Is my wife fully entitled to my Social Security after I die? My first wife and I were married for 19 years. Is my ex entitled to any of it?

Answer: Both your current spouse and your ex could be entitled to survivor benefits based on your work record. Typically someone must be married nine months to qualify for survivor benefits on a current spouse’s record. If the spouses divorced, the marriage must have lasted 10 years. Each survivor benefit can be up to 100% of your benefit. The amount may be reduced if the women start benefits before their own full retirement age, but they don’t have to share — the amount isn’t reduced because you’ve had more than one spouse.

Filed Under: Couples & Money, Divorce & Money, Q&A, Social Security