Ask Liz Weston

Get smart with your money

Q&A

Q&A: Getting a small estate transferred

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Dear Liz: My brother passed away three years ago leaving no will. All of his bills have been paid. I am unable to transfer his stocks and retirement account to my name. I have repeatedly checked the unclaimed properties list to no avail. No probate was required because the estate was too small. Will you please assist me with the steps I need to file to make this transaction occur?

Answer: Each state has its own laws for small estates and how to transfer assets, said Jennifer Sawday, an estate planning attorney in Long Beach.

In California, for example, a small estate is one with $166,250 or less in assets. If your brother’s estate was under this amount, you can complete a form that’s commonly referred to as a small estate affidavit and present it to the financial institutions or a stock transfer agent to start the transfer process. You can search online for a sample form or ask an attorney for help.

Q&A: Lump sum or monthly payout?

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Dear Liz: I need advice on choosing between a lump sum retirement benefit and a monthly payout till death (with a cost of living adjustment). The monthly payout option also includes health insurance benefits but the lump sum option does not.

Answer: It’s hard to imagine a better option than a guaranteed, inflation-adjusted stream of income for life — particularly if that option includes retiree health insurance benefits, which are increasingly rare.

If you take the lump sum, you’ll be responsible for investing the money with no guarantees that you’ll get as much as if you’d picked the payment option. A bad market or bad investments could dramatically reduce your nest egg, as could fraud or improvident spending.

Even if you’re a good investor now, there’s no guarantee you’ll remain so. Our financial decision-making abilities tend to decline with age, although our confidence in those abilities often remains high — a truly scary combination.

The devil’s always in the details, though, so take the paperwork describing these options to a fee-only, fiduciary financial planner so you can get customized advice based on your situation.

You can get referrals to fiduciary financial planners from the National Assn. of Personal Financial Advisors, the Alliance of Comprehensive Planners, the Garrett Planning Network and the XY Planning Network. The Garrett network represents advisors willing to charge by the hour; XY Planning Network advisors offer the option of paying a retainer fee.

Be absolutely sure you’re dealing with a fiduciary financial planner — one who agrees, in writing, to put your best interests first.

Most advisors are held to a lower “suitability” standard that allows them to recommend investments and strategies that pay them more, rather than those that may be the best fit for you. An advisor held to this lower standard may urge you to take the lump sum not because it’s in your best interest but because they can earn commissions by selling you various investments.

Q&A: Gift taxes vs. estate taxes

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Dear Liz: A reader recently asked about passing a $500,000 inheritance to their children. You mentioned the option of disclaiming, or refusing the inheritance so that it would go to their kids. You wrote, “If you decide not to disclaim and later give the entire $500,000 to your kids, you wouldn’t have to pay gift taxes until you gave away considerably more. Plus, gifts are tax free to the recipients.” Are you possibly mixing up gifting and inheriting? As I understand it, gifting to your kids is limited to something like $15,000 per parent per kid. Unless you have a huge family, that’s not going to add up to $500,000 of tax-free giving.

Answer: Many people get confused about how gift taxes work. The gift and estate tax systems are intertwined, causing further confusion.

There’s no limit on how much you can give away during your lifetime: You can give as much money as you want to as many people as you want. If you give more than $15,000 to any one recipient in a given year, however, you’re required to file a gift tax return. That doesn’t mean you owe gift taxes.

The amounts over $15,000 count against your lifetime estate and gift tax exemption, which is currently $11.7 million per person. So if you give someone $20,000, the extra $5,000 would be deducted from your $11.7-million lifetime exemption. Only after you exhausted that lifetime exemption would you owe gift taxes.

Q&A: Exes and Social Security benefits

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Dear Liz: I receive Social Security. My recently divorced girlfriend receives Social Security from her ex-husband who is still living. If we were to get married, would either of us lose part or all of our Social Security benefits? It seems like a simple, straightforward question, but every Social Security representative I speak with by phone or in person gives me a different answer. My girlfriend did not work long enough to earn her own Social Security benefits. She was married over 30 years and is over 60.

Answer: Your girlfriend would lose her divorced spousal benefits if she remarries, but she could then qualify for spousal benefits based on your earnings record. Your benefits would not be affected. A Social Security representative should be able to calculate how much her benefit would change.

Q&A: How a fee-only financial planner differs from a fee-based one

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Dear Liz: What is the difference between a fee-based financial planner and a fee-only financial planner? I have had a few complimentary meetings with a fee-based financial planner regarding retirement planning and income-generating strategy. I am 61 and currently have $325,000 in a traditional IRA and a 401(k) from a former employer, with 70% of both accounts held in stocks. The planner suggests that I put the whole $325,000 into a fixed indexed annuity, which he says is no risk. Is this a good idea?

Answer: Someone who is “fee based” typically accepts commissions or other incentives for selling certain investments in addition to charging fees. “Fee only” advisors accept money only from their clients.

Another important word that starts with f: fiduciary. Fiduciary advisors promise to put your interests ahead of their own. A fiduciary advisor, for example, typically wouldn’t recommend putting all your money in a single investment since having all your eggs in one basket is rarely in your best interest.

Most advisors are not fiduciaries, however, and may recommend poorly performing or expensive products to you when better options are available because those lesser options pay them more. Indexed annuities can pay high commissions to the people selling them, for example, and that can be a powerful incentive for your advisor to gloss over their potential disadvantages.

Indexed annuities are sold as a way to benefit from some of the upside of the stock market without the risk of loss if the market falls. But these annuities are complex and insurers can typically change the rules that govern your returns. In addition, you may face surrender charges if you need to take your money out.

The Securities and Exchange Commission has issued investor alerts about indexed annuities. These alerts urge potential investors to thoroughly investigate how the contracts are structured, how returns are figured and how the calculations can change. Anyone who is considering an indexed annuity would be smart to run the purchase past a fee-only, fiduciary financial planner to see whether it really makes sense for their situation.

By the way, there’s no such thing as a no-risk investment. Every investment poses some kind of risk, and a fiduciary advisor will take the time to explain those to you so you can make an informed judgment.

Q&A: When mortgage shopping, does checking your credit scores lower them?

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Dear Liz: We’re trying to refinance a mortgage. All of the mortgage lenders claim that checking our credit scores will not affect the scores. However, that is not true. What gives? The three credit bureaus all list “too many inquiries” and penalize us. Does calling them do any good or make it even worse?

Answer: Checking your own scores is considered a soft inquiry that has no effect on your scores. When a lender checks your scores, there can be a small ding, but credit scoring formulas also have a feature that reduces the effect when you’re shopping for a mortgage.

Essentially, all the mortgage inquiries made within a certain amount of time are grouped together and counted as one. In addition, the formulas ignore any mortgage inquiries made within the previous 30 days. The amount of time you can shop varies with the credit scoring formula, so it’s generally a good idea to concentrate your shopping into a two-week period.

What you don’t want to do when you’re in the market for a mortgage is to apply for other credit. Those inquiries are not grouped with your mortgage inquiries. The effect of these inquiries fades quickly and is usually pretty small — typically 5 points or less for FICO scores, for example. But even a small ding could cause you to pay more in interest if your scores aren’t already excellent.