November 23, 2020 By

Q&A: To sell or not to sell that collection

Dear Liz: You’ve twice advised collectors to sell their collections while they’re still alive, rather than leave the task to an executor who won’t have the collector’s intimate knowledge of the market for these items. Collectibles bring joy to the collector and are probably most valued the closer the end approaches. It would bring sadness rather than joy to unload them right at that point in life. Right now, I’m trying to declutter my house and even the stuff that has been moldering in boxes for decades hurts a little to let go of. I’m named as the executor in a buddy’s trust and will need to move his tools. Even if his old arthritic hands can’t operate the lathe anymore, he looks at the machine and I can see the memory of turning a bowl in the expression he wears. I say, accept the responsibility of an executor fully.

Answer: If you haven’t served as an executor, you may not fully understand how daunting and time consuming the task can be even without having to deal with a large collection.

No one is suggesting that people divest themselves entirely of a prized collection. But letting go of stuff can be immensely freeing, as well as a real gift to the people we leave behind.

If you need motivation to continue your decluttering, consider reading Margareta Magnusson’s book, “The Gentle Art of Swedish Death Cleaning: How to Make Your Loved Ones’ Lives Easier and Your Own Life More Pleasant.”

Filed Under: Follow Up, Q&A Tagged With: , ,
November 16, 2020 By

Q&A: Retitling a deed after marriage

Dear Liz: Our house was titled “joint tenant with right of survivorship” after my husband inherited the property in 1998. As a same-sex couple, we were not married at the time. However, we legally married in 2013. Will one of us get the step-up in tax basis when the other passes, or do we have to retitle the house some way? We also want to avoid probate. We live in California.

Answer: As you know, California is one of the community property states that allows both halves of a property to get a step-up in tax basis when one spouse dies. This double step-up can be a huge tax saver, since none of the appreciation that happened before the death is taxed. Other community property states include Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In Alaska, spouses can sign an agreement to make specific assets community property.

In contrast, in common law states, only half of the property gets the step-up to a new tax basis when one spouse dies. The other half retains its original tax basis.

Although assets acquired during a marriage are generally considered community property regardless of how they’re titled, in your case the property was acquired before marriage. The current title of joint tenants with right of survivorship would avoid probate, but it will not achieve full step-up in basis when the first spouse dies, said Mark Luscombe, principal analyst for tax research firm Wolters Kluwer.

Filed Under: Follow Up, Q&A, Taxes Tagged With: , ,
November 9, 2020 By

Q&A: Your prized collection isn’t going to sell itself

Dear Liz: I am in the process of winding down my duties as executor of the estate of a 91-year-old gentleman who, like the reader who wrote to you, had a prized collection. I had repeatedly urged him to dispose of his prized things. I reasoned that because he was retired and had the time, and because he knew the story behind his prized items, he was in a far better position to find a buyer than I would ever be. (Knowing the provenance of the item is important because people purchase the story, not just the item itself.) He did dispose of some of the more valuable things and actually got some good cash, which he was able to enjoy. But he didn’t follow my advice completely, which meant that when he died, I had to deal with his remaining prized collectibles.

My suggestion to any older person who has collectibles is: Don’t wait to dispose of items that have market value. If you’re retired and have the time, sell the items yourself! If you don’t need the cash, deposit the money into the bank account that will pass to your heirs in due course. Don’t burden your executor — who is probably still working full time and who has bigger things to deal with, like your house, car and investment accounts — with disposing of your collectibles.

Answer: Obviously, parting with collectibles can be tough. The alternative, though, could be that precious items wind up in a yard sale or a dumpster. Collectors who sell get the satisfaction of knowing that the items are going to people who really want them.

Filed Under: Estate planning, Follow Up, Q&A Tagged With: , , ,
November 2, 2020 By

Q&A: Death doesn’t take a holiday

Dear Liz: In a recent response, you wrote, “Your living trust should name a successor trustee who can take over managing your affairs if you should become incapacitated or die.” This sort of writing is not uncommon but it implies some people won’t die. It would have been better to write “… take over managing your affairs when you die or if you should become incapacitated.” This is important, since it is noteworthy how many people are unwilling to face the facts when it comes to being prepared and finances: None of us are going to get out of this alive.

Answer: Good point!

Filed Under: Estate planning, Follow Up, Q&A Tagged With: , ,
August 31, 2020 By

Q&A: Why it makes sense to play the Social Security waiting game

Dear Liz: I’m concerned that you don’t make it clear that in order for a Social Security benefit to grow, a person needs to keep working and earning the same income that they’ve been making. I’ve retired recently and am lucky enough to have a pension to live on. I talked to someone at the Social Security office recently. She recommended that I go ahead and start drawing my benefits now because there will be minimal growth for the next seven years if I’m not working. She says lots of people think that they should wait, no matter what. However, she says it doesn’t make sense if you’re not working. Even my personal financial advisor was recommending that I wait, but the person at the Social Security office convinced me otherwise. When you go on Social Security’s website to check your benefits, all the estimates are based on continued employment at your current salary. There’s no way to check and see what your estimates are if you are working less or not at all. I think it’s important to give the whole story.

Answer: Yes, it is, and you didn’t get the whole story — or even correct information — from the Social Security employee who convinced you to ignore your financial advisor.

Benefits grow by 5% to 7% each year you delay starting between age 62 and your full retirement age, which is between 66 and 67, depending on the year you were born. After your full retirement age, your benefit grows by 8% each year you delay until age 70, when it maxes out. That guaranteed growth happens regardless of whether you continue working or not.

You are correct that Social Security’s estimates of the dollar amount you’ll receive assume you will continue working until you apply, so it’s possible that your benefit will be somewhat lower when the agency actually calculates your first check. But that doesn’t mean you won’t benefit from the delay — you just won’t benefit quite as much as they’re estimating.

If you want to get a better idea of what your benefit will look like without additional earnings, you can use an online tool like Social Security Solutions or MaximizeMySocialSecurity.

Your financial advisor probably has access to similar tools, as well as a wealth of research about the best claiming strategies that make it clear most people are better off delaying. Plus, your advisor knows the details of your personal financial situation.

The woman at the Social Security office did not. Even if she had her facts straight, she should not have been giving you advice about maximizing your benefits.

You may still have time to rectify this mistake. You can withdraw your application within 12 months and pay back the money you received to reset the clock on your benefits. If it’s been longer than 12 months, you can suspend your benefit once you reach your full retirement age and at least get the 8% delayed retirement credits for a few years.

Filed Under: Follow Up, Q&A, Social Security Tagged With: , ,
August 31, 2020 By

Q&A: Missing refund update

Dear Liz: Thank you for including my previous email about a missing tax refund in your recent column. Just to update you, on Aug. 20 I checked the IRS “refund status” website and lo and behold, it showed they had received my mother’s paper return, processed it, and even approved the refund (with $3.59 interest no less)! The check is to be mailed on Aug. 27. So for those concerned about the delays: The IRS will indeed get to them eventually and, as you’ve previously advised, there is no need to call them and check. Their backlog is massive, so let’s keep them working on that.

Answer: Thanks for the update!

Filed Under: Follow Up, Q&A, Taxes Tagged With: , ,
July 27, 2020 By

Q&A: IRA conversions and taxes

Dear Liz: You recently advised a reader that if their income was too high to contribute to a Roth IRA, they could still contribute to an IRA or any after-tax options in their 401(k). You didn’t mention a two-step Roth IRA — first making a nondeductible contribution to an IRA and then immediately converting that amount to a Roth. That way those people whose income is too high to contribute to a direct Roth IRA can still have a Roth IRA using the two-step process.

Answer: This is known as a backdoor Roth contribution, which takes advantage of the fact that the income limits that apply to Roth contributions don’t apply to Roth conversions. Conversions, however, typically incur tax bills and don’t make sense for everyone. If you have a substantial amount of pretax money in IRAs, the tax bill can be considerable. (The tax bill is figured using all your IRAs, by the way. You can’t get around it just by contributing to a separate IRA that you then convert.)

Incurring that tax bill could make sense if you expect to be in the same tax bracket in retirement, or in a higher one. If you’re young and a good saver, it’s a good bet that will be the case. Roth conversions also can be advisable later in life if your tax bracket could jump when you reach age 72 and have to start taking required minimum distributions from your retirement accounts.

If you expect to be in a lower tax bracket in retirement, however, you probably should forgo Roth conversions because you’ll pay more now in taxes than you would later.

Of course, if you have little or no pretax money in your IRA, then backdoor conversions get a lot more attractive because the tax bill would be minimal. Otherwise, you should seek out a Roth conversion calculator to get a better idea of whether a conversion might be the right choice.

Filed Under: Q&A, Retirement, Taxes Tagged With: , , ,
June 29, 2020 By

Q&A: The ups and downs of reverse mortgages

Dear Liz: I have been a reverse mortgage specialist for the last 12 years and had some thoughts about the writer who complained that the $40,000 she initially borrowed had grown to a debt of $189,000, or more than her home was worth.

Using a compound interest calculator, it would take about 16.5 years for the debt to grow that large. The borrower would have lived in their home for all that time without making payments toward the debt, although they were still responsible for taxes, insurance and maintaining the property. They can stay in the home for as long as it’s their principal residence. Once they leave the home, the lender will sell the home and receive the difference between the sales price and the loan balance from the government insurance program that everyone with a reverse mortgage pays into. Otherwise, no lender would take out this loan for a potentially long term and risk losing money in the end. Maybe it was a good deal.

Answer: Possibly, but she regretted the decision anyway. She took out a reverse mortgage at a time of financial hardship and now wishes she hadn’t.

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People facing financial crises often develop tunnel vision and grab at solutions without thinking through the future costs of their decisions. (The excellent book “Scarcity: Why Having Too Little Means So Much” by Sendhil Mullainathan and Eldar Shafir explains the science of why that happens.)

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Filed Under: Follow Up, Mortgages, Q&A Tagged With: , ,
May 4, 2020 By

Q&A: A shutdown reality check

Dear Liz: Recently a reader asked about withdrawing money from an IRA to pay credit card debt. You mentioned the many ways that was a bad idea, including the fact that retirement money is protected in bankruptcy court. Liz, the writer had only $10,000 in credit card debt. Bankruptcy should be a last resort. A lifestyle change or picking up a second job would be a better route to knocking out the debt.

Answer: “Picking up a second job” — really? Most people will be lucky to hang on to the ones they have in the coming months.

No one suggested that this reader should file bankruptcy, but anyone considering taking money from a retirement plan to pay debt should understand this major drawback — especially now. Bankruptcy experts expect business and personal bankruptcy filings to soar because of the pandemic.

You might want to check your other assumptions, as well. People typically don’t wind up in bankruptcy court because they refused to cut out their lattes or didn’t work hard enough. They get sick or disabled, lose their health insurance, get divorced, have a breadwinner die — or get stuck in a pandemic. Those with higher incomes and more savings may be better able to weather financial setbacks, but few of us are truly immune from their effects.

Filed Under: Bankruptcy, Coronavirus, Follow Up, Q&A Tagged With: , , ,
March 23, 2020 By

Q&A: The value of waiting

Dear Liz: This is a follow-up question to one you recently answered about tapping 401(k)s in order to delay the start of Social Security. I am 63 and retired early with a good pension that fully covers my basic living expenses. Any additional money would only be “gravy” for vacations and travel. Would I be taxed the same if I start taking Social Security now vs. waiting? I could easily tap my 401(k) to put off applying for Social Security.

Answer: When it comes to Social Security, if you can wait, you probably should.

Many middle-income people who have retirement funds will pay higher taxes if they start their benefits early, according to researchers who studied the “tax torpedo,” which is a sharp increase and then decline in marginal tax rates caused by the way Social Security benefits are taxed. The researchers found that many could lessen its effects by delaying the start of Social Security and tapping retirement funds instead.

If you’re married and the primary earner, it’s especially important to delay as long as possible because your benefit determines the survivor benefit that one of you will receive after the other dies.

Filed Under: Follow Up, Q&A, Social Security Tagged With: , ,