Ask Liz Weston

Get smart with your money

q&a

Q&A: Will paying off collections help credit scores?

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Dear Liz: I have a question about clearing up collections on my credit reports. I used a credit repair company that did help me with most of the setbacks on my credit reports, but I still had collections that were recent and my scores were going up and down. The credit repair company left me to deal with the collections. Will it hurt my scores if I pay them off, and is there a way to get them off my report for good?

Answer: Paying off the collections shouldn’t hurt your scores, but probably won’t help them either. You can try to negotiate with the collection agency to stop reporting the collection accounts in return for payment, something known as “pay for delete” or “pay for deletion,” but debt experts say few agencies will agree to do that.

Plus paying off collections is more complicated than it may seem. Many agencies pay pennies on the dollar for collection accounts, which means virtually anything you pay them is pure profit. That means you should be able to negotiate a significant discount of 50% or more if you can pay in full.

However, not all collectors are ethical. Some pretend to own debts they actually don’t, so any payment to them is money down the drain. Other agencies will re-sell any debt you don’t pay in full to another collection agency, which means more collection calls.

Before you attempt to settle any collection account, visit DebtCollectionAnswers.com and download the free e-book written by consumer advocates Gerri Detweiler and Mary Reed.

Q&A: These heirs worry their parents aren’t doing enough to minimize estate taxes

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Dear Liz: My parents, ages 75 and 76, have established an irrevocable gift trust for my five siblings and me. Wonderful! With the single trust, they have maxed out their lifetime gifting exemption. What else can they do with their other investments to minimize the inevitable estate taxes that will come with their deaths? They have lived a frugal life of caution and reserve, but before their nest egg can be distributed to their heirs, the government will extract millions of dollars.

Answer: If your parents maxed out their lifetime gift exemption, that means they contributed more than $10 million to the trust. It also probably means they employed an estate-planning attorney, since such trusts aren’t typically do-it-yourself projects. If that’s the case, the attorney probably has reviewed with them their other options for minimizing taxes.

They could, for example, give each sibling $28,000 ($14,000 from each parent) each year — and make similar gifts to each sibling’s spouse and children, if they were so inclined. This annual exemption limit is separate from the lifetime gifting exemption they’ve already used. If each of you is married with two kids, that would move $672,000 out of their combined estates each year.

Another way to move money out of their taxable estate, either now or at their deaths, is to donate to charities.

If they opt not to take further steps, you can take comfort in the fact that the top estate tax rate is 40%, which means the bulk of their estate will still reach their heirs. Also keep in mind that you’re in rare company — only about two estates out of 1,000 are large enough to trigger an estate tax return, now that exemption limits have been raised to $5.49 million a person.

Q&A: Social Security benefits for children

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Dear Liz: My older brothers-in-law signed up for Social Security benefits at 62 and then suspended their benefits so that their children, who were under 18, could receive 50% of their checks. Is this process still available at age 62 for those with children who are below the age of 18?

Answer: In order for family members to receive spousal or child benefits based on the primary earner’s work record, that primary earner has to be receiving his or her own benefit.

In the past, people who had reached full retirement age — which used to be 65, is now 66 and is rising to 67 — had the option of immediately suspending their applications so their family could receive benefits while their own continued to grow. The “file and suspend” option was not available to people who applied for benefits before their full retirement age. And now it’s no longer available period, thanks to Congress.

If you do apply for your benefit early, keep in mind that your checks — and your children’s checks — will be subject to the earnings test. That reduces Social Security benefits by $1 for every $2 you earn over $16,920 in 2017. (The earnings test goes away at full retirement age.) Your benefit also will be reduced to reflect the early start.

Also, there’s a limit to how much a family can receive based on the worker’s record. The family maximum can be from 150% to 180% of the parent’s full benefit amount.

If you’re still working and your children will be younger than 18 by the time you reach full retirement age, it may make sense to wait until then to apply. To know for sure, though, you should use one of the calculators that takes child benefits into account, such as MaximizeMySocialSecurity.com.

Q&A: Advice for an investing newcomer

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Dear Liz: I am not versed at all in money matters. I have no clue where to invest or even if I should invest. I have $5,000 squirreled away that I am totally comfortable investing for 12 months because I feel I would have no need for it before then. Can you make a suggestion where I should put it to make a safe return?

Answer: An FDIC-insured bank account.

Investing requires a longer time horizon and a willingness to risk losing some of your principal. If you can’t do either, you need to stick with low-risk, low-reward options.

Q&A: The argument for having different caretakers for healthcare and financial decisions

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Dear Liz: My mother is 74 and her health is starting to deteriorate. She had a last will made up about 15 years ago when my stepdad left her. I found out that she named me executor and gave me power of attorney for healthcare decisions. After the last year, when she became very contentious about giving me any information to do this (such as sharing her credit cards numbers), we have decided it would be better to assign these jobs to another sibling. There are also big differences in what each sibling is to receive. This will cause huge problems with two of the siblings.

I do not want to be a part of that as these two cannot even be civil to each other right now. I am afraid that my mother will not get around to changing her will. Am I legally obligated to fulfill this? It is causing me extreme anxiety as I am dealing with her decline in health as well.

Answer: No one is forced to become an executor. If your mother doesn’t name an alternate, the probate court can appoint someone to take the job — and it may not be the person your mother preferred. Let her know that if she wants to have a say in who settles her estate, she needs to change her will.

You’re smart not to want to oversee a situation that’s bound to get ugly. It’s not clear, though, why you thought you needed access to your mother’s credit cards while she was still alive. The job of executor, which would require settling her accounts, wouldn’t start until after she dies. Healthcare decisions typically don’t require access to credit cards — although she should also have named someone to make financial decisions for her if she’s incapacitated.

If you’re worried about your mother’s ability to handle her finances, now or in the future, you can start the discussion by mentioning how important it is to have a power of attorney for finances as well as one for healthcare decisions. It’s not uncommon to name different people for these roles, because the skill sets needed are not the same. Someone who’s “good with money” isn’t necessarily equipped to carry out someone’s end-of-life wishes, which may include fights with medical providers about which treatments will and won’t be pursued.

Once you’ve covered that ground, you can segue into talking about what she would like to happen if she starts having trouble keeping up with daily money management tasks. Many parents add a trusted child to their bank accounts so the child can monitor transactions and make sure bills are paid. Or your mother may prefer to hire a daily money manager (referrals are available from the American Assn. of Daily Money Managers at www.aadmm.com).

Q&A: Your gift won’t get you a medical deduction

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Dear Liz: A couple I’ve known for years recently adopted 2-year-old twins. Both will need considerable medical care, as they were born to a drug-addicted mother. In sending out announcements, my friends suggested sending funds for the twins’ medical needs, rather than toys. I took note and sent a check earmarked for their healthcare. My question is: Can I include the gift in my own medical deduction for this year’s income taxes?

Answer: No. Only medical expenses paid for yourself, your spouse and your dependents typically qualify for the medical expense deduction on your income tax returns.

The expense isn’t a charitable deduction either. Contributions have to be made to qualified charities to be deductible, and individuals don’t qualify.