q&a

Beware of loans to family

April 13, 2014 By Liz Weston

Dear Liz: I went with my brother to his credit union to refinance his house and found out his wife has about eight medical bills that went to collections and he owes a phone company more than $2,000. Their debt totals about $6,300. I could lend them the money or they could do a debt consolidation or talk to a credit counselor. What’s your opinion on these options?

Answer: None of these options is likely to work the way you hope.

Your brother should be wary of any “debt consolidation” offers he gets, as many will be scams and others will charge outrageous interest. The collections accounts have trashed the couple’s credit, which means mainstream lenders will probably avoid them until their situation improves.

The debt management plans offered by legitimate credit counseling agencies, meanwhile, are designed to help people pay off credit card bills, not past-due medical or phone bills. A credit counselor may give the couple some helpful budgeting advice to enable them to pay their debts, but it typically wouldn’t arrange payment plans.

Lending your brother the money would enable the couple to pay off the overdue bills. That won’t help their credit scores, however, unless your brother is able to persuade the collectors to remove the accounts from their credit reports. That’s often difficult to do, said debt collection expert Gerri Detweiler of Credit.com.

Your brother could start by asking the medical providers to take back any accounts that have been assigned to collectors and making payment arrangements directly with those providers. Medical collections are often on consignment and can be called back if the provider wishes.

The phone account, by contrast, was probably sold to a collection agency and can’t be reassigned to the original company. Even if your brother can’t get the account deleted from credit reports, he’ll probably need to pay or settle it if he hopes to refinance his mortgage because lenders usually don’t like to see open collection accounts.

Before you lend him the money, you should understand that loans to people with debt problems often don’t get repaid. If you can’t afford to lose this money, don’t lend it.

Independent contractor clarity

April 7, 2014 By Liz Weston

Dear Liz: I was taken aback by your answer to the receptionist whose employer was paying her as an independent contractor although she should have been paid as a W-2 employee. I believe your response was to lie on her tax returns and hide the fact that her employer was doing something illegal. I cannot say in how many ways that is wrong. As a human resources professional, I would advise this person to contact regulators under her state’s whistle-blower protections and let them know what has happened and take the advice that they give. If the writer has been given a 1099, you can be assured that others in the company have too. Her name remains anonymous. Even if her employer finds out it was her, she has recourse if she’s fired. I’ve always enjoyed your column and look forward to reading it each Sunday, but this response was totally off the charts.

Answer: Actually, the advice was exactly the opposite. Tax pro Eva Rosenberg recommended telling the truth by filing new forms, which would alert the IRS to the employer’s deception. Rosenberg said that it probably would take the tax agency a couple of years to get around to auditing the employer, which would give the receptionist time to find a new job.

Also, not all states have laws protecting whistle-blowers, and some of those that do apply only to public employees. No one should assume she is protected by such a law without during further research.

Can a small credit card improve your credit score?

April 7, 2014 By Liz Weston

Dear Liz: I am trying to increase my credit scores so I can buy a house in a couple of years. My scores are pretty bad, but I do have a car loan that I have never been delinquent on. I have recently obtained a secured credit card with a $300 limit. Will a credit card with such a small limit help improve my credit score?

Answer: Yes, but you may need longer than two years to get your scores up to snuff, depending on how bad they are.

Regaining points always takes much longer than losing them, so you should make sure to pay all your bills on time and use your new credit card lightly but regularly. Charge less than $100 a month and pay the balance in full, because there’s no advantage to carrying a balance.

After six months or so of regular payments, consider adding another card to the mix. In a year or two, you may qualify for a regular credit card that will continue to enhance your scores.
Also, make sure you’re looking at your FICO scores, because those are the credit scores most mortgage lenders use. Other scores may be offered for free or sold by the credit bureaus, but they typically aren’t FICOs.

Love and money

April 7, 2014 By Liz Weston

Dear Liz: I am in a new relationship with a great woman. I’ve talked a little bit about money and retirement with her (she’s 30). I am trying to let her know that it would be wise to contribute at least enough to her company’s retirement program to get the full match. What are some books or articles that would show her the importance of saving for retirement? I like her, but this can be a deal breaker for me. What is the best way to introduce her to personal finances without scaring her?

Answer: You could start by hopping down from that high horse you’re riding.

The fact that she’s not saving for retirement is unfortunate but hardly unusual. Many people her age have trouble understanding the need to start saving young for retirement. Even those who do may have trouble investing their money, thanks to the 2008 market crash and subsequent recession. A recent survey by MFS Investment Management of people with $100,000 or more in investable assets found nearly half of adults under 34 say they would never be comfortable investing in stocks.

Of course, millennials need to get comfortable with the idea of stock market investing, because otherwise they’re unlikely to grow their wealth enough to afford a decent retirement. Some books that can help them understand the principles of investing — and the importance of scooping up those free company matches — include:

•”Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back,” by Kimberly Palmer.

•”Get a Financial Life: Personal Finance in Your Twenties and Thirties,” by Beth Kobliner.

•”On My Own Two Feet: A Modern Girl’s Guide to Personal Finance,” by Manisha Thakor and Sharon Kedar.

As you talk to your girlfriend, remember that few couples are on exactly the same page financially. Everyone has different family cultures and experiences growing up that inform how we deal with money. Asking her to talk about her background with money and taking the time to understand her perspective is a great place to start your conversations about finances. It’s certainly better than issuing ultimatums at this early stage.

Can life insurance be used as an estate planning tool?

March 31, 2014 By Liz Weston

Dear Liz: I am 70 and my wife is 59. My pension covers us for both our lifetimes. We have no debt. My wife and I do not need the required minimum distributions I will soon have to start taking from my 457 deferred compensation plan, which is currently worth $1 million. I planned to invest these distributions in an index fund to leave to our son. My accountant recommends instead that I buy a joint whole life insurance policy for me and my wife because it will be tax free when our son inherits our estate years from now. Does it make sense to buy insurance as an estate planning tool?

Answer: Does your accountant sell insurance on the side, by any chance?

Because a tax pro should know that the money in that index fund would get a so-called step up in tax basis when you die and your son inherits the account. If he promptly sold the investments, he wouldn’t owe any taxes on the growth in the account (the capital gains) that happened while you were alive. Even if he hangs on to the investments for a while, he would owe capital gains tax only on the growth in value since your death. That’s a pretty awesome deal.

If you buy life insurance, by contrast, you’d have to weigh any tax benefit against the not-insubstantial amount you’d pay the insurer for coverage. At your ages, such a policy would be far from cheap.

Any time someone suggests that you buy life insurance when you don’t actually need life insurance, you would be smart to run the proposed policy past a fee-only advisor — one who doesn’t receive commissions or other incentives to sell insurance.

There’s an outside chance that your accountant recommended a permanent life insurance policy for estate tax purposes. These taxes will be an issue only if the combined estate of you and your wife is worth more than $10 million. If that’s the case, you should consult an estate planning attorney about your options.