Ask Liz Weston

Get smart with your money

q&a

Q&A: Weekly free credit reports

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Dear Liz: In a recent column, you wrote that credit reports are now available weekly from AnnualCreditReport.com. Most people understand that they are entitled to a free credit report once a year via that site. Please explain what is meant by “now available weekly?” By signing up for a paid service from one or more of the credit reporting agencies, or for free, or what?

Answer: AnnualCreditReport.com was created to provide free annual reports, but now you can get your free reports every week.

If you navigate to AnnualCreditReport.com, you’ll see an announcement from the three credit bureaus that the site will provide free credit reports weekly until April 2021.

Free means free. You don’t have to pay or provide credit card information, although the bureaus may try to sell you credit monitoring or other services.

Q&A: Social Security survivor benefits

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Dear Liz: My husband passed away at age 59 last year. He was sick and unable to work the last four years of his life. I will be 56 in October. My understanding is I will not be able to draw his Social Security benefits until I am age 60. Is this correct? I struggle financially and need that money now. Also, could he have drawn his Social Security benefits before he turned 60 since he was unable to work?

Answer: Your husband could not draw retirement benefits before age 62, but he may have been a candidate for Social Security Disability Income or Supplemental Security Income if his condition was severe enough to prevent him from working. SSDI is available to people who have worked long enough to be “insured,” which generally means 10 years in jobs that pay into Social Security. SSI is intended for aged, blind and disabled people with low incomes and few assets.

You won’t be eligible for survivor benefits until you’re 60. If you’re struggling, please visit Benefits.gov to see if you’re eligible for other government programs. You also can call 211 or visit 211.org to see what resources in your community may be available to help you.

Q&A: Changing tax law may have made home trust unnecessary

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Dear Liz: I was told my father’s house did not qualify for a step-up in tax basis at his death because he had put the house in a qualified personal residence trust (QPRT). With your recent column mentioning the step-up when a home is inherited, I’m wondering if I paid unnecessary taxes.

Answer: In at least one sense, you may have.

Qualified personal residence trusts were a popular technique when the estate tax exemption limit was much lower. (Currently the limit is $11.58 million per person, but 20 years ago it was $675,000.) Putting a home in this kind of trust essentially froze its value for estate tax purposes while allowing the person who created the trust to continue living there for a certain length of time. At the end of that period, ownership of the home was transferred to the heirs and the person who created the trust had the option of renting the home from those heirs.

If the house hadn’t been put in a trust, the heirs would get a new tax basis when the owner died. The basis would be “stepped up” to the home’s current value, so there would be no capital gains tax owed on all the appreciation that occurred during the owner’s lifetime.

When a home has been placed in a QPRT, on the other hand, there’s no step-up in tax basis when the trust creator dies because the home already belongs to the heirs. When the heirs sell the home, they typically have to pay capital gains taxes on the appreciation that happened during the trust creator’s lifetime.

People who created these trusts were gambling that the estate taxes they would avoid would be substantially greater than the income taxes the heirs might owe. When estate tax limits were raised, many lost that bet.

So you didn’t pay unnecessary taxes in the strictest sense — you had to pay the taxes by law because the house was given to you before your father died. But in the larger sense, the tax bill you paid could have been avoided if the home hadn’t been put in that type of trust. If your father’s estate wound up being below the estate tax limit in the year he died, then the trust provided little benefit.

Q&A: When credit scores take a pandemic dive, how to figure out what caused it

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Dear Liz: My VantageScores as reported by TransUnion were in the 780 to 790 range until around February, when they all dropped 40 points for no discernible reason. My FICO 8 and 9 credit scores remained unchanged around 760 and still continue to increase. What would cause that?

Answer: VantageScores tend to react more than FICO scores when you apply for new credit, but 40 points is a pretty big drop. The other usual culprit when good scores fall is higher credit utilization, or using more of your available credit, but typically your FICO scores would have dropped as well.

Most credit monitoring services will offer you some kind of explanation for why your scores changed, so that would be the first place to look for clues. You also should check your credit reports, which are now available weekly from AnnualCreditReport.com.

Q&A: Learning an expensive car loan lesson

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Dear Liz: My grandson bought a new car with a loan that has a 24% interest rate. He owes $17,000, and the car is now worth $5,000. What options does he have to get out of this situation?

Answer: The best solution would be to refinance, but that can happen only if your grandson has some equity in the car or is able to get a lower-rate, unsecured personal loan to pay off the car loan. Your grandson probably would need good credit and steady employment to get a personal loan, as lenders are scrutinizing applications more closely these days.

Otherwise, his best course is to “drive out of the loan,” or keep making payments until he owns the vehicle free and clear. He should be making extra principal payments, if possible, to speed up that day.

You can encourage him to hang on to this car as long as possible after it’s paid off so that he can save up the cash for his next car. If he can learn from this experience to pay cash for cars, or to have at least a 20% down payment, then the expensive lesson may have been worth it.

Q&A: Social Security isn’t going broke

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Dear Liz: You have addressed Social Security in your column recently and detailed the benefits to waiting until age 70 to take payments. I read that Social Security funds are expected to run out around 2035. At that time I’ll be 76 and would only get six years of benefits versus 13 years if I start at age 62. Do you still think it is wise to wait on benefits as Social Security may go away?

Answer: Social Security isn’t going anywhere. What’s being depleted is its trust fund, which is used to supplement the taxes Social Security collects to pay benefits. This trust fund is scheduled to be out of money in 2031, according to a new Congressional Budget Office estimate that takes into account the effects of the pandemic. Even if the fund is depleted, however, the system will still collect enough in taxes to pay 76% of promised benefits.

So benefits won’t stop, and it’s highly unlikely Congress would allow benefits to be cut for retirees and near retirees. Social Security is a hugely popular program, and such cuts would be politically unpopular, to say the least, which is why most experts predict that lawmakers will fix the system before that happens.

If you allow yourself to be panicked into starting benefits early, on the other hand, you’re permanently reducing your benefit by 30%. If you’re married and are the higher earner, you’d also be locking in a lower survivor benefit. A lower Social Security benefit can have a huge effect on your standard of living in retirement, so make sure you understand the facts about the system before making a decision you may live to regret.