April 4, 2022 By

Q&A: Sorting out trust confusion

Dear Liz: In a recent column you wrote of bypass trusts that “for many people this estate planning tool has outlived its usefulness.” In California, a trust avoids probate. Isn’t avoiding probate a reason to continue with a trust?

Answer: What you’re referring to is a living trust — a revocable (which means changeable) trust created while someone is alive. A bypass trust is irrevocable (which means not changeable) and typically goes into effect when someone dies. To further complicate matters, a living trust or a will can have provisions that create a bypass trust after someone dies.

Living trusts are indeed designed to avoid probate, the court process that otherwise follows death to settle an estate. Living trusts remain useful to many people who live in states where probate can be expensive and prolonged, such as California and Florida. Living trusts are also private, unlike wills, which typically become public record after death, and so are favored by people who want to avoid publicity.

Bypass trusts, on the other hand, were primarily designed to minimize or avoid estate taxes, which are no longer a concern for the vast majority of people. Bypass trusts have a number of disadvantages, so if you have one in your estate plan, you’ll want to consult an experienced estate planning attorney about whether to keep it.

Filed Under: Estate planning, Q&A Tagged With: , ,
February 14, 2022 By

Q&A; An auto dealer keeps checking my credit. Is that a problem?

Dear Liz: How do I remove inquiries from multiple auto lenders? One of the dealerships pulled my credit at least eight times over a two-day period. I thought this could only be done while the customer is physically at the car lot.

Answer: Dealerships aren’t supposed to check your credit without your permission, and they can’t check your credit if you don’t give them your personal information, including your Social Security number. Some dealers use deceptive methods to get your personal information, such as claiming they need your Social Security number for you to take a test drive. (They don’t.)

If you did give permission, though, there’s not a lot you can do about multiple inquiries. Dealerships can, and will, check with multiple lenders to see what rates and terms they’ll offer you. If your credit isn’t great, multiple inquiries may be necessary to find you a loan.

The good news is that multiple auto loan inquiries in a two-day span won’t hurt your credit that much or for that long. Most credit scoring formulas don’t count each auto loan inquiry separately, but instead aggregate such inquiries together and count them as one. The ding against your credit scores is typically small and lasts only a few months.

Ideally, though, you wouldn’t continue to do business with a dealership that wasn’t crystal clear about why it needed your personal information and how it was going to be used. Also, consider applying for a car loan from a local credit union before you step onto a car lot. Credit unions are member-owned and tend to have good rates and terms, without the runarounds and add-ons that are so prevalent at car dealerships.

Filed Under: Car Loans, Q&A Tagged With: , ,
February 14, 2022 By

Q&A: DIY estate planning is unwise

Dear Liz: Please tell us about some estate planning tools that many might be able to use for themselves without incurring attorney fees and probate costs, such as naming payment-on-death beneficiaries at financial institutions and using real estate deeds with transfer-on-death provisions.

Answer: There are a number of ways that people can avoid probate, which is the court-supervised process of settling someone’s estate. Bank, financial and retirement accounts can pass to named beneficiaries outside probate, as can life insurance. Property owned in joint tenancy also avoids probate. Some states have transfer-on-death options for real estate and for vehicles.

The fact that you can avoid probate with these methods, however, doesn’t necessarily mean that you should.

Do-it-yourself estate planning can create a mess for your heirs that could incur far more in legal fees than you would have spent getting expert, personalized advice in the first place. A good rule of thumb: If you can afford to hire an estate planning attorney, you probably should.

Also, you shouldn’t automatically assume that probate is worth avoiding.

Probate is often lengthy and expensive in California and Florida, but may be far less cumbersome elsewhere. In addition, small estates typically qualify for simplified probate that’s faster and cheaper.

Probate also has some advantages, including limiting the time creditors have to make claims against your estate. You also might prefer a court’s supervision if you have contentious heirs or you’re concerned that your executor might not carry out your wishes.

Filed Under: Estate planning, Q&A Tagged With: ,
February 13, 2022 By

Q&A: How Social Security child benefits work

Dear Liz: I am drawing Social Security and my daughter just turned 18. Will she lose her Social Security and can I claim my wife in her place?

Answer: Child benefits, which is what your daughter receives, are designed to help the dependent minor children of Social Security recipients who are retired, disabled or deceased.

If your daughter is still a full-time high school student, then her child benefit can continue until she graduates or turns 19, whichever comes first. Otherwise the benefit typically ends at 18. (A child 18 and over with a disability can continue to get child benefits, as long as the disability started before age 22.)

Child benefits are only for the unmarried children of Social Security recipients, so obviously your wife doesn’t qualify. She may be eligible for her own Social Security benefit if she’s at least 62, or a spousal benefit based on your work record if that’s larger than her own benefit. AARP has a free Social Security claiming calculator that could help her sort through her options.

Filed Under: Q&A, Social Security Tagged With: ,
February 7, 2022 By

Q&A: Plan for taxes after mortgage payoff

Dear Liz: In a recent column, you answered a question from a couple who just paid off their mortgage. You suggested increasing retirement or emergency savings or possibly charitable contributions. All good, but you should have pointed out that the mortgage lender will not be responsible for paying the property tax and fire insurance going forward. I would suggest the couple open a separate account and build up a fund to pay those expenses or they could be facing financial hardship when the tax and insurance bills come.

Answer: Good point. Many homeowners are accustomed to paying their homeowners insurance and property taxes through escrow accounts set up by their mortgage lenders. Once the loan is paid off, these bills become the homeowners’ responsibility to pay.

Filed Under: Mortgages, Q&A Tagged With: , ,
February 7, 2022 By

Q&A: Social Security is insurance

Dear Liz: My wife died in March 2020. I receive nothing from her Social Security (other than $255) and will receive only a portion of mine due to the windfall elimination provision. Is there anything I can do since I am receiving none of what she paid into Social Security and only a fraction of mine?

Answer: In a word, no. If you’re receiving a pension from a job that didn’t pay into Social Security, the government pension offset reduces any Social Security survivor or spousal benefit by two-thirds of the amount of your pension. If two-thirds of the amount of your pension is greater than your survivor benefit, you don’t get a survivor benefit.

Is that an outrage? Perhaps, if you think that Social Security should act like a retirement account. In reality, it’s insurance. (The formal name for Social Security is Old Age, Survivors and Disability Insurance.)

With a retirement account, what you take out usually bears some relationship to what you put in. With insurance, that’s not necessarily the case. You may take out more than you put in, less or nothing at all.

Many people pay Social Security taxes for decades but ultimately get more from a spousal or survivor benefit than from their own work record. Then there are those, like you, who have their retirement benefit reduced, or a survivor benefit eliminated, because they have a generous pension from a government job that didn’t pay into the Social Security system. In these cases, it can feel like the Social Security taxes paid — the “premiums,” if you will — have been wasted even if financially you’ve come out ahead.

Filed Under: Insurance, Q&A, Social Security Tagged With: , , ,
January 31, 2022 By

Q&A: Here’s a strategy to avoid going broke in retirement

Dear Liz: A lot has been written about how much can safely be withdrawn from a balanced investment portfolio so that it will last a lifetime. A popular strategy is to withdraw a percentage, say 4%, in the first year and then increase that withdrawal each subsequent year by the rate of inflation.

What are your thoughts on an alternate strategy of withdrawing a fixed percentage, say 4%, at the beginning of each year? This has the disadvantage of providing a more variable income stream year to year but has the advantages of simplicity and it can never deplete the portfolio to zero.

Answer: Many retirees would find it hard to cope with incomes that swing wildly from one year to the next. One way to address that volatility is to ensure that retirees have enough guaranteed income — through Social Security, pensions and annuities — to cover their basic, must-have expenses. Retirement plan withdrawals then would provide for their “wants,” such as travel, meals out and so on.

Cutting back on the nice-to-haves isn’t easy, but it’s better than not having enough money to pay the mortgage or buy groceries.

This approach is the core of the “Spend Safely in Retirement Strategy,” created by retirement researchers Wade Pfau, Joe Tomlinson and Steve Vernon with the help of the Society of Actuaries and the Stanford Center on Longevity.

The strategy suggests maximizing Social Security and basing withdrawals on the IRS’ required minimum distribution percentages. Reports detailing the strategy and the research behind it are available on both organizations’ websites, and Vernon’s book “Don’t Go Broke in Retirement” explains the strategy in detail.

Of course, trying to eliminate any possibility of running short means that you may die with a whole lot of unspent money. That may be great news for your heirs, but sad for you if you denied yourself excessively while you were alive. Finding the right balance between security and spending is tough, to say the least.

Filed Under: Q&A, Retirement Savings Tagged With: ,
January 31, 2022 By

Q&A: Don’t bother with max credit score

Dear Liz: I am seeking your advice on how to maximize my credit score. Recently one of my cards was canceled for non-use, which reduced my available credit to $75,000. I use three other cards in rotation, never use more than 3% of my credit limits and always pay the balances off. I have made a few requests to have my credit limits increased in order to elevate my current 835 FICO score, only to be denied. I want to maintain as high a FICO score as possible (850). In order to do that I need to “play the game” … only I have no idea what the rules are! Could you please help me navigate this?

Answer: There is absolutely no practical benefit to having the highest possible credit score. You’ll get the best rates and terms once your scores are above the mid-700s on a 300-to-850 scale.

Regular readers can recite this next part by heart: Keep in mind that you don’t have one credit score. You have many, and they change all the time.

Even if you did hit 850 with one scoring formula from one credit bureau, you probably wouldn’t keep it for long or achieve the same number with all the other available scores.

You already know the most important credit rules: Use your cards regularly but lightly and pay your balances on time and in full every month. (Credit scoring formulas typically don’t “know” if you’re carrying a balance, so there’s no advantage in doing so.)

If you’re determined to hit 850, however, you could try using even less of your credit limit, applying for a new card to increase your available credit (the initial small ding to your scores would be short-lived) or simply waiting, since often the mere passage of time will add points to your scores.

Filed Under: Credit Scoring, Q&A Tagged With: ,
January 24, 2022 By

Q&A: When a lower credit score might not be cause for alarm

Dear Liz: I sold my house, paid off my mortgage and then got a new mortgage for another home in 2021. When I applied for the new mortgage, my credit score was 830. After buying the home, my score dropped to the low 700s. It’s gone up only 2 points in seven months. I have no other debt. What’s going on?

Answer: Remember, you don’t have one credit score, you have many. When you applied for a mortgage, you typically would be shown three older-generation FICO scores — one from each of the three major credit bureaus (Equifax, Experian and TransUnion). Your interest rate would have been based on the middle number. If your scores were 840, 830 and 700, for example, your rate would be based on 830. Any score over 740 typically gets the best rate and terms on a mortgage, all else being equal.

The score you’re monitoring now was probably created from a different scoring model. If the score is a FICO score, it probably was created from an updated formula such as FICO 8 or FICO 9. It’s also possible that you’re viewing a VantageScore 3.0 or 4.0. VantageScore is a FICO competitor.

If you’ve been monitoring the same score all along and it actually dropped 100 points since your application, then something else is going on. Please check your credit reports from all three bureaus and look for a skipped payment, a collection or some other serious problem.

Filed Under: Credit Scoring, Q&A Tagged With: ,
January 24, 2022 By

Q&A: Where to park cash?

Dear Liz: I turned 72 in December and took my first required minimum distribution. With the goal of purchasing property next year, should I put the funds — $6,000 — in my Roth IRA or just put it in my bank savings account? Also, should I convert my traditional IRA to a Roth or just leave it alone?

Answer: To contribute to an IRA or Roth IRA, you must have earned income such as wages, salary or self-employment income. If you don’t have earned income, your contribution would be considered an excess contribution that could incur a 6% penalty for each year the money remained in the account.

You don’t have to be working to convert a traditional IRA to a Roth, but there’s typically not much reason to do so at this point unless you intend the money to go to your heirs and want to pay the income taxes rather than have them do so. Even then, you should run this idea past a tax pro or a financial planner since conversions can create other problems, such as higher Medicare premiums.

Filed Under: Q&A, Retirement Savings Tagged With: ,