June 13, 2016 By

How to structure an inheritance for a spendthrift heir

Dear Liz: My financially illiterate, almost 50-year-old son will be living off his inheritance when I die. A good part of his life was spent drifting, so I have no idea if he will receive Social Security or how much. How do I structure his inheritance so that he won’t fritter it all away in a short time and then expect his dependable sibling to shoulder his burden?

Answer: A spendthrift trust can keep your son from frittering away his inheritance. These trusts limit the beneficiaries’ access to the principal — the amount you put into the trust. This limitation prevents creditors from accessing the principal as well, and he won’t be able to borrow against the trust, either.

That’s the good news. The bad news is that you have to find someone to be the trustee, and that probably shouldn’t be his sibling. Putting one sibling in charge of another’s money is a good way to ensure lifelong enmity. Look instead for a professional trustee at a bank or trust company to fill this role.

A spendthrift trust is not a do-it-yourself project. Hire a good estate-planning attorney with experience in this area. You’ll need to make a lot of decisions, such as how payments will be determined, how often they’ll be made, whether the trustee will have the power to deny payments or to give your son access to the principal if his circumstances change.

Filed Under: Estate planning, Q&A Tagged With: ,
June 13, 2016 By

Q&A: A dirty problem

Dear Liz: I bought a house four years ago. The previous owner allowed a gentleman to plant flowers every spring and tend them all summer. I allowed the man to continue after I bought the house. He waters the flowers using my water and I help weed every year. He came to me last week and said he was getting too old to tend to the flowers and wanted to sell me the dirt for $1,000. This was never addressed when I bought the house. Presumably the guy did bring in special dirt, but removing it would damage the property. What should I do?

Answer: The dirt goes with the real estate you bought and has long since become part of it, said real estate expert Ilyce Glink of ThinkGlink.com. Without a written agreement, the man was simply doing work for free.

That said, his labor and the flowers he bought enhanced the curb appeal of your home and arguably its value, said Glink, author of “100 Questions Every First-Time Homebuyer Should Ask.” Consider offering him $500 as a compromise or “retirement gift” to thank him for his efforts.

Filed Under: Q&A, Real Estate Tagged With: , ,
June 13, 2016 By

Q&A: State pensions’ effect on Social Security

Dear Liz: Recently someone wrote to you about plans to receive a state pension and apply for Social Security benefits. You said if the person’s job didn’t pay into Social Security, the Social Security benefit might be reduced because of the state pension. I have a state pension from a job that did not pay into Social Security and was under the impression that I would not be eligible for Social Security benefits. Am I wrong about that?

Answer: If you previously worked at a job that paid into Social Security, you may be able to receive both your state pension and a Social Security retirement benefit. Your Social Security benefit is typically reduced, but never eliminated, because of pensions received from jobs that didn’t pay into the system.

This reduction, known as the windfall elimination provision, does not apply to people who worked for 30 years or more in jobs that paid into Social Security. Its effect is greatest on people who worked less than 20 years in such jobs. Between 20 years and 30 years, the impact declines year by year.

Your state pension also affects — and can eliminate — any spousal or survivor benefits you might have received based on a current or former spouse’s Social Security work record. This separate provision is known as the government pension offset. You can learn about both the windfall elimination provision and government pension offset on the Social Security site, www.ssa.gov.

Filed Under: Q&A, Retirement Tagged With: , ,
June 6, 2016 By

Q&A: Spreading out the tax hit from capital gains

Dear Liz: We are in the lowest tax bracket. If we sell a capital gains asset worth several hundred thousand dollars, does that put us in a higher bracket and we pay 20% or do we remain in the lower bracket and pay 15%?

Answer: In the two lowest federal income tax brackets, the capital gains rate is actually zero. For a married couple filing jointly, taxable income below $18,550 in 2016 would put you in the 10% tax bracket, while income between $18,550 and $75,300 would put you in the 15% bracket. Both 10% and 15% income tax brackets pay no federal tax on long-term capital gains.

But capital gains count as income in determining your tax bracket. So a big capital gain can push you into a higher bracket, which means you would pay a higher capital gains rate.

Let’s say your normal taxable income is $75,000. You sell an asset with a $25,000 capital gain. Now you’re in the 25% tax bracket with taxable income between $75,300 and $151,900, which means your long-term capital gains rate will be 15%.

A really big gain would put you in the top 39.6% bracket, which applies to taxable income above $466,950. In that bracket, your capital gains rate would be 20%. Also, an additional 3.8% surtax applies for taxpayers with adjusted gross incomes over $250,000 for married couples and $200,000 for singles. The surtax is applied to the lesser of the taxpayer’s net investment income or the amounts over those limits.

There may be ways to alleviate or spread out the tax hit. You could sell losing investments to offset some or all of the gain. Another option for some assets is to sell a portion at a time over several years, or use an installment sale. A tax pro can walk you through your options.

Filed Under: Q&A, Taxes Tagged With: , ,
June 6, 2016 By

Q&A: Cerebral slide can hit your wallet

Dear Liz: As a practicing attorney, age 72, I take exception to your advice to the grandmother who complained about her husband co-signing for his granddaughter’s deadbeat boyfriend’s auto loan. You said, “He is showing signs of cognitive impairment.” She never gave his age. Even if he was past 70, an impairment may or may not be true without knowing more facts. I know people in their 80s and beyond who are careful and manage their money very well. In my 30 years of practice, I have seen many cases where relatives and friends co-sign for a family member or friend, often for an auto loan. This practice crosses all age and demographic lines. Each person has a reason for co-signing (or lending money), but the most common thread in family members is: “It’s really hard to say no to a person I love.”

Answer: You might want to take another look at that column. The grandfather co-signed a loan not for a relative or a friend, but for a young man whose last name he didn’t know — and he did so without consulting his wife.

Not everyone turns into a financial fool in his later years, but our cognitive abilities do decline with age, starting in our 20s. Until our 50s, those losses in cognitive function are offset by increased experience and knowledge. After that, our growing wisdom isn’t enough to offset our cerebral slide.

If you think you’re cognitively as sharp as you were in your youth, then you may be the exception — or you may be deluded.

Researchers who tested people in their 80s found that “large declines in cognition and financial literacy have little effect on an elderly individual’s confidence in their financial knowledge, and essentially no effect on their confidence in managing their finances,” according to a paper for the Center for Retirement Research.

That’s why it’s important to put protections into place to keep yourself from making bad financial choices. You can start by simplifying your finances and consolidating accounts to make them easier to monitor. You may want to develop a relationship with a trusted financial advisor, one with a fiduciary duty to put your interests first, so that you can seek good counsel before making financial moves. Also, many people as they age give a trusted child or friend access to their accounts so they can be watched for suspicious transactions.

Filed Under: Q&A Tagged With: , ,
June 6, 2016 By

Q&A: Do the math on retirement benefits

Dear Liz: My full retirement age for Social Security benefits is 66. To receive that amount, do I have to keep working until I am 66? I was going to retire at 63 and receive a state pension and wait until 66 to apply for Social Security. I wasn’t planning on working full-time from 63 to 66.

Answer: You don’t have to keep working. When to retire can be a separate decision from when to start Social Security benefits.

Before you do either, though, find out how your state pension may affect your Social Security benefits. If you’re receiving a pension from a job that didn’t pay into the Social Security system, your Social Security benefit may be reduced. If that’s the case, it can make sense to delay taking your pension and start taking Social Security earlier. You can use claiming software such as MaximizeMySocialSecurity.com or SocialSecurityChoices.com to see what might be the best approach.

Filed Under: Q&A, Retirement Tagged With: , ,
May 30, 2016 By

Q&A: How to negotiate the medical bill maze in search of a better deal

Dear Liz: My husband and I have run into some serious medical bills recently. We have insurance, but one provider is out of network with a huge deductible and low payout, while another claim was flat-out denied. We’re looking at around $16,000 in bills, assuming nothing else is denied. What can we do to get these bills lowered?

Answer: Act fast, negotiate hard and don’t pay the “sticker price” for healthcare if you can possibly avoid it.

Start by reviewing your bills for errors such as duplicate charges, fees for services you didn’t receive and charges that seem excessive. A medical billing advocate may spot more subtle overcharges, such as separate, higher fees for procedures that should have been billed together as one bundle. The National Assn. of Healthcare Advocacy Consultants and the Alliance of Claims Assistance Professionals can offer referrals.

You may be able to resolve the errors with a call to your insurer, but you’ll still want to ask how to file a formal appeal so you can challenge the claim denial.

Look for other ways to reduce the bills. Some medical providers have charity programs that may help, and they aren’t just for low-income people: Partial relief may be available for those earning up to 400% of the poverty level for their areas.

Even if you don’t qualify, don’t assume that the numbers on your bills are what you actually have to pay. As you know from previous medical bills, the amounts providers charge bear little resemblance to the amounts they’re willing to accept from insurers. Ask to be charged the same amount that the provider would accept from Medicare, or from the largest insurer in its network.

If you can pay your bill all at once, ask for another discount for paying in cash. If you can’t pay, ask for a no-interest payment plan. Providers may push you to pay the bill with a credit card, but resist doing so unless you get a significant discount and can pay off the bill quickly.

Filed Under: Insurance, Q&A Tagged With: ,
May 30, 2016 By

Q&A: Retirement account bears close scrutiny

Dear Liz: About five years ago, I transferred a 401(k) account to an IRA with a financial advisor recommended by a friend. I receive monthly statements, but like most people, I am busy and do not study them, which is my fault. The statements are very confusing, even though I am a college graduate with a business degree. I recently realized that the account has not grown at all, even though it’s invested in stock mutual funds. The Standard & Poor’s 500 has been up about 10% each year on average, so I feel that I should have a much better return. How do I best go about finding out why I am not making any money? Approaching this financial advisor is useless.

Answer: It appears your advisor is worse than useless; he or she is a hazard to your financial health.

A properly diversified retirement portfolio may not grow at exactly the same rate as a stock benchmark such as the S&P 500, but it certainly should have grown significantly in the past five years. It could be that the advisor has been trying to “beat the market” with actively managed funds, which typically fall far short of the mark and do little other than cost investors too much. Or the advisor could be pushing high-cost funds that pay fat commissions and benefit the firm far more than they benefit you.

The Department of Labor recently instituted regulations that should stop many of these shenanigans by requiring advisors giving retirement advice to put their clients’ interests ahead of their own. You shouldn’t wait for those changes to be implemented, though, because you’ve already lost enough ground. Transfer your IRA to a low-cost provider such as Vanguard, Fidelity or T. Rowe Price and consider investing in a target-date retirement fund that will take care of asset allocation and rebalancing for you.

Filed Under: Q&A, Retirement Tagged With: , , ,
May 30, 2016 By

Q&A: Healthcare coverage should be part of retirement planning

Dear Liz: You’ve been writing about how much to save for retirement, including how much of our incomes we should aim to replace with our savings. Two additional reasons to shoot for a higher replacement rate is the possibility that medical needs will be higher the older one becomes (even with Medicare and a supplemental plan) and the possibility that long-term care will take a huge bite out of savings if one self-insures for this. My wife and I took these into account when we saved as much as we could afford during our working years.

Answer: Many people erroneously believe that Medicare will take care of their healthcare costs in retirement. In reality, Medicare generally pays for about 60% of typical healthcare services, according to the Employee Benefit Research Institute. Fidelity Investments estimates the typical couple at age 65 can expect to spend $245,000 on healthcare throughout retirement. That figure doesn’t include the costs of nursing homes or long-term care, which also aren’t typically covered by Medicare. Anticipating and saving for these expenses was a smart move on your part.

Filed Under: Elder Care, Insurance, Q&A, Retirement Tagged With: , ,
May 23, 2016 By

Q&A: The ins and outs of credit scores

Dear Liz: I’ve been using a free credit site to learn more about credit reports and credit scores. Recently I looked around and found reviews about how “horribly inaccurate” these free scores are. Where can I go to find my real FICO credit scores? I need the ones that matter, the ones that lenders use.

Answer: Some free scores aren’t used by any lenders. But many sites these days give out VantageScores, a FICO rival that’s being used in a growing number of credit decisions. So VantageScores are “real” scores, just not the most commonly used scores.

Here’s the thing, though: You generally can’t predict which scores a lender will use. Not only are there different name brands, but FICO offers versions customized for certain types of lending. The scores typically used by credit card issuers are different from the ones used by auto lenders, for example. These industry-specific FICO scores are on a 250-to-900 scale, rather than the 300-to-850 scale used by other FICO scores.

There are also different generations of each type of score, much like the different operating systems for your computer. Some lenders quickly upgrade to the latest version, just as some computer users upgraded to Windows 10 when it came out. Others use older versions of the scores, just as users may cling to Vista or XP. (For you Mac users, that would be something like hanging on to Mountain Lion or Snow Leopard instead of updating to El Capitan.)

Mortgage lenders, in particular, use relatively old versions of FICO. That’s because the agencies that buy most home loans, Fannie Mae and Freddie Mac, haven’t updated their requirements so that lenders can use newer versions.

Some credit card companies offer their customers free FICO scores, typically from one bureau. You can get a glimpse of the array of scores lenders might use by buying the most commonly used FICO, the FICO 8, for about $20 each from MyFico.com. Along with each FICO 8 you buy (you can buy three, one from each of the three major credit bureaus), you’ll get additional versions used for auto, credit card and mortgage lending.

If you’re going to be in the market for a major loan, such as a car loan or a mortgage, it makes sense to buy your FICOs so you can get a better idea of how lenders might view you. If you’re just interested in tracking your scores generally, though, the free versions can be perfectly adequate.

Filed Under: Credit & Debt, Credit Cards, Q&A Tagged With: , ,