Ask Liz Weston

Get smart with your money

q&a

Q&A: Don’t rush when setting up your living trust

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Dear Liz: Your column recently answered a question about whether a living trust was the right move, and I thought you mentioned a free online form or worksheet that one could download and fill out. Where can I find that?

Answer: Many sites offering free software or forms are actually subscription services. You typically use a credit card to sign up and are charged a monthly fee after the free trial period ends. If you can wrap up your estate planning in short order and cancel before the fee kicks in, your trust may be free — but given what’s at stake, it’s not a good idea to rush.

After all, if you make a mistake with your estate planning that’s revealed after your death, you can’t come back and fix it. That means your desire to save a few bucks could cost your heirs dearly.

At a minimum, you should consider consulting with an attorney to ensure you’re not making obvious errors. Some of the do-it-yourself sites, including LegalZoom and RocketLawyer, offer the option to consult with a lawyer. RocketLawyer, a $40-a-month subscription service, has a seven-day free trial. LegalZoom sells a $269 living trust package that includes a 30-day free trial of its subscription advice service. After the free trial, the subscription costs $15 a month. Legal self-help site Nolo has an online living trust form for $60 that doesn’t include advice, but you can use Nolo’s attorney directory to find an expert you can hire for a review.

If your situation is at all complicated — blended families, special needs children, contentious heirs, family businesses, foreign assets and large estates all count — then it’s best to seek out an experienced estate planning attorney to draft your paperwork.

Q&A: Get your credit score ready for the home-buying process

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Dear Liz: What score do you need to be approved for a mortgage? Is 520 even close? If not, how do I get that score higher quickly?

Answer: A score of 520 on the usual 300-to-850 FICO scale is pretty bad. Theoretically, you might be able to get a mortgage if you can make a large down payment, but you’ll have more options — and pay a lot less in interest — if you can get your scores higher.

That, however, takes time. You need a consistent pattern of responsible credit behavior to start offsetting your mistakes of the past. If you don’t already have and use credit cards, consider applying for a secured credit card, which requires a cash security deposit, typically of $200 or more. You’ll get a credit limit equal to your deposit. Using the card lightly but regularly, and paying in full every month, can help your scores.

A credit builder loan, offered by credit unions and the online company Self Lender, is another way to improve your credit while building your savings at the same time. The money you borrow is put into a savings account or certificate of deposit that you can claim once you’ve made 12 monthly payments. Making your payments on time helps improve your credit history and scores.

Taking a year to build your credit also would give you more time to save for your down payment and for closing costs. Rushing into homeownership is rarely a good idea, so take the time you need to get your financial life in order first.

Q&A: Ease identity theft fear by checking your credit report

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Dear Liz: I am suddenly receiving junk mail addressed to my estranged brother at my house. I’ve been in this house for 15 years and have never before gotten mail addressed to him. Is it possible he applied for credit or something similar using my address? He has always had money issues.

Answer: It’s more typical for an identity thief to divert a victim’s mail to his own address than to cause junk mail to be sent the victim’s way. Still, it can’t hurt to check your credit reports via www.annualcreditreport.com to see if there are any accounts or activity you don’t recognize.

Q&A: Don’t get tripped up by invalid Roth IRA contributions

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Dear Liz: A friend told me that when he takes out his required minimum distribution from his traditional IRA and pays the tax, he then puts the money in his Roth IRA. I believe since this was not earned income, this was wrong. Who’s right?

Answer: The money contributed to an IRA doesn’t have to be earnings, necessarily, but your friend or his spouse must have income earned from working to make an eligible contribution. Earned income includes wages, salary, tips, bonuses, professional fees or small business profits. Earned income does not include Social Security benefits, pension or annuity checks and distributions from retirement accounts.

Another restriction is that contributions can’t be greater than the amount of earned income. If your friend or his spouse earned $3,000 last year, that’s all he’d be allowed to contribute — not the $6,500 maximum allowed for people 50 and over.

The ability to contribute to a Roth begins to phase out when someone’s modified adjusted gross income exceeds certain amounts. In 2017, single filers’ ability to contribute phased out between $118,000 and $133,000. For married couples filing jointly, the phase out began at $186,000 and ended at $196,000.

The penalty for ineligible contributions is 6% of the ineligible amount. The penalty is owed each year the taxpayer allows the lapse without correcting the oversight. If your friend has been doing this for several years, the penalty will be pretty painful.

He could cross his fingers and hope the IRS doesn’t notice, but the error isn’t that hard for the agency to catch. The IRS would simply need to compare Form 5498, which IRA custodians issue to report contributions, to your friend’s income and the sources of that income to know whether he was eligible to put money in an IRA.

Q&A: How to improve your credit score and whether you should bother

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Dear Liz: My credit scores are good, but I was wondering if there is a way to bring your scores to 800 or more if your income isn’t that high. I always pay my bills on time and my credit card off each month. In the last two years, I took out a small loan to pay off a car, then paid off furniture and now am paying on six new windows for my home.

My FICO scores run from 747 to 781. I’m told the reason they aren’t higher is that the number of accounts I have is too low and that my credit report shows no recent nonmortgage installment loans or “insufficient recent information” about such loans. I’m pleased that my scores are that high, but they say you get the best low-interest loans with a score over 800.

Answer: It’s not true that you need FICO scores of 800 or above to get the best deals. The best rates and terms typically are available once your scores are above 760 or so on the usual 300-to-850 FICO scale. Some lenders set the bar lower, to 740, 720 or even less. Also, your income is not a direct factor in your credit scores — although having a higher income can lead to creditors granting larger lines of credit, which could favorably impact your scores.

If what you’re after is bragging rights, there are some ways to boost good scores even higher.

The easiest may be to make more frequent payments on your credit card to reduce your credit utilization, or the amount of available credit you’re using. If your issuer reports your statement balance each month to the credit bureaus, paying off what you owe a few days before the statement closing date will reduce your apparent credit utilization. Just remember to pay off any remaining balance once you get your bill.

Another approach would be to apply for another credit card and spread your purchases between the two cards, which also can lower your credit utilization. Either way, continue to pay your cards in full, since there’s no credit scoring advantage to carrying a balance.

Taking out another installment loan could boost your scores, but it’s not smart to borrow money you don’t need if your scores are already good.

Remember, too, that there are many different credit scoring formulas. There are different versions and generations of the FICO score as well as FICO rivals such as VantageScore.

If you achieve an 800 with one type of score, you might not with another — and whatever score you achieve, you might not keep for long. Your scores fluctuate all the time, based on the changing information in your credit files.

It’s worth the effort to improve bad or mediocre scores because those can cost you in many ways such as higher interest rates, higher insurance premiums, bigger utility deposits and fewer options for cellphone service. Improving already good scores doesn’t offer much if any payoff, so it’s usually not worth incurring extra costs to do so.

Q&A: Revocable living trusts don’t help with taxes

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Dear Liz: Thanks for your recent column on setting up a living trust. This sounds like something that I should do, but I have a few questions. Would federal and state taxes be due on earnings on assets in the trust? Would these taxes due be paid out of earnings of the trust? Would I continue to pay taxes on my income from sources other than the trust?

Answer: Revocable living trusts are an estate-planning tool used to avoid probate, the court process that otherwise follows death. Unlike many other types of trusts, revocable living trusts don’t trigger special tax treatment. You’re still considered the owner of the assets, so you’ll continue reporting earnings and income on your individual tax return, as you previously did.

Revocable living trusts also don’t get special estate tax treatment. Revocable living trusts are designed to eliminate the potential costs and delays of probate, not of the estate tax system. Living trusts may include provisions meant to reduce estate taxes, such as language creating a bypass trust upon death, but those are the same kinds of provisions that can be included in wills.