tall image
AARP Article

The Second-Marriage Dilemma

Estate planning can be tricky for couples who have former spouses

Inheritance questions tend to be easy when you’ve been married only once. If you die first, your assets—whatever they are—usually go to your spouse. If you have children, you divide the money among them equally. Unequal inheritance sometimes makes sense. For example, you’d leave more to a child who’s disabled. But for the sake of future family harmony, equal amounts work best.

If you enter into a second marriage, however, the choices get harder—especially if you remarry later in life. How much, if anything, do you want to leave to your new spouse? If you own the house, does he or she stay in residence if you die first? In long second marriages, do you leave anything to stepchildren?

If you avoid making these kinds of decisions, state and federal laws decide where your money goes. Your second spouse typically will be able to claim one-third to one-half of the assets covered by your will, even if it says something else. Joint bank or brokerage accounts held with a child will go to that child. Your IRA will go to whomever you’ve named on the IRA’s beneficiary form, leaving your new spouse out.

If you want some other arrangement, you and your spouse must have a written prenuptial (or postnuptial) agreement that meets your state’s inheritance laws. You’ll also need to change those beneficiary forms.

Overwhelmingly, the spouse with more assets wants to make sure that the second spouse is provided for, says attorney Shirley Whitenack of Schenck, Price, Smith & King in Florham Park, N.J. That might mean leaving him or her with money that otherwise would have gone to your kids.

Where assets are roughly equal, however, or in a late-life marriage, spouses might choose to put their own kids first and leave little or nothing to their new mate.

Complications arise when you own a house. You might leave it to your kids but give your spouse the right to occupy it for life. In some states, the spouse’s right is guaranteed, even if he or she remarries, says attorney Molly Abshire of Wright Abshire in Houston. Before the house can be sold, your new spouse and kids will have to come to some kind of agreement (usually financial).

A risk that might not occur to you is the potential cost of long-term care. In many states, married people have a legal duty to support each other. If your second spouse eventually needs long-term care, his or her assets and yours might be tapped to pay the bills. In Texas, that even includes your own income and IRA, Abshire says. You’ll be spending your kids’ inheritance on your second spouse’s medical expenses.

In other states, however, your personal income and IRA might not be forfeited for a spouse’s nursing home expenses. So get good legal advice. You might decide to skip the “I do’s” and publicly become partners instead.

These decisions can be tough to make, especially if you and your new beloved find that you don’t agree. It’s even harder to tell the kids that their inheritance might change. “Often, people freeze and do nothing,” Whitenack says. Or they make their plans secretly, figuring “I’ll be dead and won’t have to worry about it.” That’s the worst outcome. Be brave. Fess up. 

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Beware the ‘Tax Torpedo,’ Spousal Benefits and Mortgage Deductions

Q: My wife and I were shocked to discover that when we start taking the required distribution from our individual retirement accounts at age 701/2, our Social Security taxes will jump and we will be in a higher tax bracket. We’re 69. What can we do?

A: It feels natural not to tap an IRA early because those investments accumulate tax deferred. But as you’ve learned, a “tax torpedo” awaits. If your IRA is large, it’s often smarter to live on it for a few years after you retire while putting off filing for Social Security. You’ll shrink the IRA and hence the size of your required withdrawal at 701/2. Meanwhile, your Social Security account will grow by a guaranteed 8 percent for every year after 66 that you wait to collect, up to age 70. Social Security income is taxed less than IRA income, so this strategy often brings you out ahead. At this point, unfortunately, there’s nothing you can do. But I hope that your question will help others!

Q: You wrote that a divorced wife can collect spousal benefits on her ex’s account when she’s 62. Social Security says I can’t get half of his benefit until I’m 66.

A: We’re both right. If you were married at least 10 years, you get half of his benefit if you claim at 66, but less if you file at a younger age. If he dies, you can get survivor’s benefits as early as 60 (50 if you qualify as disabled). But again, claiming early means that your check will be reduced.

Q: I have a small mortgage on an investment condo. I can pay it off but I’d lose the tax deduction. What do you think?

A: The “value” of the interest deduction is a scam foisted on us by the mortgage industry. A deduction is not a gift! OK, in the 25 percent bracket, you write off $25 for every $100 paid in interest, but it costs you $75 out of pocket. How is that good? You’re always ahead when you have no debt.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

The Smart Way to Help Grandkids With College

4 tips for helping offset tuition bills

Are you planning financially to help a grandchild  — or niece or nephew — go to college? A common question is whether your gift will hurt the student’s chance at financial aid. The answer: sometimes yes, sometimes no. It all depends on the type of aid the child is apt to get.

If the family earns a substantial income, aid based on financial need is off the table. Instead, the school might offer a merit scholarship. This form of aid goes to students a school particularly wants, typically supersmart kids or those with a special gift. Grandparent money has no effect on merit scholarships, says Dean Skarlis, founder of the College Advisor of New York, which counsels families on educational choice. So feel free to give any amount of aid in any form you want.

It’s another story, however, if the family qualifies for aid based on financial need. In that case, your gift will indeed reduce the amount the student receives. But so what? The money you give will almost certainly exceed any potential loss in need-based aid. What’s more, that “aid” might have come in the form of student loans. Your contribution will help your grandchild graduate with a smaller burden of debt.

Here’s how to help the student while still getting the most out of need-based aid.

1. Give the money to the parent rather than the student and let the parent pay the bills. Students are expected to contribute 20 percent of their assets toward college; the contribution expected from parental assets is limited to 5.6 percent. By routing your gift through the parent instead of through the child, the child will qualify for more aid.

2. If the parents have a 529 plan for college savings, see if you can contribute to that one rather than setting up a 529 of your own. Money paid to the school from a grandparent’s plan won’t affect need-based aid in the student’s first year but counts as student income in future years. As a result, aid could drop sharply. Payments from parents aren’t considered student income. (Quick note: 529 investment plans grow tax-free when the money is used for higher education. They’re offered through brokers and — at lower cost — directly from the states.)

3. Grandparent gifts become a nonissue in January of the student’s junior year. By then, the student will already have filed an aid application for his or her senior year. Any future grandparent contributions won’t show up in the record, so they’ll take nothing from a financial-need award, says Joe Hurley, founder of savingforcollege.com, an expert site for information on 529s. You might let the student and family pay for the first 21/2 years of school and then start making your own contributions after that.

4. A student with financial need might also receive a merit scholarship, says Karen McCarthy, senior policy analyst for the National Association of Student Financial Aid Administrators. A grandparent gift may affect the size of the need-based award but, in most cases, should have no bearing on the merit award.

Before you start writing checks for college (or promise to), be sure that your own retirement is assured. Helping grandchildren to an education is a splendid act — as long as you won’t have to ask for the money back in your older age!

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Got Money Questions?

Jane Bryant Quinn on personal finance.

Q: My husband and I are wondering when would be the best time to collect our Social Security benefits.

A: I get lots of questions like this. The answer differs for every couple, depending on their ages and the size of their potential benefits. Sometimes one of you should take retirement a year or two early so that the other can claim spousal benefits on that account. Sometimes it’s better to wait. These services can provide the answers you need. SocialSecuritySolutions.com charges $20 for a report showing the best time to claim benefits based on the life expectancy you set; it costs $50 if you want to be able to play with various retirement assumptions and $125 for one-on-one advice. SocialSecurityChoices.com charges $39.99 for a claiming strategy based on three projected lifetimes. The services’ recommendations differ a little bit because of the math involved, but both are sound. AARP’s free Social Security Calculator can also help you determine your best age to claim benefits..

Q: Our disabled son’s inheritance will go into a special-needs trust. Can I use a codicil form from the Internet to change the trustee?

A: Please don’t! If the codicil’s wording — or the way you fill in the names or sign the document — doesn’t conform exactly to your state’s law, a court might not accept it. Your son’s welfare is too important to leave to boilerplate.

Q: How are individual retirement accounts divided among heirs? Can I leave my stocks to one child, my bonds to another and my CDs to a third?

A: Yes, you can divide your children’s inheritance in this way, says IRA expert James Lange of the Lange Financial Group in Pittsburgh. But do you really want to? The person who inherits the stocks might wind up much richer than the person who gets the CDs (or much poorer, if the market collapses). You might leave anger or envy behind. And what if you want to sell some stocks and reinvest in CDs? You’d be favoring one child over another. Instead, leave the total value of the IRA in percentages — say, divided into thirds. The trustee will split the assets according to the percentages you decree.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Are You Ready to Retire Early?

Use this checklist to assess your plans

Are you thinking about retiring early? Back when boomers were young they considered it almost a generational perk. Life’s second half should be merry years of play and rest.

Once you slide into your 50s, however, the question of early retirement grows complex. You might still need your paycheck. If so, case closed. And you might love your work and hope to pursue it for many more years.

If you’re ready to quit, however, there’s a lot to consider before casting loose. On the plus side, you’ll be able to take your life in any direction you want. On the downside, early retirement carries financial and emotional risks. Before telling your boss to take that job and shove it, run down this checklist to see if your plan is sound:

Do you really have enough money to finance a long retirement?

Don’t underestimate your longevity. At, say, 55, men have an average of 28 more years to live, and women 31 years. Roughly half of you will live longer than that. During your early years of play, you’ll be living primarily on your savings and investments, plus any special sources of income such as rents, royalties or perhaps a small pension. You’ll have to wait until 62 to qualify for Social Security retirement benefits. But by claiming that early, your benefit will be docked by as much as 30 percent, compared with what you would receive if you waited until your full Social Security retirement age (67 for today’s 55-year-olds). You might come to regret that.

Have you made a retirement budget you can live with?

To make it easy, sketch the budget for only your first retirement year. Start by listing the income that you can realistically expect after your paycheck stops. For budget purposes — and to feel fairly sure that your money will last for the next 30 years — assume that you’ll take only 4 percent out of your savings and investments. The total, from savings and other sources, represents your spending limit.

Now add up your expenses.If they’re higher than your spending limit, you’ll have to cut back — maybe sharply. That might not be hard if your largest budget item is your house and you’re happy to downsize. If not, you’re probably not ready, financially, to make the leap.

In fact, you’re not even ready if your budget just barely breaks even. Inevitably, you’ll run into costs that you didn’t expect. If you cover them by digging too deeply into savings, you might run seriously short of money a couple of decades from now. You might be better off staying at work for a few more years, cutting spending and concentrating on saving more.

When budgeting future withdrawals from your savings and investments, follow the classic 4 Percent Rule: Take 4 percent of your financial assets in Year 1. Take the same dollar amount plus an inflation increase in Year 2. In Year 3, take last year’s dollar amount plus another increase to cover inflation, and continue on that track. When you eventually sign up for Social Security (later, not sooner, I hope), that income will be inflation indexed, too.

Are you out of debt?

Giving up a paycheck when you’re carrying credit card debt is nothing short of madness.

Do you have health insurance?

Some corporations provide early retirees with health insurance until they reach 65 and qualify for Medicare. If you’re not that lucky, survey the private marketplace carefully to see what’s available at a price you can afford. Going bare can wreck your finances overnight.

Do you have a sustainable investment plan?

At today’s interest rates, you’d need a two-ton truck full of money to live off the interest paid by high-quality bonds or certificates of deposit. Low-quality bonds yield more but carry market risk. If you switch your savings into dividend-paying stocks, you’re facing market risk plus a lack of diversification. That’s because you’ll have too much money in financials, consumer staples and utility company stocks and not enough in the growth stocks that typically don’t pay dividends.

Financial planners might advise early retirees to hold 60 to 70 percent of their money in an index mutual fund that follows the total stock market (both large and small stocks), for 20- and 30-year growth. The balance would go into intermediate-term Treasury bond funds. They’re a good cushion because their prices usually rise when the stock market falls. Research shows that following this strategy in conjunction with the 4 Percent Rule gives you very high odds of making your money last for 30 years. Put an extra 5 percent into stocks if you need the money to last for 40 years.

If you’re married, how well do you and your spouse get along?

Retirement at any age throws you continually into each other’s company. Doing the 50 states in an RV will become a misery if you’re arguing all the time.

How flexible are you?

If your early retirement doesn’t work out because you’re bored or you’re spending money faster than you expected, be prepared to go back to work — part time, at least. That means keeping up your skills or finding new ways of deploying the natural talents you have. If you’re choosing a new place to live, you might consider its employment opportunities, just in case.

Who succeeds at early retirement?

People who have enough money (with “enough” depending on how high on the hog you want to live), plenty of personal interests and an adventurous disposition. Have a happy second half of your life!

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Maximize Your Social Security Benefits

Jane Bryant Quinn answers to your most common Social Security questions

Are you wringing all the money you can out of Social Security?

Based on my reader mail, I worry that some of you are losing out. Here are quick answers to the questions I get the most.

What can you apply for?

Retirement benefits, based on your own lifetime earnings. Spousal benefits, based on a living spouse’s lifetime earnings. Survivor’s benefits, payable after a spouse’s death.

You can effectively collect only one of these benefits at a time. Social Security automatically gives you the largest check you’re entitled to. Children might get benefits, too.

What’s the best age to claim?

This varies a lot. In general, your check is always reduced for life if you file for any benefit before what Social Security calls your “normal retirement age.” That’s 66 for people born from 1943 to 1954 and rises gradually for every birth year through 1959.

For those born in 1960 or later, normal retirement age is 67. There’s a fat bonus for collecting your benefits late: Social Security pays you an extra 8 percent for every year past “normal” that you delay your claim, up to age 70.

Can you claim a benefit as a spouse and later switch to benefits based on your own earnings record?

Yes, provided you wait to file for spousal benefits until you reach “normal” (or “full”) retirement age. You might collect a spousal benefit check from, say, age 66 to 70, then put in for your personal retirement benefit, which will have grown.

This strategy does not work, however, if you file before you reach your normal retirement age. Early filers receive a benefit amount equal to the spousal benefit or their own retirement benefit, whichever is higher. Never both.

Does it ever pay to collect benefits early?

For many married couples, yes. A wife, for example, might retire early on a reduced benefit. When her husband reaches normal retirement age, he can file for spousal benefits on her account. When he reaches 70, he can switch to his own, larger retirement account. How well this strategy works will depend on your ages and which of you is the higher earner.

What if you’re divorced?

You can claim spousal and survivor’s benefits on your ex’s earnings record if you were married for at least 10 years and are not currently married. (Exception: You can keep the survivor’s benefits if you remarry after you pass 60.) Your ex has to be eligible for Social Security, even if he or she has not yet retired.

What if your spouse dies?

If you’ve been collecting a spousal benefit, you can step up to the larger survivor’s benefit. To get the maximum amount, consider putting off your claim until you reach normal retirement age.

You might make a different choice, however, if you have a substantial Social Security earnings record of your own. You might take the survivor’s benefit early, then switch to your own, larger benefit at a later age. Play with the numbers until you get it right.

Helpful resources

(Originally published in The AARP Monthly Bulletin.)

AARP Article

What to Do About Dementia; Debt and Divorce

Jane Bryant Quinn answers your financial questions

Q: My wife has early-onset dementia. When I call to ask about her retirement account or credit cards, the reps need her permission to speak with me, which she can’t give. What should I do?

A:This is a powerful reminder of the need for a properly executed power of attorney. Had your wife given you her POA as soon as she got the diagnosis, you’d have the right to manage her affairs. It might not be too late, says Rebekah Brooker, an attorney with Scheef & Stone in Dallas. People with dementia often have good days as well as bad ones. On a good day, your wife could legally sign a power of attorney. If your wife doesn’t have good days, your only option is the complexity of a legal guardianship.

Q: When I divorced 12 years ago, my ex agreed to pay the credit card debt but never did. I am being dunned for money I don’t owe. How do I get this off my credit report?

A:Such a short question with so many issues! First, you, too, owed this debt because you’re a joint account holder. A divorce agreement doesn’t change that. You can’t be sued for it because the statute of limitations has presumably run out. But the collection firm that owns your bad debt is still allowed to bill you, which is totally unfair. Unpaid debts should drop off your credit report after 7 1/2 years from the first missed payment. But the debt owner might not have told the credit bureau when to start the clock. Use the bureau’s website to dispute the bills, says Chi Chi Wu, staff attorney for the National Consumer Law Center — not on the ground that your ex should pay (that won’t work) but because they’re stale. The bureau will check with the debt’s owner, which should solve the problem.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Dealing With Credit Card and Time-Share Companies

Financial expert Jane Bryant Quinn answers readers’ questions

Q: My husband died this year. Our credit cards are jointly held. Do I have to contact the card companies to have his name taken off the account?

A: You’re named on the cards, so you’re still entitled to use them. But yes, tell the issuers. They’ll find out anyway, during routine checks of Social Security numbers. Your husband is listed as “deceased.” As a result, any account with his name on it will no longer receive a credit score, says John Ulzheimer of CreditSesame.com. By law, lenders are not supposed to pull the credit of a surviving spouse unless there’s evidence of inability or unwillingness to pay, says Gerri Detweiler of Credit.com. Some of them will simply ship you a new card. But others will make you reapply, based on your own income. If they think it’s insufficient, they can raise the card’s interest rate or even refuse to reissue it. To me, that flies in the face of the spirit of a law intended to protect spouses. But what’s new about that?

Q: How do I get rid of a time-share I no longer need and can’t afford?

A: Unwanted time-shares are a glut on the market. Most of them have little or no resale value. Here’s great advice from Brian Rogers of the Timeshare Users Group (TUG):

1. Lower the price of your share to $1 and list it on TUG, Craigslist, eBay and similar sites. To attract buyers, offer to pay the closing costs and perhaps a year of maintenance fees.

2. Write (don’t call) your time-share’s homeowners association, asking it to take the property back. It might, if you give good reasons (poor health, don’t travel anymore, retired and can’t afford the fees). You might have to write several times.

3. Don’t get sucked in by a middleman who promises — for a mere $2,000 to $5,000 — to help you donate the time-share to charity and deduct its “value” on your tax return. Taking a big write-off for a property that can sell for only $1 amounts to fraud.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

‘The Talk’: Your Kids and Your Money

Families should keep all members in the loop, financial planners say

What should you tell your adult children about your money? That’s a question all of us confront. Some people think it’s none of the children’s business. A few tell all. Most of us are probably somewhere in the middle, revealing some things and reserving others, depending on our own feelings about money and whether the facts might cause anyone distress.

I put the disclosure question to members of the National Association of Personal Financial Advisors, who are all fee-only financial planners. They lean strongly toward having “the talk.”

Start by telling the children where to find your will, health care directive, financial records and any life insurance policies (small policies sometimes get lost). If the will leaves them uneven shares, explain your decision. Often, the children will understand. If you can’t bring yourself to discuss their shares in person, at least leave a thoughtful, explanatory letter so that the siblings won’t start blaming each other for secretly currying your favor. Tell them, too, if one of your children has power of attorney or is the executor of your will. “They should hear this from the parents,” says Marc Roland of Dean Roland Russell Family Wealth Management in San Diego. “If they learn only after your death, they might think that Mom and Dad loved one kid over another.”

You might not want to tell your children exactly what you’re worth, in case your assets get depleted later in life. The kids shouldn’t be planning on an inheritance they might not get. On the other hand, upfront disclosure about your intentions can help prevent one sibling’s dishonesty in handling family assets, if that’s a risk, says Daniel Johnson of Parsec Financial Wealth Management in Asheville, N.C.

It becomes more important to talk to the children as you get older. You might become ill or incapacitated and need help with your finances. Children also might wonder, and worry, about whether you have enough income and savings to last for life. If so, it’s a kindness to let them know that you’ll be OK. If not … well, it’s hard to face this yourself, let alone discuss it with a child, says Rob O’Dell of Wheaton Wealth Partners in Naples, Fla. But the sooner they learn about the problem, the better.

In any situation, “the talk” lets you put your wishes into words that your children will understand, says Dan Fitzgerald of Aequus Wealth Management Resources in Chicago. It can even result in useful changes to your plan. I’ve had personal experience with improving a financial decision because my kids were in the loop. Families manage better when you leave no big surprises behind.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Making Sound End of Life Decisions

A living will and health care proxy can be crucial for you and your loved ones

Most of us have probably said to a relative or friend, “If I’m in a coma and living on tubes, just pull the plug.” But decision-making toward the end of life isn’t that simple. Maybe another few days might bring you around — how long should your family wait? Often, the medical issue isn’t even the “plug.” What if you have advanced Alzheimer’s and a doctor says you need triple-bypass heart surgery? Would you want your children to say yes or no?

If you’re of sound mind when difficult medical questions arise, you can deal with them yourself. You’re always in charge of your own treatment.

But if you’re in a mental haze, even if only temporarily, someone will have to make decisions on your behalf. That “someone” will be glad for all the advance guidance you can give.

Good medical planning starts with a conversation, among family or friends, to help you clarify your thinking about care. How far do you want any treatments to go, and what minimal quality of life are you willing to accept? Free workbooks are now available online to help with the process, says Charles Sabatino, head of the American Bar Association’s Commission on Law and Aging. A few to try: the Conversation Starter Kit, developed by the columnist Ellen Goodman; End-of-Life Decisions from Caring Connections, a national hospice organization; the ABA’s comprehensive Consumer’s Toolkit for Health Care Advance Planning; and AARP’s Caregiving Resource Center.

To turn your preferences into a legal document, set them down in a properly witnessed living will (a type of advance directive). Your doctors are supposed to act in accordance with what you’ve said. AARP provides state-specific forms at aarp.org/advancedirectives. Caring Connections also provides the forms, as does the American Bar Association. In many states, forms can also be found on the website of the attorney general.

Read any online forms carefully. Some deal mainly with the “easy” questions, such as whether you want treatment ended if you’re being kept alive mechanically. The better forms leave space for expressing your personal values. For example, what kinds of handicaps are you willing to live with? Would you want surgery if there’s a high risk of brain damage? Are you okay with life in a nursing home?

It’s especially helpful to say whether you’d want to be fed intravenously if your conditional is terminal. Medically, the answer may be “no.” Dying people lose their ability to process nutrients, according to the National Hospice and Palliative Care Organization. Even providing water might add to discomfort by creating bloat. Well-meaning relatives need to know these things.

If you want to try everything that might keep you alive, it’s also important to say so. Doctors generally won’t provide treatment they think is futile but will go the last mile if that is your written wish and your family insists.

A living will is just the start. You also need to appoint someone as your health care proxy, to stand up for your wishes and make medical decisions that your will doesn’t cover. If you have no close family members, choose a trustworthy friend. You also should sign what’s known as a HIPAA release, giving your advocate access to your medical records.

You need to be especially careful in your planning if you have a degenerative disease, says Martin Shenkman, an attorney in Paramus, N.J., and author of Estate Planning for People with a Chronic Condition or Disability. Living will forms should be modified to include such things as experimental treatments outside the United States, if you want them. Breathing tubes might be fine if they help you maintain an acceptable life at home.

As the disease progresses, your choices might change, which you should also indicate in your living will. Be sure that your health care advocate has a deep understanding of your disease. He or she should live nearby, in case you have an attack and quick decisions are called for.

Religious people should talk with their family about anything in the will that might contravene their beliefs, Shenkman says. For example, some faiths expect doctors to take heroic measures that you might not want, or prohibit organ donation even if it helps advance research into your disease. Warn your family if you’re taking these steps, and be sure that your health care advocate is on your side.

Most end-of-life decisions are made peaceably, without living wills being invoked, says elder-care attorney Gregory French of Cincinnati. They’re invaluable, however, if siblings fight about “what Mom would want” (and the doctors duck).

When you make a regular will for your heirs, your attorney may provide his or her own versions of a living will and health care proxy. Modify them to suit your situation, then sign. As a last act, it’s a classy one.

(Originally published in The AARP Monthly Bulletin.)