Reader Questions

Divorced and deceased in Arizona, will the survivor be chased down by creditors?

As promised, on to more Reader questions:

Bernie wrote:

My daughter is divorced (2009) and lives in Scottsdale, AZ. On June 18, 2010 her ex-husband, who lived in Mesa, AZ, died suddenly and unexpectedly from a heart attack at age 50. She is now seeking guidance with respect to the fiscal ramifications of the death, in particular how to avoid inheriting her ex-husband’s debts.

My daughter’s ex-husband has a considerable amount of credit card debt. (est. $35,000) and has no assets other than an automobile that is valued at less than $3000. Her ex-spouse at the time of death was unemployed and has been for most of the past three years. It is likely that he wasn’t making anymonthly payments to creditors for at least the past year.

My daughter has approximately $20,000 in credit card debt and she owes approximately $15,000 on an automobile loan. She has always made regular, on-time payments on credit card accounts and the car loan, and her credit rating is excellent. Her only financial asset is money that is in her teacher retirement account; she doesn’t own any property. My daughter has been steadily employed since graduating from college in 1992 and she currently works as a XXXXX in Arizona, earning approximately a gross of $50,000 per annum.

My daughter was married in Massachusetts in 1998 and moved to Arizona in 2005 so that her ex-husband could find employment. From 2005 to 2007 her ex-husband was employed selling appliances, mainly to home builders. He lost his job three years ago as a result of the slowdown in the housing market.

My daughter and her ex-husband have maintained separate credit card accounts since before they were married in 1992. That is, her name has never appeared on any of his accounts and his name was never on any of her accounts.

In 2008 my daughter and her husband agreed to separate and their divorced was final in 2009. In the divorce decree they mutually agreed to an equal disposition of personal assets and assumption of full responsibility for debts that were in their respective names; meaning each took responsibility for credit card debt in their name.

Community Property — We are aware that Arizona is a community property state; we understand what that means, and consequently we are very concerned about how the community property designation complicates matters. In addition, we also understand that the level of joint liability for new debt ceased with the divorce.

The big question is, how can my daughter be protected from her ex-husband’s potential creditors?
My daughter’s ex-husband did not have a will. The funeral arrangements and the dissolution of personal items is being been handled by the deceased brother who resides in Massachusetts. The brother is also going to notify all creditors of the death.

It is unclear what protections my daughter might enjoy and how to respond in the event she is chased down by her ex-husband’s creditors. We are looking for guidance and possibly legal assistance to protect my daughter’s resources. Can you please give me a preliminary prognosis, or let me know if you need additional information before you can offer an opinion?

Bernie, thanks for your question. The fact is, it’s a stretch for me to believe that creditors would come after your daughter for his past personal debts. The potential litigation costs and possibilty that the creditor wouldn’t collect are too high in my opinion to believe that they would try and chase your daughter down for his personal credit defaults.  That doesn’t mean they won’t however. In the event they do, then I would retain an attorney in Arizona to help, but until then, in my opinion, you’re simply wasting money on retainer that you likely won’t need or use. I hope this helps!

Effect on personal taxation of gold transactions to businesses that buy/sell gold?

I apologize for not posting in some while – I took a much needed vacation to the West Coast and enjoyed my time out in the So Cal area thoroughly. While I was gone I received a couple of reader questions which I will answer over the next couple of days, and then I will get back to personal finance basics as promised. Check out my most recent reader question from Mary.

Dear Finance Dad;
In 2004, I rolled over part of a retirement annuity into Palladium. The initial investment was $50,000. In December 2007, I rolled over approx. $83,000 total of the Palladium acct into Gold Coin. Unfortunately for me, the transaction was completed in February of 2008, when the cost of gold was at a peak that year (but Palladium was also rising). Initially I was dusted a bit on that transaction, but it is now slowly increasing and as of June 30 of this year the value is now $94,900. This investment represented half of my total retirement accounts (the initial amount into palladium). I feel it has done very well. I am close to the end of my work years, having worked 40 years at this point.

My question to you is, what do you feel the effect of the Obamacare clause re: taxation on gold transactions to businesses that buy/sell gold will affect me? I am surely feeling the bottom line of the food chain (moi), will probably be nailed on any transactions that I will be making out of that gold IRA. Would it be adviseable to close out the account prior to the initiation of the taxation law, and simply roll over the money?

I hope this made sense. 50% of my total life retirement was invested into the initial palladium IRA, and although it was a good move, I am beginning to panic.

Please advise.

Thank you in advance.

Sincerely,

Mary

First off, thanks for your question Mary, I will try and address it and some other concerns I have after reading your story. But please keep in mind, I’m only providing my opinion on this matter, and that doesn’t mean it’s right for you. I’m going off of very limited information and my answer should only be taken as one man’s opinion and nothing more. You should seek professional advice from a certified financial planner or similar.

For some background on what Mary is talking about:

According to an ABC news report, the new 1099 provisions in the health care bill, which will force business owners to declare all purchases over $600 on their yearly tax return, will also directly affect the sale of gold coins and bullion:

Section 9006 of the Patient Protection and Affordable Care Act will amend the Internal Revenue Code to expand the scope of Form 1099. Currently, 1099 forms are used to track and report the miscellaneous income associated with services rendered by independent contractors or self-employed individuals.

Starting Jan. 1, 2012, Form 1099s will become a means of reporting to the Internal Revenue Service the purchases of all goods and services by small businesses and self-employed people that exceed $600 during a calendar year. Precious metals such as coins and bullion fall into this category and coin dealers have been among those most rankled by the change.

So every time a member of the public sells more than $600 worth of gold to a dealer, Piret said, the transaction will have to be reported to the government by the buyer.

The new legislation works in both directions to track the buying and selling of gold.

Essentially, any transaction over $600 will be logged buy the dealer, whether you buy $600 or more worth of gold, or sell it back to the dealer.

The article then proceeds to give some reasons to be concerned beyond the possibilty of taxation.

Since the transaction will require a social security number (or federal employer identification number) to be logged at the time of sale or purchase, this new legislation gives the government the capability to track every single precious metals purchase (over $600)  in the country.

While the legislation implies that taxation of such transactions to generate additional revenue is the goal, precious metals buyers, who generally like to remain anonymous, will most certainly see that the real issue in this instance is not taxation, but the ability to track who owns the gold.

When the US government ran into money problems in the 1930’s, Franklin Roosevelt confiscated all gold held in the hands of the public, and those who refused to give up their gold were either fined or imprisoned. Incidentally, the communists in Russia and eastern Europe did the same thing throughout the 20th century, but those penalties went a bit further than just imprisonment.

With a US dollar currency crisis and a US federal government debt crisis looming, many precious metals investors are concerned that similar government action may be instituted in the future.

Though it has been argued by many that confiscation in the US would not be necessary or feasible, the 1099 legislation certainly makes it easier to identify who has the gold.

Of course, those who purchase prior to January 1, 2012 will be “off the books,” until that time when they attempt to sell their gold to a registered dealer who will be required to log the transaction.

There’s a reason economist Marc Faber advised clients that they should hold their gold outside of the US.

Historically, when the economic or political shit hits the fan, governments have always moved to seize precious metals from the citizenry. The Nazis did it in World War II. The US did it in the 1930’s. The Bolsheviks did it in 1917. Rome did it by removing 90% of the silver from their coinage.

It is conceivable that, because of global economic problems, governments like the US, China and EU may once again make a move to “repatriate” the gold belonging to their citizens. Even if this is avoided, the tracking capabilities that have been provided for in the Obama health care legislation now give the government the ability to know exactly who buys how much gold, as well as an easy tracking mechanism for taxing the transaction. Rather than confiscating your gold, they may simply tax your profits at 95% at the point of sale, virtually wiping out the very reasons for why an investor buys precious metals to begin with.

This is why we advocate a diversified strategy for gold investing and wealth preservation that includes not only the acquisition of bullion here at home, but if you have the capability, international storage of physical metals (i.e. Singapore, Australia via Perth Mint, Hong Kong, South America, etc.). Though you may lose some gold in the event of a confiscation or extreme taxation in one country, you may be able to retain some wealth internationally. We also recommend looking into the purchase of gold equity ETF’s like the Market Vectors Gold Miners (not commodity ETF’s like GLD) that give you direct shares of some of the top gold companies in the world.

And of course, for those without the ability to invest internationally, buy off the books while you still can and keep your gold out of sight of potentially prying eyes. Once the $600 reporting period begins, be sure to change dealers regularly, as the $600 is a yearly accrual based on the social security number or federal EIN.  The other option after January 1, 2012, of course, is to keep your purchases and sales under $600. This can be achieved with fractional gold coins (though the price of gold may rise significantly taking these above the $600 threshold as well) or one ounce silver coins which trade for significantly less than gold.

By Mac Slavo
http://www.shtfplan.com/

Mac Slavo is a small business owner and independent investor focusing on global strategies to protect, preserve and increase wealth during times of economic distress and uncertainty. To read our commentary, news reports and strategies, please visit www.SHTFplan.com

While I think the above article gives Mary reason to be concerned, I would argue that this new law is the least of her concerns. The fact is, her portfolio being 50% invested in gold scares the heck out of me at her implied age. If I’m guessing correctly, Mary is probably in her late 50′s or early 60′s, and she’s taking way too much risk for her age. At this point in life Mary should be concerned with asset preservation versus wealth accumulation.

Precious metals are far too volatile to have half of your nest egg in when you’re nearing retirement. I would agree with this article in saying that I wouldn’t have more than 5-10% of my portfolio tied up in precious metals. The fact is, if I were just a few years away from retirement, I would have certainly less than 5% of my portfolio invested in gold and other precious metals. Having said that, Mary, get out of those risky investments and look at transitioning your portfolio over to more bonds (specifically TIPS), where the risk is much lower, but the reward is being able to keep the money you’ve accumulated. I’m not sure what the other 50% of Mary’s portfolio is invested in, but it certainly couldn’t be diversified enough to outweigh the risk of the other half of her portfolio.

I hope this helps Mary!

Will Congress raise the age at which you can withdrawal from a 401k or IRA without penalty?

I love when people Ask FinanceDad questions, it gives me a chance to see what people are interested in, and provide them with answers that both make sense and which give actionable advice. Moreover, half of the questions I receive, I would have never thought about myself. Therefore, your questions gives me the opportunity to often learn new things on my own and share them with you.

Reader Nick recently asked me some great questions:

I was recently told that Congress is considering raising the age at which you can begin withdrawing from a 401(k) or IRA without penalty?  Is that true?  What age are they considering raising it to?  As a young worker just beginning my career, it troubles me to think that not only will social security not be available for me, but I also won’t be able to access my own retirement savings until so late in life.

First, Nick thanks for your questions. Now, let’s move on to answering your questions. With regards to speculation that congress is considering raising the withdrawal age, I’ve seen or heard nothing of the sort, even after an exhaustive news and blog search. On the contrary, I’ve seen proposals from the Obama administration to eliminate required minimum distributions, and to remove in partial, penalties for early withdrawal. However, for the sake of argument, let’s say congress one day does decide to pass a bill that would raise the age limit for penalty free withdrawals from 59 and 1/2 to say, like 65 years of age. Any such move would likely come as a result of increased life expectancy. Although, that doesn’t address your concern, having access to your money should you decide to retire earlier than the imposed penalty free withdrawal age.

Currently, there are completely legal ways around these penalties, for people to access their retirement funds much younger than 59 and 1/2. I wrote an article ironically, two years ago yesterday about accessing your retirement funds early without paying a penalty. With the 72(t) and 72(q), the IRS allows you to make extended, regular withdrawals penalty free. The key here is, you have to make the exact same withdrawal (with very little exception) or the IRS will slap you with the penalty along with additional interest and fines for not abiding by their rules. My point is, there are usually ways around the penalties that allow you access to your retirement funds.

But for Nick and my other readers, even if congress raises the retirement age for accessing your retirement funds and takes away the 72(t) and 72(q) and other options, you can still retire early if you plan properly. Retirement planning is a reltively simple excercise (once you understand it), which I will describe breifly below.

Say your desire is to retire at 40. You must determine what it will take to get there by looking at your starting point, and deciding how much you will need to have to be able to retire at 40 and maintain whatever lifestyle you desire. Lets say Nick is 23 years old right now, he determines he will need to have 2 million in savings and investments to be able to retire at 40 and live to 85. Nick must determine how much money he will have to have save and invest each pay period to reach that goal over the next 17 years. He must decide how much risk he needs to take to acheive his goals. If the law says he can’t touch his 401k or IRA until he is 65, or he will face a stiff penalty, he must have enough in savings to last him through retirement until he can access his other funds. He may need to have 1 million in savings, combined with half a million in investments (which will need to grow to 1 million in investments by the time he is 65 to reach his two million dollar goal in investments – if you combine his 1 million in investments with his million in savings, it totals his 2 million dollar retirement goal needs), this way he is not dependent on 401k or IRA funds in entirety for early retirement.

But you’re probably thinking, what if I plan on that basis and the government decides after I’m 40 to bump up the age for penalty free withdrawals to 70. Plan conservatively, plan with that potential worst case scenario. Planning is your friend, and will make life much less complicated and will help take away many of your worries. I’ve wrote a cool series on understanding the basics of retirement planning, I encourage you and my readers to take a look when you get a chance, it’s no more than a couple hour read and will help squelch many of your fears. It details how to make goals and evaluate them to see if they are feasible.

You’re right on about social security though Nick, however, if you plan accordingly, there’s no need to worry whether social security will be there for you when you decide to retire, I’m certainly not counting on it. In summary, think of your retirement plan as a set of stairs, you may have to live off of savings (the bottom stairs) until you’re able to access investments (the top stairs), but you can still retire early if you save, invest and plan properly.

I hope this helps!

Reader Questions: Biweekly mortgage payments and cutting years off of my loan

As my site expands and my readership grows, I will try and answer more specific questions for my readers and create a FAQ section on the site for readers to thumb through if interested. Please, submit your questions to me as well, I will answer them as quick as possible.

Today’s question comes from a friend and a reader Ryan K:

“My mortgage company called me and asked me if I would be interested in signing up for a biweekly mortgage payment plan, they’re telling me I can save thousands in interest and cut years off the life of my loan – what’s the deal, is this something I should look into further?”

First off, Ryan (and my other readers), be wary of any products being “offered” by your mortgage broker that claim to save you thousands of dollars. Quite often, you can accomplish the same thing by simply calling your bank and asking them. In doing this, you can avoid unnecessary fees and other charges that would go right to the mortgage broker for something offered free by your bank. Also, as the old mantra goes “If it sounds too good to be true, it probably is.”

To answer the question though, what they’re telling you with regards to saving money and cutting years off of the life of your loan is quite misleading. They want to make you think that you’re payments will be the same in total and that the frequency of your payments will create savings and lower the life of the loan and associated interest charges. It’s just not true.

Let’s use an example of a mortgage payment of $1000 due every month. If paid as usual, you would pay $12,000 at the end of the year. In going to a bi-weekly payment plan (making a payment every two weeks) rather than making 12 payments per year of $1000, you will be making 26 payments of $500. You will pay off the loan faster because you’re paying more on your loan each year. Instead of having paid $12,000, you will have paid $13,000 at the end of the year.

There’s no question you can save money in the form of interest charges as well as increase your taxable deductions, but you will have to come up with the additional $1,000 per year in mortgage payments to do so.

You can accomplish the same task for free by sending your mortgage payment along with an additional payment to be applied towards principal (make sure your lender allows this, and that you don’t have prepayment penalties).

I caution you to make certain you can make the additional payments if you decide to move to a biweekly payment plan, as you will pay more throughout the year. If you can do it, yes, it’s great. But you’re not saving money by paying more frequently, rather by paying more on the loan period.

What’s your question?