Lynn Brenner's Family Finance

My Late Husband's Name Comes First on Our Mortgage

Q: In 1982, my late husband and I bought my co-op apartment. His name comes first on the mortgage. He died in 1987. Now Chase Bank, which holds the mortgage on the co-op, has sent me a verification notice about my husband's Social Security number.

How important is it for me to get the mortgage into my name? I have just 18 months to go to pay it off, and I don't want to spend the money to hire a lawyer. (When last I checked in 1997, I found out it would cost me $500.) --BS, via email

A:   It doesn't sound as if you need a lawyer. You should be able to resolve this simply by calling the bank.

Of course, in real life tackling a bank's bureaucracy can prove very time-consuming. You may find it takes several phone calls, and perhaps a couple of follow-up letters.

Here's a likely explanation for what has happened:

Every year, the bank files tax Form 1098 with the Internal Revenue Service, reporting the interest payment it received on your mortgage. On this form, when property is in joint names it's standard procedure to use only the Social Security number of the first listed owner.

In this form, the bank is telling the IRS that your late husband paid X dollars of interest on this loan.

In reality, of course, you are now making the interest payments. And every year, on your tax return -- which carries your Social Security number --  you're claiming a tax deduction for it.   

It sounds as if the IRS has noticed this discrepancy and is trying to resolve it by asking the bank to verify that your husband's Social Security number on the loan is correct. And the bank, in turn, has asked you the same question.

Assuming that is what has happened, if you respond to the bank by verifying your late husband's Social Security number, eventually you'll get a letter from the IRS saying you're not entitled to the deduction.

(If that happens, don't be alarmed! You have nothing to worry about no matter how long it takes to straighten this out. You are entitled to this deduction. This is just a question of updating the information on a tax form.)

My advice is to tell the bank that your husband is dead and that from now on, the Form 1098 they file with the IRS must carry your name and Social Security number. That change should present no problem to the bank because based on what you say, your name and Social Security number are both already on the mortgage. 

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

 

What Are the Financial Pros and Cons of Marriage?

Q: My partner and I are in our late 50s, and have been together for 4 years. We plan to be together for the rest of our lives, but we're wondering what the ramifications of marriage would be on finances.

I'm especially concerned about my home, which is solely in my name and will be paid off in a few years. If we were married and my husband needed long-term nursing home care, would my home be an asset that might be lost? I seem to remember when my grandmother went into a nursing home in her final years, they required that her home be surrendered as payment. We have agreed that my home will eventually go to my children. I don't want to risk losing it.

Are there any other financial pros or cons we should be aware of when considering whether or not to legally tie the knot? -- CB via email

 

A:  I can give you some pointers, but you and your partner should to consult a lawyer about the specifics of your situation. Look for an estate lawyer who knows elder law, and is therefore familiar with your state's rules about nursing home care.

Here's my earlier post about how to find an estate lawyer.

You don't just need legal advice on how to protect your house in the event that either of you needs long-term care. You also need to put your agreement that your kids will ultimately inherit the house in writing -- not because you distrust your partner, but because state law will supercede your agreement unless it's in a legal contract.

Your marriage is a unique relationship that you create together. But it's also a legal partnership with rights and obligations regulated by the government.

By federal law, your spouse is legally entitled to be the beneficiary of your employer-sponsored retirement plans, for example. State laws require that you leave a certain percentage of your assets – typically at least one-third – to your spouse. As a married couple, you also have the option to file a joint income tax return, which may substantially reduce your total tax bill. You’re automatically entitled to be each other’s dependents for health insurance and other employee benefits. And you’re automatically entitled to Medicare, and to Social Security spousal and survivor benefits based on each other’s work records. These marital rights can all add up to a very pretty penny!

But of course the one-size-fits-all marital inheritance rights don't fit every family -- and you don't have to accept them. You can sign a prenuptial or postnuptial agreement -- a contract in which both of you agree to waive your legal entitlements, and create a plan that’s more appropriate to your situation.

Naturally, prenuptial contracts are particularly important for people who want to safeguard some of their assets for their children by a previous marriage.

A good prenuptial or postnuptial agreement protects your spouse as well as your kids. In your case, for example, your agreement could say that your children will inherit your house when you die, but that your husband will have the right to continue living there for his lifetime if he survives you. (If so, the agreement should also spell out who will be responsible for the cost of maintenance and capital improvements to the house while your surviving spouse lives there.)

A prenuptial and/or postnuptial agreement allows both of you to leave your solely-owned assets to anyone you wish. But it won't protect those assets from legitimate third party claims -- and these include claims from your spouse's medical providers. By state law, spouses are responsible for paying for each other's food, clothing, shelter and medical care.

An attorney familiar with your state's laws can tell you if there are legal steps you can take to protect your house from potential future claims. (One way might be to put your children on the deed now, for example.)  

From what you say about your grandmother, it sounds as if Medicaid paid for her nursing home care. Medicaid is a joint federal and state program that provides medical and long-term care based on financial need. (Don’t confuse it with Medicare. Medicare is a federal program whose benefits are not based on financial need; it provides medical coverage, but doesn’t cover long-term care.)

Although Medicaid rules are state-specific, in general you must spend most of your assets before you can qualify for nursing home benefits. Your house is an exception, however. Even if you are receiving Medicaid nursing home benefits, in most states your house cannot be sold to pay for your care as long as you affirm your intention to return there. And even after your death, Medicaid cannot enforce a lien against your house to recoup benefits that it paid for your care as long as your spouse still lives there.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

Is There A New Tax on Selling a Home? Say It Ain't So!

Q: Is it true they’re going to impose a new 3.8% tax on the selling and buying of a home? This would mean a $15,000 tax on a house worth $400,000? Please say it’s just a rumor! –DL via email

 

A: It isn’t a rumor; but it’s not as draconian as you’ve described it, either.

You’re talking about the new 3.8% tax on unearned income, which goes into effect in 2013. Its proceeds are earmarked to shore up Medicare, which is seriously underfunded and is about to be hit by a tidal wave of new beneficiaries as the baby boomers turn 65.

But in the first place, this tax will be levied only on single people with adjusted gross income of more than $200,000, and on married couples filing jointly whose adjusted gross income is more than $250,000. (The 3.8% tax applies to whichever is the smaller amount – your unearned income, or the amount by which your modified adjusted gross income for the year exceeds the high-income threshold. For more information about how the tax works, read this article at CNNMoney.com).

If you earn less, you won’t be affected by it.

In the second place, the 3.8% tax applies only to unearned income that exceeds existing tax exemptions.

When you sell your primary residence – i.e., a house that you’ve owned and lived in for at least two of the previous five years – you get a generous tax exemption on your profit: If you’re single, you owe no taxes on the first $250,000; and if you’re a married couple filing jointly, the first $500,000 of your profit is tax-exempt.

Your profit is the sale price minus your original cost, which includes capital improvements and transaction fees. So let’s say you sell your house for $400,000, and after deducting the price you paid for it and the capital improvements you made, your profit on the sale is $300,000.

If you’re married, you would have no taxable profit: the entire $300,000 would be tax-free. If you’re single, your taxable profit would be only $50,000.

Let's assume you're single. A 3.8% tax on that $50,000 profit would be just $1,900.

Of course, that wouldn't be your only tax. You'd also owe a capital gains tax on the $50,000.

The capital gains tax is currently capped at 15%, but is likely to be raised to 20% in the future. If the capital gains rate rises to 20%, and you’re also subject to the 3.8% additional tax – probably a safe assumption in a year when your income is inflated by a $300,000 profit on the sale of a house – you’d owe 23.8% in taxes on your $50,000 taxable profit.

In other words, on total proceeds of $300,000, you'd owe $11,900 in taxes. All things considered, that's not a huge hit.

Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.

Should I Take Social Security Early to Pay Off My Mortgage?

Q: My husband will start taking Social Security in May at his full retirement age (66). I'll turn 64 in May. We both plan to work as long as our health permits. We're wondering whether it makes sense for me to take a reduced Social Security benefit at 64. My benefit would be about $10,000 a year, which we'd use to pay down the principal on our mortgage.

We have 8 years left on the mortgage, and we can cut that time in half by paying $8,000 extra each year toward the principal. The rate on the mortgage is 5.125%. About $300 a month of our current payment goes to interest. Is it worth my taking a reduced Social Security amount to pay off the mortgage? -- DW via email


A: This dilemma involves emotional as well as financial issues. But based on the numbers, I think it's better for you to delay taking a Social Security benefit until you turn 66.

Here are the pros and cons to consider:

The true cost of your mortgage is actually less than 5.125% because the interest is tax deductible. But that's a shrinking advantage. You'll get less and less of a tax deduction over the next eight years, says Christine Fahlund, senior financial planner at T. Rowe Price, because the closer you get to paying off the mortgage, the less interest there is in each mortgage payment.

And of course, you'd like to be mortgage-free when you retire.

All in all, paying off the mortgage early is a very attractive idea.

But if you use a discounted Social Security benefit to do it, says Fahlund, you'll be meeting a short-term problem (4 to 8 years of mortgage payments) with a long-term solution (20 to 30 years of Social Security payments).  

There's a steep discount for taking Social Security at 64 instead of 66. For every $1,000 in monthly benefits you'd get at age 66, you'll get $866 at age 64, points out Eleanor Blayney, a financial planner who is also the consumer advocate for the Certified Financial Planner Board of Standards. Simple math suggests that taking Social Security at age 64 would cost you more than you'll save by paying off the mortgage four years early: a 6% annual discount in benefits in exchange for saving 5.125% a year on your mortgage.

Blayney did a quick spreadsheet calculation and found you'd save $10,660 over the next eight years with your plan to take early Social Security and pay off the mortgage early. By Year Eight, you'd have sacrificed about $6,190 in Social Security benefits. But of course, the Social Security discount doesn't stop after eight years: When you take a benefit early, it's forever smaller than if you'd waited. If you delay taking Social Security instead, it would take you only about three more years to break even, Blayney says. "So as long as you're healthy and planning to live more than eleven years, I would recommend the delay strategy."

On the other hand, both advisers acknowledge that there's a great psychological benefit in not having a mortgage in retirement. Only you can weigh what those four extra mortgage-free years would mean to you.

Here's an alternative you may want to consider:

If you wait two years, at age 66 you'll have the option of applying only for your spousal benefit. (You don't get that option when you're younger.) And at 66, you'd get the maximum spousal benefit: 50% of your husband's benefit. You could use that towards paying down the mortgage, while letting your own benefit keep growing. There's a big reward for that extra delay: You get an 8% annual bonus for each year you postpone taking your benefit between ages 66 and 70.  That bonus permanently increases your benefit, just as a discount permanently reduces it.

Another advantage of this alternative is that at 66 you'd receive your maximum spousal benefit regardless of how much you earn every year. You intend to keep working -- and one drawback of taking Social Security at 64 is that you forfeit $1 of benefit for every two dollars you earn above $14,160. This annual limit changes every year, but it applies only as long as you're under your full retirement age. After that, your benefit isn't reduced no matter how much you earn.


Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.