Financial Aid, Student Loans Available if Parents Don’t Have Sufficient Funds
Q: I will be 59 in July. I have a son aged 18 and a daughter who’s 16, but I do not have any ready cash saved for their college educations. I do have equity in my home and my retirement plans through my current and former employers.
Should I sell my house and take advantage of the $500,000 in capital gains profit exclusion? It’s a seller’s market now and I may get a good price for my house, although my wife is scared that we will never again be able to afford a house in a good neighborhood in Southern California.
Or should I refinance my house with a low adjustable-rate mortgage and get some cash out? I am scared that interest rates may go up, and I may not be able to afford monthly payments and may end up losing my house. Or should I withdraw money from my retirement plans? If I do that, how much tax or penalty would I have to pay the IRS?
A: How about “none of the above”?
It doesn’t make much sense to sell your house, even in a seller’s market, if you will need somewhere to live and you aren’t content to rent. (You said three times the house was yours and twice referred to your retirement funds, but because California is a community property state, the house and the funds probably belong to both you and your wife. Her opinion counts too--more than mine.)
Refinancing to get cash out may be an option if you’re willing to take on more debt. Because you’re unsure whether you would be able to afford higher payments in the future, you would need to consider a fixed-rate mortgage or a fixed-rate home equity loan rather than an adjustable-rate version.
Tapping your retirement to pay for your children’s college is rarely a good idea, unless you have far more money in those accounts than you know what to do with. If you withdraw the money after age 59 1/2, you won’t face the 10% early-withdrawal penalty (plus the 2.5% California state penalty), but you will have to pay regular income taxes on the withdrawal and you will lose future years of tax-deferred compounding.
It might be time to meet with a financial planner who can examine your options and give you personalized advice. For information on finding a planner, check out https://www.latimes.com/finplan.
You are not obligated to pay for your children’s college educations, particularly if it means working until you’re 80. Your children may qualify for need-based financial aid, including scholarships and grants. If not, they will at least be able to get loans and part-time jobs to help with their expenses. Starting adult life with tens of thousands of dollars in student loans isn’t ideal, but many people do it. Unlike you, your children have many working years ahead of them to pay off the debt.
Two Trustees Would Protect Estate
Q: My ex-husband died suddenly after a short marriage to his longtime girlfriend. Many weeks later, our grown children inquired about his living trust. They were told they were not mentioned in it, which was a big surprise to them as they were greatly loved by their father.
After spending $5,000 on attorney’s fees to force her into court, the new wife produced the trust showing that they will inherit his estate, but only after her death and only if there is anything left. Their names were at the end of a long list of beneficiaries, which included her family and nieces and nephews.
Our adult children are concerned she’s depleting the estate, but they have already spent many thousands of dollars on attorney’s fees with no results. Could my husband have named a financial institution as trustee or named two trustees to protect the estate?
A: Of course, and obviously he should have if he wanted his children to inherit anything.
It sounds like your ex set up a bypass trust, which allows a surviving spouse to receive income from the estate while (theoretically) preserving the principal for the ultimate beneficiaries (your children and the other relatives). Naming a single trustee on such a trust is rarely wise; naming one with the ethics of this particular woman was ridiculous.
One would like to think that the dear departed didn’t know his wife wasn’t trustworthy, but that rather strains credulity. It’s more likely that, for whatever reason, he didn’t care enough about making sure your kids got an inheritance to put sufficient checks and balances on her.
Your children can incur big legal bills trying to monitor the situation; only they can decide if the potential inheritance is worth the hassle. If they do decide to cause a fuss, they should look for an attorney who specializes in these difficult cases. The family lawyer may not have enough experience in estate matters to be much help.
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Discuss Simplicity
Are you overwhelmed--or have you found ways to simplify your financial life? Share your ideas or seek strategies at The Times’ Business Discussion Board at https://www.latimes.com/businesstalk . Liz Pulliam Weston will be dropping in on the discussion over the weekend and may use your ideas for future columns.
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Send letters to Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 9001, or e-mail liz.pulliam@latimes.com.
