Dear Liz: I've been self-employed for just over a year. Because of disbursements from a recent divorce, I have enough money to make a 40% down payment on a modest house. My income will easily cover the resulting mortgage payments, health insurance and other expenses, but I've been turned down for a loan several times without a cosigner. A family member has offered many times to do this, as the person doesn't have the means or interest in buying a house anytime soon for various reasons. Reluctantly I am considering it.
This person has a good job but will not be contributing any money toward my down payment or mortgage payments. I plan on setting up a separate shared bank account that will cover at least a year to 18 months of expenses for the home in case something happens to me, so my relative isn't burdened in any way. I also plan on listing this person as a beneficiary on the mortgage so they could choose to sell the house or live in it.
What would be the tax liability if this happens? What if we become roommates and they pay me rent? Would it be a good idea to refinance in a year or so to remove the cosigner? Would a revocable living trust be a better way to handle this situation?
Answer: The best way to handle this situation is to find a good real estate attorney who can explain your options. Your relative should do the same.
Cosigning a loan would have a lot of upside to you and mostly downside to your relative. Cosigners are equally responsible for the home loan, but they aren't typically owners of the property.
If you want your relative to inherit the house should you die, you can include her as the property's beneficiary in estate planning documents or a transfer on death deed, if your state has that document for real estate. (Mortgages aren't assets, so they don't have beneficiaries.) If your relative inherits the house, she typically wouldn't owe taxes unless yours is one of the six states that still has an inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania). In these states, closer relatives typically pay a lower rate than more distant relatives or those who aren't related.
You also could leave a sum of money to pay the home's expenses for a certain period. That probably would be a better idea than a shared bank account, unless your relative insists on access to such a thing as a condition of the loan. In general, you should minimize financial entanglements with people if you're not married to them or legally or morally responsible for them.
You probably should try to refinance this loan at your earliest opportunity, rather than leaving her on the loan or inviting her to be your tenant. Even in areas where landlord-tenant law favors the landlord, such a relationship can be tricky. In other areas, you could find yourself saddled with a relative who would be extremely difficult to evict.
When waiting to take Social Security doesn’t make sense
Dear Liz: I receive $2,400 per month in Social Security. My wife, who turned 66 in early April, was told by the Social Security Administration that her retirement benefit will be about $800. Can I get spousal benefits for her of $1,200, less what her Social Security amount will be? My problem is that she wants to wait to get her maximum amount of Social Security. Could she start spousal benefits now or does she have to wait until age 70?
Answer: Waiting would be pointless. Even though she would boost her retirement benefit by 8% each year, or a total of 32% by age 70, she still would receive less than if she just signed up for spousal benefits now.
Because she has reached her full retirement age of 66, her spousal benefit would equal 50% of what you're receiving. (Technically, she will receive her own benefit plus an additional amount that brings her up to 50% of your benefit.)
Delayed retirement credits, which increase retirement benefits between full retirement age and age 70, don't compound but increase benefits by two-thirds of 1% each month. There are no delayed retirement credits for spousal benefits, but spousal benefits are reduced when people start them before their own full retirement age.