Why your estate plan might need a do-over
Dear Liz: We had a living trust done in 2006. The lawyer recently died and his office mailed us a packet with the trust document in it. We want to make a few changes. Every lawyer wants to do the whole thing over and have us sign papers giving them powers.
Answer: Your estate plan is probably ready for a do-over.
Previous columns have mentioned that estate planning laws have changed significantly since 2010. Any estate document created before that point needs to be reviewed and updated. Your previous attorney can’t do the updating, and another lawyer might be wary of being held responsible for a document they didn’t draft.
That said, it’s not clear what “powers” you’re being asked to give. What these attorneys may want to do is have you create powers of attorney that would allow a trusted person to make financial and healthcare decisions should you become incapacitated. These documents are essential and a good reason to schedule an appointment with the attorney of your choice today.
This advice is well worth repeating: Do-it-yourself estate planning can create a mess for your heirs that could incur far more in legal fees than you would have spent getting expert, personalized advice in the first place.
A living trust is a key document for passing your assets along to heirs after your death.
The ins and outs of I-bonds
Dear Liz: As you know, interest rates on certificates of deposit are extremely low. I was thinking of investing in government I-bonds. Can you discuss the pros and cons?
Answer: I-bonds are guaranteed by the U.S. government and currently pay an interest rate of 7.12%. But they do have some downsides.
The rate on Series I savings bonds is a composite of two rates: a fixed rate, which is currently zero, and an inflation rate, which changes every six months. The semiannual inflation rate is currently 3.56%, which translates into a 7.12% annual rate. This rate applies for I-bonds issued November 2021 through April 2022 and is good for the first six months you own the bond, according to Treasury Direct, the financial services site that allows you to buy securities including I-bonds directly from the U.S. government.
Although the rate can change, it can’t go below zero, so you can’t lose your principal. However, you also can’t cash in I-bonds for the first year, and if you cash them in before five years, you’ll lose the previous three months’ worth of interest.
Also, the bonds don’t pay interest to you directly. Every six months, the interest earned is added to the bond’s principal. That creates a new principal value, and interest is then earned on that value.
The bonds are exempt from state and local taxes but subject to federal taxes. You can opt to pay federal tax on the interest each year, but most people defer reporting the interest until they cash in the bond or it stops earning interest at 30 years, in which case it’s automatically cashed out and the interest reported to the IRS.
You can buy up to $10,000 in I-bonds electronically each calendar year. You can buy another $5,000 in paper bonds, but only if you use your tax refund to do so.
Should a 101-year-old sell her real estate now or leave it for heirs to sell? The tax implications are complicated
No cash-back offer on unused exemption
Dear Liz: When selling a home and qualifying for the $500,000 exemption, but only needing to use $250,000 of it, what happens to the unused balance? An accountant told my friend she would get it in cash, which sounds incorrect to me.
Answer: You’re right — that’s not correct. It’s so incorrect, in fact, that your friend is probably an unreliable narrator. It’s hard to imagine an accountant being so out of touch with this basic tax provision as to offer that advice.
Each homeowner can exempt up to $250,000 of home sale profits provided they owned and lived in the house as their primary residence for at least two of the previous five years. That means a couple can exempt up to $500,000.
There’s no cash-back offer if someone uses less than the full exemption. On the other hand, the exemption potentially could be used every two years, so it’s not exactly a “use it or lose it” proposition, either.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
