How to Split $250,000 in Student Loans in a Divorce

Divorce is stressful and complicated and hurts on so many emotional and financial levels. It becomes even more complex when you throw in the additional financial stress of student loans — whether they are loans the spouses took out for their own education or for a child’s college. It can be hard to deal with even after you have decided whether a student loan is a marital or separate debt.

Student loans are a complex liability because there are so many different and complicated repayment methods. These repayment plans come with such acronyms as PAYE, REPAYE, IDR and PSLF.

The borrower’s circumstances can also play a huge factor in deciding how to deal with student loans properly. For example, you might not have to repay your student loans in total if you qualify for student loan forgiveness for various reasons. The most common are taxable long-term forgiveness or Public Service Loan Forgiveness.

How student loans are handled in a divorce can be tricky. Depending on the laws of the state in which the divorce occurs, if one of the parties incurred student debt before the marriage, it could be considered separate property. That is especially common if the borrower’s partner received no economic benefit from the student loans or if the parties come from certain states that have community property laws. (1)

But what happens if you have Parent PLUS loans that you took out for your children? Let’s imagine the case of Jack and Jill, a couple who have been married for years but are now divorcing. Let’s say that a few years ago Jill took out $250,000 of Parent PLUS loans under her name to pay for their two children’s college education.

This is a common situation. Arguably, because the Parent PLUS loans were taken out during the marriage for the benefit of their children, they ought to be considered marital debt. (1)

Analyzing the case

Jack and Jill are both 55. Jack makes $180,000 a year working for an accounting firm, and Jill makes $45,000 working for a non-profit.

Jill has $250,000 of federal Parent PLUS loans that charge a 6% interest rate. As a result, considering these loans as marital debt, Jack and Jill together expect to pay $2,776 a month, or $33,312 a year. For both Jack and Jill, it is a significant financial burden that impairs their ability to plan for retirement and other long-term goals.

What if Jack and Jill refinance?

If Jack and Jill refinance at 3%, it will reduce the monthly payments to $2,414 a month. Although the $362 monthly savings are welcome, they are not a significant improvement in their situation.

Divorce has a way of making money scarce. In many divorces, the division of assets and debts approaches 50%, meaning that the burden of paying for her half of the loans would be significantly greater on Jill, who only makes $45,000 a year. Even with an asymmetric division to reduce Jill’s share, it would likely not be easy to sustain. (2)

How their house factors into the equation

Jack and Jill have agreed to sell the family home as part of the divorce. They expected to net about $250,000 after expenses and mortgage repayment to be divided equally. Jack wants to use the proceeds from the sale to pay off the entire parent loan balance. Jack had heard horror stories about other parents not being able to retire because of parent loan payments, so he wanted to get rid of the balance and not worry about monthly payments that could continue into his retirement.

So, he and Jill decide to split the loans down the middle. It means that Jack will pay Jill $125,000 from the sale of their shared home, since the Parent PLUS loans are in Jill’s name. With that, Jack’s share of the parent loan debt is addressed, and he believes that Jill should use her share of the sale to pay her half of the debt.

One of Jill’s loan options could save big bucks

Here’s the thing. With the $125,000 that she would receive from Jack and her $125,000 share from the home sale, she could pay off the debt and move on to other issues. Jill was all in on the idea of each side paying half of the loans until she spoke to a Student Loan Strategist and decided to take a different route with the $250,000 of Parent PLUS loans still in her name. 

Jill has always been passionate about providing support for vulnerable children worldwide. She works full-time at a local charity, a 501(c)(3) non-profit organization. She loves her work and has no plans to retire for at least 10 years. In this case, Jill could qualify for Public Service Loan Forgiveness (PSLF). It means that she could get her loans forgiven tax-free after she makes 120 monthly payments in an Income-Driven Repayment plan. (2)

Here is a summary of Jill’s parent loan repayment options:

Option No. 1: A flat cost of $250,000

She could make a lump-sum payment of $250,000 from the sale of their marital home ($125,000 from Jack + $125,000 of Jill’s share) to pay off the entire loan balance.

In this case, the total cost of the parent loan is $250,000. This way, Jill can get rid of the parent loans in her name. However, Jill still needs to figure out her post-divorce life, including how to pay for her new housing and how to invest the other assets she may receive from Jack from the asset division from their divorce.

Option No. 2: A cost of up to $333,062    

She could keep the $250,000 proceeds and pay off the loans with the standard federal 10-year repayment plan or private refinancing.

The cost of paying off $250,000 of federal loans with a 6% interest under the default 10-year standard repayment plan is $2,776 per month and $333,062 total over the 10 years. However, if Jill could find a private refinancing deal at 3% interest for the same 10-year term, the cost is $2,414 per month and $289,682 total, which is a savings of $362 per month and $43,379 in total.

It may make sense for Jill to do that if she needed to use the $250,000 home sale proceeds to buy a new house to live in, and if she could afford the $2,000+ per month of payments for the student loans. However, this is not an attractive option for Jill since her monthly income is $3,750, and the loan payments would absorb much of it. Even if her divorce agreement provided for alimony, it would still be difficult.

Bar chart shows a standard repayment plan would cost $333,061. Refinancing would cost $289,680. Lump sum payoff $250,000. PSLF: $29,766.Bar chart shows a standard repayment plan would cost $333,061. Refinancing would cost $289,680. Lump sum payoff $250,000. PSLF: $29,766.

Option No. 3: A cost of just $29,766

Finally, Jill could enroll in an Income-Driven Repayment plan and pursue Public Service Loan Forgiveness (PSLF).

Typically, federal Parent PLUS loans are only eligible for one of the Income-Driven Repayment plans, called the Income-Contingent Repayment (ICR) plan, even after being consolidated into a Direct Consolidation Loan.

Still, in some cases, these loans can be “double consolidated” (to learn more, please read How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000) and qualify for cheaper Income-Driven Repayment plans.

 For example, let’s say that Jill double consolidated her parent loans, enrolled in Pay As You Earn (PAYE), and pursued Public Service Loan Forgiveness for 10 years. Then, filing taxes as Single every one of those years, working for the 501(c)(3) employer and making the same level of annual income ($45,000, adjusted annually for inflation), she pays $205 to $283 monthly and a total of $29,059 over 10 years. (3)

The remaining loan balance (which happens to be $430,633 under this scenario) is forgiven tax-free under current tax rules. In this case, assuming that Jill makes the $205~$283 monthly payments out of her cash flow, she gets to keep all $250,000 from the home sale proceeds and pay off the parent loans for just under $30,000. She can use the $250,000 to buy a new home for herself or invest it in retirement, whatever she and her wealth strategist thought would work best. (4)

The burden is still on Jill

Did we mention that student loan repayment options can be complicated? Jill should ensure that she has her ducks perfectly aligned before engaging in the double consolidation/PSLF strategy. In the worst case, she could have missed something and may remain liable for the entire loan and the full payment or end up with a very large tax bill. Hence Jill should get an experienced student loan strategist to counsel her on her strategy.

If she felt inclined, she could discuss this PSLF option prior to the divorce with Jack and divide the benefit between them. However, Jill should remember that the burden is still on her because under this strategy, she has to stay in the PSLF program for 10 years. That obligation is not quantified but should be considered in the asset division.

Summary

Sometimes we can find a silver lining in the worst situations. In their divorce, Jack and Jill could take advantage of a quirk of student loans and could save up to hundreds of thousands of dollars. As a result, Jill could have an additional $220,234 to support her lifestyle.

Student loan repayment strategies can be very different depending on the situation. For example, it would be an entirely different situation if Jill’s income were higher, her employment did not qualify her for Public Service Loan Forgiveness, or she retired earlier than expected. There are still pitfalls ahead for her.

Solutions to student loan problems tend to be unique and difficult to generalize. If you have federal student loans, the short- and long-term costs can vary significantly depending on your income situation and the repayment plan you choose. However, as a federal student loan borrower, remember that you do not always have to pay back the entire loan balance.

Everyone’s situation is different, especially in divorce, especially with student loans. If you are unsure what to do, reach out for help. It might pay off!

(1) Consult an attorney to figure out what applies to you. (2) Consult a financial professional with a specialization in student loans. (3) Note: The projection in the PSLF option assumes that, among other factors such as Jill’s PSLF-qualifying employment status and family size staying the same, Jill’s income grows 3% annually, which increases her monthly payment amount each year. Individual circumstances can significantly change results. (4) Consult a financial planner.

Associate Planner, Insight Financial Strategists

Saki Kurose is a Certified Student Loan Professional (CSLP®) and a candidate for the CFP® certification.  As an associate planner at Insight Financial Strategists, she enjoys helping clients through their financial challenges. Saki is particularly passionate about working with clients with student loans to find the best repayment strategy that aligns with their goals.

Source: kiplinger.com

Dear Penny: Am I Responsible for My New Husband’s Secret $200K Debt?

Dear Penny,

I am 59 and was recently married. I just learned he is in debt for over $200,000. As of right now, all of our financial stuff is separate. If he passes away, am I responsible for his debt even though it was acquired before our marriage? Also, are we better off filing our taxes separately?

-M.

Dear M.,

Getting married without telling your spouse you have $200,000 of debt is a huge breach of trust. I implore you to think carefully about whether you want to stay married to someone who would keep debt of this magnitude secret from you. But more on that shortly.

Generally speaking, you’re not responsible for debts your spouse incurred before you married. This applies regardless of whether you live in a common law state, where it’s easier for married couples to keep assets and liabilities separate. It also applies if you live in a community property state, where any assets or debts acquired during the marriage are assumed to be jointly owned. Because your husband brought this debt into the marriage, you shouldn’t be on the hook for paying it, even if he died.


I can’t tell you whether you’d be better off filing separately, given the substantial penalties involved. Only a tax adviser can tell you that. What I can tell you is that even if your husband owes the IRS, you wouldn’t be liable since he racked up that debt before you married. If you filed a joint return and had your refund intercepted, you could apply for injured spouse status. Then you could collect your half of the refund.

Now back to the elephant in the room, which is the fact that your new husband didn’t tell you about the $200,000 he owes. I have so many questions. Do you know how he acquired the debt? Is he current on payments? Did he tell you about his debt, or did you discover it on your own?

There are a lot of reasons someone could acquire massive debt. Obviously, if it’s the result of a major illness, that’s a lot different than, say, if he went into debt from gambling or chronic overspending. But even if it’s the product of pure bad luck, that’s no excuse for hiding debt from your spouse.

My biggest concern isn’t so much about the money your husband already owes. I worry about any future debt he could incur. If you live in a community property state, you could be liable for any debt your husband acquires while you’re married.

The fact that he kept such a big secret makes me question his trustworthiness. In the worst-case scenario, he could take out fraudulent debt in your name. That’s a legitimate concern, given that a spouse typically has all the information they need to steal your identity.

No matter how much you keep your finances separate, your husband’s debt affects you. Under the best of circumstances, I’m afraid that you’ll be left shouldering most of the expenses while your husband tries to pay down this debt. Maybe this marriage is worth it to you. But that’s something he should have made you aware of before you exchanged vows.

Assuming this isn’t a dealbreaker, you need to bring everything about your finances into the open. You should both review each of your three credit reports. Make sure you understand every debt that’s listed. There are no dumb questions when you’ve just discovered your spouse has six figures of debt. Be vigilant about monitoring your credit reports, as well.

It’s also essential that you make a budget and regularly review how much you’re spending and earning. Typically, I’d suggest doing this on a monthly basis. But given the amount of debt involved, this should be a weekly occurrence.

If money mismanagement is at the heart of your husband’s debt, maybe he could agree to turn over his paycheck to you and allow you to pay the bills. This would be a temporary solution. But if he has a history of reckless spending, it may help if he has less room to fail.

Regardless of how you proceed, under no circumstances should you combine finances. Don’t make your husband an authorized user on your accounts. Do not co-sign for him. Do not open any joint accounts together.

This is about way more than $200,000 of debt. Your husband kept an enormous secret from you. Trust isn’t given. It’s earned. Right now, your husband has a long road ahead.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community.

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Source: thepennyhoarder.com

Talking Money With Your Spouse

It seems that my column titled “Honey, We Need to Talk About Money” struck a chord. A typical response: “You certainly could have been talking about my wife and me,” writes reader Del Richter. 

As I wrote in January, when it comes to finances, women often suffer from an eyes-glaze-over syndrome that can be attributed to a number of reasons—lack of time, interest or confidence, to cite a few. Fortunately, Richter and others have come up with successful strategies to overcome a spouse’s resistance. 

As he approached retirement, Richter launched what he calls “a multi-pronged underground campaign” to pique his wife’s interest. First he said, “Honey, you know when I retire there won’t be a paycheck coming in anymore, so we really need a forward-looking budget to see if we can continue this lifestyle.” 

Next, he convinced his wife, Dena, that they needed to tackle updating their wills. “She realized our assets had grown substantially, and we had to address how we wanted them to be disbursed to children, grandchildren and charitable causes.” (My observation: By taking things one step at a time, the Richters made the process manageable rather than overwhelming.) 

The time factor is critical, says reader Coco Yackley. “Many of my women friends resist getting involved in finances not because they lack interest but because they lack the time and mental space to do so.” Yackley’s suggestion: “Have their husbands take over some household chores so they can prepare the paperwork for taxes or attend a class on financial planning.” 

Dan Williamson says hiring a financial adviser helped ease his wife’s concerns about the future. But he worries that his three 40-something daughters, two of whom are single mothers, don’t have time to focus on finance. (My advice: Dad could take them to see his financial adviser or, as Yackley suggests, offer to babysit the grandchildren while his daughters take a financial class or seminar.)

The Power of Sharing

Amy Breiting found that a simple step like sharing passwords made a big difference. “My husband is recovering from heart surgery, and we hadn’t shared passwords,” writes Breiting. “Now I promote sharing them with someone you trust.”

Breiting has always made it a point to accompany her husband to appointments with their financial adviser, and she felt comfortable calling on him when her husband fell ill.  

Outside help that they seek as a couple has been a boon to other couples as well. Richter’s “third prong of attack” was to have his wife participate in the year-end review with their financial adviser. “The adviser would ask my wife pointed questions like ‘What are your concerns about the plan we are discussing?’ and ‘Are there items you don’t understand or want to change?’ ”

After managing the family finances for the first half of their almost 40-year marriage, Sandy V. encouraged his wife, Ellie, to hire a financial adviser so she would feel comfortable taking the reins in case of his death. She interviewed two women advisers, chose both of them to manage different pools of assets, and now meets with them at least once a year. 

Some women just need a little encouragement to go it alone. “I couldn’t get my wife, Mary Beth, interested in our investment accounts, which she perceived as mine,” writes Randy Johnson. “So I set up an account for her and guided her through the buying and selling process. Now, four years later, she has a portfolio of 28 stocks. She usually outperforms my accounts.”

Source: kiplinger.com

How to Afford a Down Payment on Your First Home, Step by Step

Saving for a down payment when you have a boatload of bills is no easy task, but first-time homebuyers with good credit have an edge: They often can put just 3% down, and they have access to a host of down payment assistance programs.

A down payment gift from a family member, and sometimes a close friend, is allowed for most loan types. Then there are gifts of equity from home sellers.

Smart Ways to Save Up for a Down Payment

Here’s the lowdown on down payments, from 3% to 20%, to buy a home before you go shopping for a mortgage.

1. Low Down Payment Mortgages

Conventional loans, the most common type of mortgage, are offered by private mortgage lenders, such as banks, credit unions and mortgage companies. Many of those lenders allow a down payment of 3% for a fixed-rate conventional conforming loan.

To qualify, borrowers usually will need to have a credit score of at least 640 and a debt-to-income ratio of 43% or less. Income limits may apply.

Putting 20% down will allow a borrower to avoid private mortgage insurance (PMI) on a conventional loan.

Government-backed loans like FHA and USDA mortgages are designed to help low- to moderate-income borrowers or those with lower credit scores.

An FHA loan requires as little as 3.5% down on one- to four-unit owner-occupied properties as long as the borrower occupies the building for at least one year. To qualify for 3.5% down, your credit score must be 580 or higher. Someone with a credit score between 500 and 579 may qualify to put 10% down.

A VA loan, for veterans, active-duty military personnel, National Guard and Selected Reserve members, and some surviving spouses, requires no down payment. Borrowers can buy a property with up to four units, as long as the borrower occupies the property throughout the ownership. There is no stated minimum credit score, but generally speaking, lenders require a minimum credit score of 580 to 620 to qualify.

A USDA loan, for properties in eligible rural and suburban areas, also requires no down payment. Lenders typically want to see a credit score of at least 640, and household income can’t exceed 115% of the area’s median household income.

USDA and VA loans typically come with lower interest rates than conventional or FHA loans, but a USDA loan requires a guarantee fee, a VA loan requires a funding fee, and an FHA loan, upfront and annual mortgage insurance premiums (MIP).

It pays to understand PMI vs. MIP in understanding the total costs of your loan.

And lender-paid mortgage insurance has its pros and cons.

2. State and Local Down Payment Assistance

State, county, and city governments and nonprofit organizations offer down payment assistance programs to help get first-time homebuyers into homes. (By the way, the definition of who qualifies as a first-time homebuyer is more expansive than it seems.)

Down payment assistance may come in the form of grants or second mortgage loans with various repayment or loan forgiveness provisions.

HUD steers buyers to state and local programs.

The National Council of State Housing Agencies has a state-by-state list of housing finance agencies; each offers a wealth of information designed to boost housing affordability and accessibility.

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3. Down Payment Gifts

“Hey, Mom and Dad (or Uncle Clyde or Aunt Betty, or My Dear Girlfriend), I’d love it if you gave me a large cash infusion to help me buy a house.” It just rolls off the tongue, right? In fact, one or more loved ones may be willing to pitch in toward your down payment or closing costs.

Under conventional loan guidelines, gift money for a principal or second home is allowed from someone related by blood, marriage, adoption, or legal guardianship, or from a domestic partner or fiance. There’s no limit to the gift, but conventional loans may require borrowers to come up with a portion of the down payment.

FHA guidelines allow gift money from relatives, an employer, a close friend, a charitable organization, or a government agency that provides homeownership assistance.

With USDA or VA loans, the only people who cannot provide gift funds are those who would benefit from the sale, such as the seller, lender, real estate agent, or developer.

A mortgage gift letter signed by donor and recipient will be required, verifying that the down payment funds are not expected to be repaid. A lender may also want to track the gift money.

Then there are gifts of equity, when a seller gives part of the home’s equity to the buyer to fund all or part of the down payment on principal or second homes. For FHA loans, only equity gifts from family members are acceptable.

A signed gift letter will be required.

4. Crowdfunding a Down Payment

Crowdfunding to help buy a house? It’s possible with sites like GoFundMe, Feather the Nest, HomeFundIt, and even Honeyfund, set up as a crowdfunder for honeymoons.

Feather the Nest isn’t associated with a mortgage lender, so donation seekers can decide where to go for a loan. It charges a fee of 5% for every contribution.

HomeFundIt charges no fees, but you must pre-qualify and then use CMG Financial for your home purchase. The site shows a money match toward closing costs for first-time buyers.

GoFundMe charges 2.9% plus 30 cents per gift.

For Honeyfund, U.S. residents receiving U.S. dollars via PayPal are charged 3.5% plus 59 cents per transaction.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

5. Retirement Account Withdrawals or Loans

It might be a good idea to explore all options for getting cash before tapping your 401(k) savings account.

As you probably know, taking money out of your 401k before age 59 ½, or before you turn 55 and have left or lost your job, is met with a 10% early withdrawal penalty and income tax on the amount. So withdrawing money early from this tax-deferred account has a painful cost and impairs long-term growth.

A traditional IRA, on the other hand, allows first-time homebuyers to take an early withdrawal up to $10,000 (the lifetime limit) to use as a down payment (or to help build a home) without having to pay the 10% early withdrawal penalty. They still will have to pay regular income tax on the withdrawal.

Your employer’s plan might let you borrow money from your 401k and pay it back to your account over time, with interest, within five years, in most cases. You don’t have to pay taxes and penalties when you take a 401k loan, but if you leave your current job, you might have to repay the loan in full fairly quickly. If you can’t repay the loan for any reason, you’ll owe taxes and a 10% penalty if you’re under 59 ½.

Then there’s the Roth IRA. You can withdraw contributions you made to your Roth any time, tax- and penalty-free.

If you take a distribution of Roth IRA earnings before age 59 ½ and before the account is less than 5 years old, the withdrawal may be subject to taxes and penalties. You may be able to avoid penalties but not taxes if you use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.

If you’re under age 59 ½ and your Roth IRA has been open for five years or more, a withdrawal of earnings will not be subject to taxes if you use the withdrawal to pay for a first-time home purchase.

Recommended: First-Time Homebuyers Guide: Getting Loans & Grants

The Takeaway

How to afford a down payment on a house? First-time homebuyers may benefit from assistance programs, down payment gifts, and mortgage types that require little down.

SoFi offers a help center for home loans to ease the way. And when you begin the hunt for financing, a good first step is to get pre-qualified and then seek mortgage pre-approval.

Consider SoFi mortgage loans. Qualified first-time homebuyers can put just 3% down, and checking your rate takes only minutes.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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Source: sofi.com

The Lowdown on Living Trusts

If you’re putting together an estate plan, you have no doubt heard about the benefits of a living trust. Assets placed in a trust won’t go through probate, a time-consuming and potentially costly process. In addition, a living trust, also known as a revocable trust, allows you to designate a trustee to manage your estate after you’re gone—an important consideration if your heirs are minor children or adults who are unable to handle a large inheritance.

But although living trusts can streamline the disposition of your estate, there are plenty of opportunities to make costly missteps, particularly when it comes to transferring your assets to a trust.

What Not to Put in a Living Trust

Some types of accounts should never go into a trust, even if they account for the bulk of your estate. That category includes assets in your retirement accounts, such as your 401(k) plan, IRAs and tax-deferred annuities. Health savings accounts and the less-common medical savings accounts, which allow you to take tax-free withdrawals for medical expenses, should also be excluded from your trust.

If you transfer any of these accounts to your trust, the IRS will treat the transaction as a distribution and you’ll have to pay income taxes on the entire amount, says Kris Maksimovich, president of Global Wealth Advisors in Lewisville, Texas. Maksimovich says one of his clients recently transferred an IRA to a trust; fortunately, he was able to unwind the transaction before the distribution was taxed. 

You can make your trust a beneficiary of your retirement accounts, which is what Maksimovich did for his client’s IRA. Naming your trust as a beneficiary allows you to determine how the assets will be distributed to your heirs and could also protect the funds from creditors. However, the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, which requires non-spouse beneficiaries to deplete inherited IRAs in 10 years, created some uncertainty with respect to how long a trustee has to deplete an IRA that’s left in a trust, so consult with an attorney before naming the trust as beneficiary. 

Most other assets can be placed in a trust, but some should probably be excluded for practical reasons. For example, in order to transfer a vehicle to a trust, it must be retitled, which can trigger taxes and fees, depending on where you live. In addition, cars and other vehicles, such as boats and motorcycles, typically don’t go through probate, so you don’t need to transfer them to a trust. 

Also, although most accounts with financial institutions belong in your trust, you should exclude accounts used to pay your monthly bills. Some entities, such as your utility company, may not accept payments unless they’re in your name, Maksimovich says. In addition, your bank may require you to close the account and open a new one in the name of the trust. For those reasons, it’s simply easier to keep those accounts outside the trust.

Assets That Belong in a Trust

Another common misstep is to set up a trust and then fail to fund it. Funding a trust typically involves retitling property and financial accounts. You and your attorney should come up with a detailed inventory of assets that belong in the trust:

Real Estate, Including Your Home

It may be your largest asset, and it’s an appropriate one to place in your trust. Doing so will decrease the time required to transfer the home to your heirs. And if you own property in another state—a vacation home, for example—transferring the title to a living trust will enable you to avoid going through probate in more than one state. You’ll need to create a new deed that transfers ownership of the property to your trust.

Transferring your home to a trust won’t affect your ability to sell it, says Letha McDowell, an attorney with the Hook Law Center and president of the National Academy of Elder Law Attorneys. However, if you want to refinance your mortgage or obtain a home equity line of credit, your lender may require you to transfer the property out of the trust and back to your name in order to get the loan. Once you’ve completed the transaction, you can transfer the property back to the trust. But because this process can be cumbersome, you may want to postpone transferring your home to a trust until after you’ve refinanced or closed on a HELOC or home-equity loan. 

Financial Accounts

Financial accounts that can be transferred to a trust include stocks, bonds, mutual funds and other investments in nonretirement accounts; certificates of deposit; money market funds; and bank savings accounts that aren’t being actively used to write checks. You can put your safe deposit box in the trust, too. 

This process requires some paperwork. For bank and brokerage accounts, you’ll need to open a new account in the name of the trust. If you have any physical stock and bond certificates, you may need to work with a stock transfer agent or bond issuer to change ownership to the trust. You may need to open a new CD to fulfill the transfer, so ask your financial institution if it will waive penalties before making the switch. 

If this seems like a lot of work, consider it a gift to your heirs. Transferring inherited shares of stock or mutual funds to an estate (outside of a trust) can take months, during which time your heirs will be required to fill out lots of documents and probably make a few phone calls, all of which can delay probate.

Personal Property, Like Collectibles, Jewelry and Art

You usually don’t need to retitle these types of assets, but you should draw up a list with instructions that they should be included in the trust. You can use the trust to designate who should receive these items, which should prevent family disputes over who gets your grandmother’s pearls. You can also provide this type of direction in a will, but a will becomes a matter of public record—not desirable if grandmother’s pearls are worth a lot of money. And while the car you drive around town probably doesn’t belong in a trust, you may want to include any collectible vehicles you own, particularly if you think the vehicle will retain its value or appreciate over time. 

Once you’ve transferred and retitled assets that belong in your trust, you should review it periodically to make sure it’s up to date. Maksimovich says he reviews his clients’ trusts annually. In other cases, every three to five years may suffice, but you may need to review (and possibly update) the trust after a major life change, such as the sale of your home, the birth of a child or grandchild, or a marriage or divorce.

Do You Really Need a Trust?

As we’ve explained, funding a living trust requires some legwork, and there is also the issue of cost. Depending on where you live, expect to pay $1,000 to $1,500 in legal fees, compared with $200 to $500 for a basic will.

A living trust may be worth the cost if it reduces the hassles of going through probate. If you’ve served as an executor of an estate, you may already be aware of what’s involved. “No one appreciates avoiding probate more than someone who has gone through probate,” Maksimovich says.

But the exigencies of probate vary, depending on where you live. “There are some states where it’s horribly expensive and time consuming and others where it’s not,” McDowell says. Most states exempt a certain amount of assets from probate, so if your estate is small—less than $100,000, for example—you probably don’t need a living trust. In addition, if most of your money is in retirement accounts, you may not need a living trust, because those assets will transfer to beneficiaries outside of probate. Life insurance with a named beneficiary won’t go through probate, either, because the death benefit will go directly to the beneficiary. 

You can also arrange to make bank and other accounts payable upon death to your heirs, in which case those accounts won’t go through probate. Property owned jointly, such as a home owned by you and your spouse, will transfer to the surviving owner outside of probate, too. 

Source: kiplinger.com

Estate Planning Checklist: 12 Things to Get in Order

It may not be a fun thing to think about or talk about, but it’s important to get your estate planning organized. Unfortunately, death doesn’t just happen to other people. We should all get our affairs in order so that our loved ones can focus on grieving and moving on once we pass.

Of course, a “getting your affairs in order before death checklist” may not rank as the ultimate way to kick off a relaxing weekend, but you will rest easy once it’s all said and done. Luckily, it’s not nearly as painful as you might think. It can be less painful than doing your taxes every year. Here, we break it down for you into 12 steps.

12 Estate Planning Must-Haves

Estate planning isn’t just something for retirees or people with multiple homes. All of us need to take this step and determine how and by whom decisions will be made if we are incapacitated or near the end of our life. We also need to funnel our assets to the appropriate people when our time on earth is over.

It can sound grim, we grant you that, but it’s actually a gift to your loved ones to get all of this taken care of. So let us take you through the dozen items to wrangle so you know your affairs are in order.

1. Last Will and Testament

This is super-important because it outlines how your estate (your assets) will be divided. A will is a legal document that serves a couple of important functions. Wills are mainly used to specify how you want to distribute your assets. Assets can include things like personal property, real estate, cars, bank accounts, art, jewelry, or stocks. Despite what some people think, you can give your assets to anyone. You aren’t limited to immediate family. You can even donate your assets to charities or nonprofits if you wish.

A will also ensure that the people you care about are taken care of after you have passed away. If you have any children, a will can name whom you intend to become their guardians if you die. It can also do the same for pets.

You can create a will online using digital tools (you will need it signed and witnessed, though) or work with an attorney, often for under $1,000, to create one.

Recommended: What Happens If You Die Without A Will?

2. Proof of Identity

When the time comes for a will to be put into effect, an executor of the estate plays a crucial role. This individual, who you can name in your will, carries out your will’s instructions. To help this person do their job, make sure you have all of your IDs in one place. Documents you will want to have may include:

•   Birth certificate

•   Social security card

•   Armed forces discharge papers

•   Marriage certificate

•   Prenuptial agreement

•   Divorce certificate

This will make following your directives that much easier.

3. Digital Logins and Passwords

In recent years, our digital lives have become inextricably woven into our “real life.” It’s not uncommon for people to have dozens of digital accounts, containing vital information about our assets. Should you fall ill or suddenly die, your loved ones will likely need to access some of them. For example, you may have financial account information there, and email may be how you interact with some of your closest friends and colleagues. Fortunately, there are many ways to properly document and keep track of your online accounts. Whether you use a digital vault, an integrated password manager, or simply pen and paper, you should establish a system for your loved ones. You can pass this information along to your financial power of attorney to deal with, or you can name a digital executor to close your accounts and distribute your assets.

4. Property Deeds and Titles

Any titles you have for cars, homes, or real estate need to be gathered and put in a safe place. Details on that “safe place” need to be shared with one or two key people in your life, like your next of kin and/or your will’s executor. However, just gathering these items doesn’t mean you can necessarily spare your loved ones the process known as probate. Probate is a potentially complicated and expensive process in which a deceased person’s property is reviewed and allocated. Having a will is of course an important step, but with real estate, for example, things can get complicated even with that document in place. To skip the probate process, you can create a revocable living trust (which is discussed below), and then transfer ownership of your properties to it and list the trust as the current owner.

It’s important to remember that any names on titles or deeds will overrule anything you write in a will. For example, if you bought a car with your ex-wife a few years before you got a divorce and her name is still on the title, it won’t matter whose name you write in your will. She will inherit the car because it is her name that is on the title.

5. Revocable Living Trust

Above, we mentioned the potentially drawn-out and expensive process of probate and why you would want to take steps now to help your loved one’s avoid it later. Let’s drill down on one way to do just that. A revocable living trust is a type of legal instrument that allows you to use and control your property while you’re alive, but also change who inherits it at will. If you have one legally established, it allows all of the assets you entrust to it to skip probate, meaning your beneficiaries can receive your assets much more quickly.

After you’ve created a revocable living trust, you must also name a ‘successor trustee’ to manage your trust. This person will be responsible for distributing your assets to the proper beneficiaries.

Recommended: What Is A Trust Fund?

6. Debts

It would be nice if all debts vanished when our lives ended, but, sorry, that’s not how things work. Your beneficiaries are going to need to know about and potentially address your debts (these are often paid out from your estate before the remaining assets are distributed). To smooth the process, compile a list of all your debts. This may include things like:

•   Auto loans

•   Credit cards

•   Mortgages

•   Personal loans

•   Student loans

On your list include contact information for the lender, your account number, login information, and approximate debt amount. For credit cards, include a list of frequently used credit cards and ones you simply have but rarely use. If you have a lot of open cards in your name, and aren’t quite sure how many you have, you may want to get a free credit report from Annual Credit Report .

7. Non-probate Assets and Beneficiaries

If you have assets that are able to skip probate, meaning they can be transferred directly to the named beneficiaries after you die, then you should keep up to date on naming beneficiaries (say, if a death or divorce has occurred) and keep a list of these assets with account details. Which details exactly? Details like where any paperwork or policies are, account numbers, and contact information for the issuing entity are a good place to start.

Non-probate assets include such things as:

•   Insurance policies

•   401(k) accounts and IRAs

•   Pensions

Non-probate assets should not be listed in your will because any designations you make with each institution will override anything you write anyway.

8. Financials

While you are gathering all of your estate materials, make sure to keep a neat list of all your login and password information for the following:

•   Bank accounts

•   Car insurance

•   Credit cards

•   Health insurance

•   Home insurance

•   Life insurance

•   Loans

•   Pension plans

•   Retirement benefits

•   Tax returns

If everything is online, you may want to make sure every account is listed along with your other digital accounts in your password manager or digital vault.

9. Advance Healthcare Directive

An advance healthcare directive (also known as an AHCD) allows you to decide, in advance, how medical decisions should be made on your behalf if you are unable to communicate your wishes. AHCDs typically have two parts: designating a medical power of attorney (you may also hear this called a healthcare proxy; we share more on this below) and a living will.

A living will describes and outlines your medical care wishes just in case you are ever unable to communicate them to your healthcare providers or loved ones. It can describe any aspect of healthcare preferences, and can include things like:

•   End-of-life requests

•   Medications

•   Resuscitation requests

•   Surgeries and surgical procedures

10. Power of Attorney

This is an important part of putting together your estate-planning checklist. The goal here is typically to make sure that, if you were incapacitated (say, due to dementia or a medical emergency), someone could act on your behalf. When you give someone power of attorney, that person then has legal authority to manage all of your affairs. There are two types of power of attorney: financial and medical.

A financial power of attorney is responsible for:

•   Accessing your bank accounts to pay for healthcare, bills, groceries, and any other housing needs you have

•   Collecting upon any debts you have

•   Filing taxes on your behalf

•   Applying for benefits, such as Medicaid

•   Making investment decisions on your behalf

•   Managing any properties you own

A medical power of attorney (also sometimes referred to as a healthcare proxy) is responsible for:

•   Choosing which doctors or care providers you see

•   Deciding what type of medical care you receive

•   Will advocate if there are disagreements about your care

It’s not uncommon for one person to be designated as both a financial and medical power of attorney, but they don’t have to be the same person. It often provides tremendous peace of mind to know you have designated who will look after your best interests in the situations outlined above.

11. Funeral Wishes

Okay, take a deep breath for this one. It may sound morbid at first, but wouldn’t you want your earthly remains and any celebration of your life to reflect your wishes? So it can make sense to spell out what you want to happen to your body (say, burial, cremation, organ donation).

You can also detail funeral wishes. This typically includes things like what type of music you want to be played or passages to be read, and you can even specify that you want charitable donations instead of flowers.

Whatever you decide, just make sure you communicate your wishes. Unlike other things on this list, there isn’t a formal, legal document you need to sign, but you can usually include your wishes somewhere in your will.

12. Speak with an Estate Planner

Now that you’ve read almost all of this estate planning checklist, you should still consider getting some skilled guidance. Even if you’re completely comfortable writing up legal documents, it’s a good idea to visit an estate planner to make sure you’ve covered all of your bases. He or she may have recommendations for you that can save everyone money and better protect your beneficiaries.

Recommended: Estate Planning 101: The Basics of Estate Planning

The Takeaway

While it can be a difficult topic to think about, estate planning takes time and patience. If you have children, dependents, or a spouse, clear up a weekend and do it as soon as possible. Life happens fast even in the best of circumstances

Estate Planning Made Easier: SoFi and Trust & Will Partnership

Now that you know the steps involved, here’s a super-simple way to approach some of these to-do’s: with a digital estate planning partner. No in-person sales pitches or long phone calls required! SoFi has joined forces with Trust & Will*, a leading provider, and offers a 10% discount to help you purchase Guardian, Will, or Trust-based estate plans.

Interested in the easy and reliable route to estate planning? Check out what’s offered by SoFi in partnership with Trust & Will.

Photo credit: iStock/Kerkez


*Trust & Will, a leading digital estate planning platform, is offering a 10% discount specifically for SoFi members. No promo code required. The 10% discount is automatically applied at checkout to the initial purchase of any Guardian, Will, or Trust-based estate plan.
SoFi member benefits are provided by third parties, not by SoFi or its affiliates. Providers pay royalty fees to SoFi for the user of its intellectual property. These fees are used for the general purposes of SoFi. Some provider offers are subject to change and may have restrictions. Please contact the provider directly for details.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Source: sofi.com

Dear Penny: Can I Stop My Ex-Wife From Claiming Half My Social Security?

Dear Penny,
Your benefit would be even less than half if you claim Social Security early. If you started collecting at 62, as soon as you’re eligible, you’d only receive 32.5% of your ex-wife’s full benefit. You also can’t earn 8% delayed retirement credits each year should you hold out past full retirement age. Your benefit would cap out at 50% of your ex’s primary insurance amount.
Dear R.,
Related Posts

There seems to be a misconception at the heart of your question — which is the idea that when you claim your ex’s Social Security, you’re somehow taking money from them. That’s simply not true.
If your ex-wife earned more than you, she’d almost certainly get more money by taking her own Social Security. But even if you made more money, there’s no reason to worry that your ex could “come after” your Social Security. Her benefit has zero impact on your benefit, and vice-versa. Now to answer your question: It sounds like you’d qualify for your ex-wife’s benefits, as long as you’re not currently married. Your marriage lasted for 10 years and you’ve been divorced for more than two years, as Social Security requires.


The important point is this: Social Security wouldn’t take money out of your ex’s check and send it to you. Nor would they send half of your check to your ex. They’ll simply use the former spouse’s work record if it results in more money for the person who’s applying. Social Security will give you whichever benefit is bigger, but not both. Ready to stop worrying about money? Also, would she be able to come after half of my Social Security? How can I prevent the latter? (I earned less than she did.) There’s nothing anyone can do to prevent their ex from claiming their Social Security. Even though some divorce decrees specify that one spouse will relinquish their rights to collect the other spouse’s benefits, the Social Security Administration says these provisions “are worthless and are never enforced.” Get the Penny Hoarder Daily Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community. When it’s time to apply, Social Security will need to locate your ex-wife’s record. This process will be easier if you still have her Social Security number. Otherwise, you may need to provide her date of birth, where she was born, and the names of her parents. Also be prepared to provide a copy of your marriage certificate and divorce decree. The bottom line here is that your ex’s Social Security doesn’t deserve to occupy any real estate in your brain. Focus on getting the maximum benefit for yourself, whether it’s through your own benefit or your ex’s. Fortunately, you don’t need to make this into a guessing game. When you apply for Social Security, you can ask them to calculate both your retirement benefit and your spousal benefit. You’ll get whichever benefit is more. You can also use Social Security’s online calculators to estimate how much you’d get from retirement benefits vs. spousal benefits.
Social Security doesn’t have a pot of money set aside for you. Instead, you pay into the Social Security trust through payroll taxes. When you become eligible to start collecting, your benefits are calculated based on how much you paid in. Alternatively, if you’re married or divorced, you may qualify for spousal benefits. In that case, Social Security bases your benefit on your current or former spouse’s earnings instead of your own.

-R.

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Source: thepennyhoarder.com

What Does Head of Household Mean?

The IRS also considers you unmarried for tax purposes if your home state has declared you legally separated from your spouse. Simply moving out of your shared home isn’t enough; you need to get in front of a judge to be granted a legal separation.
While both single and head of household refers to unmarried individuals, the head of household must pay for more than half of the household’s expenses and support qualifying dependents. The benefit of filing head of household is a larger standard deduction, lower tax rate, and higher income limits for stimulus checks. For 2022, the standard deduction for single filers is ,950, while the standard deduction for head of household is ,400.
Don’t get any ideas about divorcing your spouse for a few days around the end of December just to file as head of household. If you turn around and get remarried any time during the following year, you’ll face tax consequences from the IRS.

Definition of Head of Household

Can I File as Head of Household if I’m Married?
Most tax professionals advise taxpayers to file your tax return as head of household whenever possible to take advantage of available tax breaks that include:

1. You’re Not Married on the Last Day of the Year

What is the Difference Between Single and Head of Household?
Filing your taxes as head of household can seem vaguely intimidating, but it’s really nothing more than a designation by the IRS that may lower your tax bill and put more money in your pocket.

If you still have some questions about qualifying for head of household status, check our answers below to the most common questions.
This tax status allows you a larger standard deduction, lower tax rate, and higher income limits for stimulus checks.

2. You Paid More Than Half the Expenses for Keeping Up the Home During the Year

To qualify as head of household, you’ll need to meet certain criteria.
Does Receiving Child Support Disqualify me from Claiming Head of Household?

3. You Must Have a Dependent Living in the Home With You for at Least Half the Year 

Source: thepennyhoarder.com
Who Qualifies for Head of Household?
Can you Claim Head of Household Without a Dependent?

Filing Taxes as Head of Household

Check the IRS website for a full list of qualifying dependents.

  • Larger standard deductions. People filing under a single or married filing separately status are entitled to a $12,550 deduction for the 2021 tax year. That figure jumps to $18,800 in 2021 if you file as head of household.
  • Lower tax rate. Filing as head of household puts you in a different tax bracket than other filing statuses. That could mean you have less taxable income and lead to a lower tax bill or a larger tax refund.
  • Higher income limits for stimulus checks: Like the other stimulus checks, reduced payment began for the third stimulus check at $75,000 for single users. However, if you’re the head of household, this phaseout doesn’t apply until your income is $112,500.

That means you must have paid more than half of all household bills, including rent or mortgage, groceries, utilities and insurance.

Frequently Asked Questions (FAQs) About Head of Household

It’s all fun and games until tax time rolls around, and then “head of the household” takes on an entirely different meaning.

Being an adult is great. You get to be king or queen of your own castle — or head of the household, if you will.
Get the Penny Hoarder Daily
What Does it Mean to be the Head of Your Household?
In order to qualify for head of household, you must be unmarried, legally separated, or divorced, cover more than half of the household’s expenses, and have a qualified dependent in the home. A qualifying dependent is most often a child under 19 years old (or 24 years old if they’re a full-time student), but can also include a person with disabilities or a financially-dependent family member who lives with you. Check the IRS website for a full list of qualifying dependents to see who qualifies.
It’s OK if someone gave you money for something like child support during the year to help you cover the bills as long as you paid more than 50% of them with your own savings or money you earned.
Traditionally, being head of your household means you’re the one responsible for making decisions and making money. In a tax sense, however, the head of household has three specific qualifications:

  • Be unmarried, divorced, or legally separated
  • Cover more than half of the household’s expenses
  • Have a qualifying dependent in the home
  • You can also claim parents, stepparents, grandparents and certain individuals who are related to you by marriage as dependents. The key is they must have lived with you for at least half the year, and you must have paid more than half of their financial support. You can still claim your parents if they don’t live with you as long as you pay for more than half of their living expenses.

    No, even if your spouse has no income, you can’t file as head of household if you’re married. You wouldn’t want to anyway. The standard deduction is higher for joint filers (,900) than head of household (,400).
    Lisa McGreevy is a former staff writer at The Penny Hoarder and Whitney Hansen is a contributor and veteran personal finance writer.
    A court-decreed annulment also qualifies you as unmarried for tax purposes. You’ll need to fill out some extra paperwork, though, so be sure to check with the IRS or a professional tax preparer to find out exactly what you need to do.
    Qualifying dependents include biological, step-, foster and adopted children, and your siblings. They must be under 19 if they are not a student, or under 24 if they are a full-time student. There is no age cap if the dependent child is permanently and totally disabled.
    Ready to stop worrying about money?
    Head of household is a filing status the IRS uses to determine what tax bracket, tax credits and responsibilities apply to you during the course of a tax year.

    No, a head of household status requires a qualifying dependent. You can, however, claim head of household without having a child. Other qualifying dependents include your mother or father, a relative who is permanently disabled, or other relatives that live with you and make less than ,500 a year. Basically, if you financially support them and they live with you, they likely qualify as a dependent for head of household status. <!–

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