Dear Liz: What is the difference between a fee-based financial planner and a fee-only financial planner? I have had a few complimentary meetings with a fee-based financial planner, regarding retirement planning and income-generating strategy. I am 61, and currently have $325,000 in a traditional IRA and a 401(k) from a former employer, both accounts invested in 70% stocks. The planner suggests that I put the whole $325,000 into a fixed indexed annuity, which he says is no-risk. Is this a good idea?
Answer: Someone who is “fee based” typically accepts commissions or other incentives for selling certain investments in addition to charging fees. “Fee only” advisors accept money only from their clients.
Another important word that starts with f: fiduciary. Fiduciary advisors promise to put your interests ahead of their own. A fiduciary advisor, for example, typically wouldn’t recommend putting all your money in a single investment since having all your eggs in one basket is rarely in your best interest.
Most advisors are not fiduciaries, however, and may recommend poorly performing or expensive products to you when better options are available because those lesser options pay them more. Indexed annuities can pay high commissions to the people selling them, for example, and that can be a powerful incentive for your advisor to gloss over their potential disadvantages.
Indexed annuities are sold as a way to benefit from some of the upside of the stock market without the risk of loss if the market falls. But these annuities are complex and insurers can typically change the rules that govern your returns. In addition, you may face surrender charges if you need to take your money out.
The Securities and Exchange Commission has issued investor alerts about indexed annuities. These alerts urge potential investors to thoroughly investigate how the contracts are structured, how returns are figured and how the calculations can change before investing. Anyone who is considering an indexed annuity would be smart to run the purchase past a fee-only, fiduciary financial planner to see if it really makes sense for their situation.
By the way, there’s no such thing as a no-risk investment. Every investment poses some kind of risk, and a fiduciary advisor will take the time to explain those to you so you can make an informed judgment.
Gift taxes vs. estate taxes
Dear Liz: A reader recently asked about passing a $500,000 inheritance to their children. You mentioned the option of disclaiming, or refusing the inheritance so that it would go to their kids. You wrote, “If you decide not to disclaim and later give the entire $500,000 to your kids, you wouldn’t have to pay gift taxes until you gave away considerably more. Plus, gifts are tax free to the recipients.” Are you possibly mixing up gifting and inheriting? As I understand it, gifting to your kids is limited to something like $15,000 per parent per kid. Unless you have a huge family, that’s not going to add up to $500,000 tax free giving.
Answer: Many people get confused about how gift taxes work. The gift and estate tax systems are intertwined, causing further confusion.
There’s no limit on how much you can give away during your lifetime: You can give as much money as you want to as many people as you want. If you give more than $15,000 to any one recipient in a given year, however, you’re required to file a gift tax return. That doesn’t mean you owe gift taxes.
The amounts over $15,000 count against your lifetime estate and gift tax exemption, which is currently $11.7 million per person. So if you give someone $20,000, the extra $5,000 would be deducted from your $11.7-million lifetime exemption. Only after you exhausted that lifetime exemption would you owe gift taxes.
Exes and Social Security benefits
Dear Liz: I receive Social Security. My recently divorced girlfriend receives Social Security from her ex-husband who is still living. If we were to get married, would either of us lose part or all of our Social Security benefits? It seems like a simple straightforward question, but every Social Security representative I speak with by phone or in person gives me a different answer. My girlfriend did not work long enough to earn her own Social Security benefits. She was married over 30 years and is over 60.
Answer: Your girlfriend would lose her divorced spousal benefits if she remarries, but she could then qualify for spousal benefits based on your earnings record. Your benefits would not be affected. A Social Security representative should be able to calculate how much her benefit would change.
Liz Weston, a 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.