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Money Talk: Sept. 29, 2013

Dear Liz: I have $40,000 in credit card debt due to home healthcare I had to provide for my mom, who lived with me for six years before she passed away in 2011. I filed a Veterans Affairs claim on her behalf but just got a VA check for $344 with no explanation about whether this was all it was going to allow. If it is, I need to file for bankruptcy. I owe $18,000 on my mortgage and $32,000 on a home equity loan I took out in 2001 to help my son get on his feet after he finished graduate school and had his first child. I also had some credit card debt from helping my brother in 2009 when he had cancer and could not work and his wife left him so he had no income. I also have $20,000 in a money market account that I call my retirement fund. Is it protected if I were to file for bankruptcy?

The economic downturn caused me to have to take a $700-a-month pay cut the first of this year that will reduce my annual salary to $55,000 if there are no more cuts or layoffs. If they were to close the business completely, my Social Security benefit will be $1,900 per month, compared with $3,400 that I take home now. I have always paid my bills, but Mom’s medical expenses really have taken a toll on my finances.

Answer: Your debt exceeds your income, and few people in that situation manage to pay off what they owe. But bankruptcy isn’t a get-out-of-jail-free card. Your home equity and your savings could be at risk. Had you actually put your money into a qualified retirement account, such as an IRA or a 401(k), it would have been protected from creditors. Just calling an account your retirement fund offers no protection whatsoever. A bankruptcy attorney familiar with the laws of your state can tell you what to expect. You can get a referral from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org.

You also need to call the VA at 877-222-VETS, or 877-222-8387, to find out whether you can expect any more help. The VA does offer some long-term care benefits to veterans and their spouses who qualify for the aid. The time to request help, though, was when your mother was still alive.

Which leads us to the problem of your spending money you didn’t have to help people who may well have had other options. If your mother couldn’t get VA help, she may have had assets that could have paid for assistance. If not, she might have qualified for long-term care benefits through Medicaid, the federal healthcare plan for the indigent. Your brother also may have qualified for federal or state benefits. Your son may have had a rough time getting established, but he had a degree and a working lifetime ahead of him.

That doesn’t mean you should have thrown family members to the wolves. But it’s not clear you considered any other options before turning to credit. Sites such as Benefits.gov and the Eldercare Locator at http://www.eldercare.gov could have connected you and your family to resources that might have helped. Other family members may have been able to pitch in, or the people involved may have had assets to tap. If there truly were no other options, your assistance should have come out of your current income. If you have to borrow, then you really can’t afford to help.

As it is, your generosity has left you at the threshold of retirement with little savings and big debts. Let’s hope your family is as willing to help you in your old age as you were to help them.

Dear Liz: My brother passed away, and for one of his bank accounts, he had named me as his beneficiary. Do I have to pay taxes on the $100,000 I received? Is it subject to a gift tax?

Answer: Estate taxes are paid by estates, not by inheritors, said estate attorney Burton A. Mitchell of Los Angeles firm Jeffer Mangels Butler & Mitchell. The vast majority of estates don’t owe taxes anyway, now that the estate tax exemption limit is over $5 million.

Some states have estate taxes with lower exemption limits, and a few have what are called “inheritance” taxes, which are levied based on the relationship of the heir to the deceased, Mitchell said. The more distant the relation, the higher the tax rate. Siblings typically face a higher rate than spouses or children. Ask the executor of your brother’s estate whether any of these taxes apply.

Gift taxes, meanwhile, are the responsibility of the giver and again aren’t an issue for the vast majority of people. Your brother would have had to give away more than $5 million in his lifetime for federal gift taxes to be an issue.

Your inheritance may, however, be subject to creditors’ claims if your brother didn’t leave enough money to satisfy his debts, Mitchell said. Check with the executor of his estate and consult an attorney if necessary.

Liz Weston is the author of The 10 Commandments of Money: Survive and Thrive in the New Economy . Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, Calif. 91604, or by email at liz@lizweston.com. Distributed by No More Red Inc.