Dear Liz: Can my daughter use her 529 balance to fund summer study abroad in Costa Rica? She will take two semesters of Spanish for credit through her university. She has a minor in Spanish. Can she use the 529 to cover tuition, living expenses, and airfare? What if it was all part of a package deal paid for her university?
Answer: Yes, tax-free withdrawals from 529 college savings plans for study abroad are permitted as long as the classes are accepted for credit by the sponsoring university and the sponsoring university qualifies for federal financial aid (the vast majority of U.S. institutions do).
Eligible expenses can include tuition, fees, books, and supplies, as well as room and board if enrolled at least half-time. Living expenses and other transportation costs, including airline tickets, are not eligible expenses.
Refreshing confidence after life changes
Dear Liz: My wife and I have set up a trust in California to distribute our assets to our children after we die. In 2017, we moved to Texas and had the trust updated by a Texas attorney to reflect some of the changes and any differences between the Texas and California rules. We moved back to California in 2020. Do we need to update our trust documents again due to the move? Do we need to do this anytime we move? The conditions contained in the document are generally good. I don't know if a change in residency requires a document update.
Answer: Your last step requires updates. Why not this one?
Any major change in your life, including moving to another state, should trigger a review of your real estate documents. Such a review is anyway a good idea every five years or so, even if you think nothing has changed in your personal circumstances. Laws can change, or you may have different ideas about who your beneficiaries should be, or who you want to make decisions on your behalf in the event you become incapacitated.
People often think (or hope) that estate planning can be a one-time process. But life and the law are not static, so estate plans must evolve, too.
How Capital Gains Boost Medicare Premiums
Dear Liz: We are retired and live mainly on a pension that covers our monthly needs. We own our house outright and are thinking about downsizing. When we do this, will the capital gain cause our Medicare premiums to rise after two years? If so, will it automatically decline again after one year?
Answer: A large enough capital gain can trigger the Medicare income adjustment amount, which is an additional charge on your Part B and Part D premiums. As you may have noticed, there is a two-year lag between the higher income on your tax returns and the higher premiums.
If you have a life-altering event — marriage, divorce, death of a spouse, or loss of income, for example — you can appeal the increase by filing Form SSA-44. Otherwise, consider saving some of the home sale profits to cover the higher insurance premiums for the one-year period.
Transferring ownership raises a tax problem
Dear Liz: I am considering transferring title (condo) to my child via deed of transfer while I am still alive. If she continues to live in the apartment for two years after taking possession, won't she get a $250,000 capital gains exemption when she sells the property?
Answer: Yes, if she owned the home and lived in it for at least two of the previous five years, she can exclude up to $250,000 in gains from the sale of the home from her income. However, its taxable gain will depend on your tax basis in the property: essentially what you paid for the home, plus any qualifying improvements. Only if you inherit the house will the tax basis be updated to reflect its fair market value on the date of your death. Although taxes should never be the only consideration for transferring ownership, a favorable increase in basis may be a strong incentive to postpone. Consider discussing your options with a tax professional.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions can be sent to her at 3940 Laurel Canyon, No. Box 238, Studio City, CA 91604, or by using the “Contact” form at Asklizweston.com.
