Where Your Money Goes After These 16 Life Curveballs
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If you want to get in control of your finances, you need to know where your money is going. Of course, you need to track your spending so you don’t blow your paycheck each month. You also need to know how much of your money you should be saving for the future.
But what about those circumstances where you’re not sure what happens to your money? No, not a Friday night when you’re out with friends and aren’t sure how you spent a couple hundred bucks. Rather, it’s those major life events, tragic situations or other scenarios that you know could impact your finances but you’re not entirely clear how. Read on to find out what happens to your money when…
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“There’s one great way to control where your money goes when you die: draft a will,” said Rebecca Neale, a family law attorney in Massachusetts.
If you don’t have a will, the laws of the state where you lived will dictate who gets your money. It might all go to your spouse, be divided among your spouse and kids or go to your parents or siblings if you’re not married.
“Every state has its own hierarchy,” Neale said.
With a will, you can specify who gets your assets. However, your money isn’t handed out to your heirs automatically. Assets are distributed during a legal process called probate. Again, the process will vary depending on the state where you live, Neale said. On average, it can take anywhere from several months to just over a year to settle an estate, according to Nolo, an online legal resource and publisher of do-it-yourself legal guides.
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Your Bank Closes
You likely won’t lose your money if it’s in an account with a bank that is insured by the Federal Deposit Insurance Corporation. FDIC insurance provides $250,000 in coverage per depositor per insured bank for deposit accounts such as checking, savings, money market and CD accounts. If an account has two owners, each gets $250,000 worth of coverage. However, investment products such as mutual funds, annuities and life insurance policies are not covered.
When an insured bank fails, the FDIC usually gives account holders a new account at another bank with an amount equal to their balance at the failed bank, or issues them a check. If the balance of your accounts exceeds $250,000, you might get the uninsured portion of your money when the FDIC sells the failed bank’s assets — but it could take years.
Accounts at a credit union that is insured by the National Credit Union Administration have the same level of protection. When choosing a bank or credit union, make sure it’s insured by the FDIC or NCUA.
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You Don’t File a Tax Return and Are Due a Refund
Most taxpayers are required to file a tax return if their income exceeds certain limits. For example, if you were single and younger than 65 during the 2016 filing year, you had to file a return if your income was $10,350 or more, according to the IRS. If you don’t file a tax return but are due a refund, you won’t get it unless you claim it.
“You have three years to put in your claim,” said Abby Eisenkraft, CEO of Choice Tax Solutions, a tax preparation and audit representation service. “For example, if you don’t file your 2016 tax return, which was due April 18, 2017, in three years, you will lose that refund.”
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You Owe Taxes But Don’t Pay
When you have an unpaid tax bill, a variety of scenarios are possible depending on the action you take, Eisenkraft said. If you file a tax return but do not pay, you will be charged a 0.5 percent penalty on what you owe each month until you pay in full. You can set up an installment plan with the IRS to pay off what you owe.
“If your circumstances are dire and the IRS agrees, the IRS may deem you ‘uncollectible’ and put you in a status where your bill is not paid but they will not attempt to collect,” she said.
If you don’t contact the IRS about your inability to pay, the consequences can be worse. For starters, the penalty for failing to file a return is 5 percent of the tax owed each month your return is late, up to a maximum of 25 percent.
“You will go through a system where you will receive various notices. And at some point, if there is no response, the IRS will collect via a bank levy, wage garnishment or some other type of levy to take the funds you owe,” Eisenkraft said.
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You Win the Lottery
Your chances of winning a big jackpot are slim. But if you do, you’ll obviously have a lot more money — and a big tax bill. Lottery winnings are taxed as income on the state and federal level, according to the Tax Foundation. Yet there’s another drawback to coming into that much money at once.
“You might have to reorganize your life,” said Carlos Dias Jr., founder of Excel Tax and Wealth Group, an Orlando, Fla., financial planning firm.
For example, you might need to set up a trust or corporation to receive the money to protect your identity, he said. And you might have to change your phone number to avoid being harassed by people who want a piece of your winnings.
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You File for Bankruptcy
What happens to your money, assets and debt owed depends on the type of bankruptcy you file. Chapter 7 bankruptcy doesn’t erase all kinds of debt. You still have to pay student loans, tax debts and child support. Provided you don’t have those types of debt, most or all of your debts could be canceled. However, some of your property might have to be sold to repay your creditors, according to Nolo.
With Chapter 13 bankruptcy, you pay back your debts with a court-approved repayment plan. You don’t have to sell your property, and you might have to pay back some of your debts only partially — depending on what you can afford, according to Nolo.
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You Buy Stock in a Company That Goes Bankrupt
What happens to your investment in a company when the company goes bankrupt? “If you are a common stockholder, you are probably out of luck,” said Charles Read, CEO of online payroll service GetPayroll.
The company’s secured creditors are paid first. Then bondholders get paid.
“If there is anything left, which there is normally not, you may get a few cents on the dollar,” Read said. That’s why it’s important to diversify your portfolio rather than put all of your money into shares of a single company.
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You Get Divorced
When you get divorced, your money will be divided between you and your spouse, Neale said. Exactly how it’s divvied up depends on state law. And your state might limit how you use your money as you go through the divorce process, she said.
It can also be costly to divorce your spouse. You’ll have to pay fees if you hire an attorney and go to court or use a mediation process to avoid court.
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You Owe Child Support
“If you owe child support and are not paying it, the person you’re supposed to pay it to can file for contempt,” Neale said. Then the court can order you to make payments that you missed and pay going forward.
You might also be ordered to pay the attorney fees for the child support recipient, depending on state laws. In some circumstances, the child support recipient can ask that you be put in jail, Neale said.
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You Don’t Pay Your Debts
If you don’t pay what you owe, your creditors can sue you. If you’re found liable, you’ll be forced to pay.
“They can seize your bank account,” Neale said. Your creditors might not be able to take every cent you have because every state has rules about how much you can keep safe from creditors in a bank account, Neale said.
Creditors also can garnish your wages to get what is owed, she said. Federal law limits garnishment to 25 percent of your disposable income or the amount your weekly income exceeds 30 times the minimum wage, whichever is lower, according to Nolo. Some states set a lower percentage.
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You Don’t Pay Your Student Loans
If you don’t pay a federal student loan, your tax refund can be seized, Neale said. And your wages can be garnished without a court order. So if you’re having trouble paying bills, make your student loan payments a priority, Neale said. Even if you file for bankruptcy, your student loans probably won’t be discharged.
If you don’t pay a private student loan, the lender can sue you in court to collect what is owed, Neale said.
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Your 529 College Savings Plan Beneficiary Doesn’t Use the Money
A 529 college savings plan allows you to set aside money to pay for a child’s qualified education costs. But the child you’re saving money for might decide not to go to college.
“Don’t react too quickly,” said Amy Jucoski, national planning manager for Abbot Downing, a Wells Fargo wealth management firm. “You have options.”
Although a 529 can have only one beneficiary at a time, you can change the beneficiary at any time — as long as the beneficiary is a family member, she said. Or if there is excess money in the account after paying for one child, you can use the rest for another by changing the beneficiary.
If you don’t have another beneficiary you can give the money to, you can withdraw it. However, you’ll pay income taxes and a 10 percent penalty on the account’s earnings, Jucoski said.
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You Make Loans to Family
It can be a bad idea to loan money to family, because you might not get it back. Then your relationship with that family member could be damaged. However, there are other financial repercussions.
“In instances when you loan larger amounts of money, it’s important to charge interest and to sign a loan contract,” Jucoski said. “If you don’t, the IRS could deem loan amounts that exceed $14,000 a year a gift. You probably won’t owe the gift tax — which is 40 percent — if you don’t exceed the $5.49 million lifetime gift exemption amount.” However, the amount of the gift will go against your lifetime gift exemption.
Plus, if you have a signed loan contract and the loan isn’t repaid, you can claim a tax deduction for a non-business bad debt, Jucoski said. “Be sure to work with your legal advisor when drafting a loan contract to ensure you’re covered,” she said.
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You Have Forgotten Accounts
There might be money that belongs to you that you haven’t claimed. Perhaps you have a forgotten utility security deposit, an annuity or certificate of deposit you never collected or an insurance benefit you never received.
Accounts that haven’t had activity or the company hasn’t been able to contact the owner in a year or more are turned over to state treasurers, according to the National Association of Unclaimed Property Administrators. You can search for unclaimed property at MissingMoney, a website endorsed by NAUPA.
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You Can’t Manage Your Money on Your Own
If dementia, developmental disability, mental illness or other health condition leaves you unable to make financial decisions, one of two things could happen. If you drafted a power of attorney document while you were competent, the person you named as your power of attorney will be able to make financial decisions for you, Neale said. If you don’t have this document, the court has to name someone to manage your finances for you.
In one famous example, this happened to pop star Britney Spears in 2008 when a court approved a conservatorship to take control of her finances because she was considered mentally unstable, according to The New York Times.
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You Enter Witness Protection
It’s a secret as to what happens to your money if you enter the Witness Security Program. The program was created to protect witnesses who are in danger as a result of the testimony against criminals. Those who enter the program have to give up their identities.
The U.S. Marshals Service, which operates the program, provides only basic information on its website about what happens to the money of witnesses: “Witnesses initially receive financial assistance for housing, subsistence for basic living expenses and medical care. Job training and employment assistance may also be provided.”