Separation Could Spare Wife From Husband’s Future Gambling Debts

Q: My parents have been married for more than 30 years. They are nearing retirement age and are middle class. My father has accumulated about $40,000 in gambling debts that my mother just discovered. He has used credit cards and loans on the house for gambling money. I know at this point my mother is as financially responsible as my father for the $40,000. My parents would rather not divorce, so can they be legally separated in the state of California? If so, could my mother be held responsible for any future gambling debt? Or is divorce her only option? In either case, divorce or separation, they would be living in the same household.

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A: As you already know, divorce or legal separation won’t save your mom from responsibility for the debts your dad has already run up. In California, as in other community property states, couples are jointly responsible for debts incurred during the marriage. If your father doesn’t pay, creditors will come after your mother.

Legal separation could limit your mother’s future liability if your father continues to gamble. Your parents would have to legally divide up their property and their debts and close any joint accounts. The way they handle this division of property and debt should not be designed to defraud any creditors. Legal separation is not easy or painless and can have some serious financial and legal repercussions: If your mother is covered under your father’s health insurance, for example, she would probably lose that coverage because she would no longer be considered a dependent. This is definitely a step that should be discussed carefully with an attorney, an accountant and a financial advisor before proceeding.

It also might be wise to invest in little family counseling. Gambling debts of $40,000 indicate that gaming is more than a habit with your dad. It could be an addiction; in any case, it is definitely putting both of your parents at serious financial risk.

Teen May Not Need to Withhold

Q: Our teenage daughter just landed her first summer job and brought home a W-4 withholding form for us to fill out. We’re stumped. She’ll be working part time for minimum wage. How much should we have withheld?

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A: Possibly nothing at all.

If your daughter didn’t owe taxes last year and expects to earn less than $4,300 this year, she can write “exempt” on the form. The exception would be if she expects to get more than $250 in investment income (interest from bank accounts and the like). If she will get that much unearned income, she has to fill out the form if her earned income for the year will exceed $700.

If she does have to have taxes withheld, she should follow the instructions on the back of the W-4 form. It will be her first lesson in the joys of our complex tax system. Her second will be when she actually files her return to get some or all of those withheld taxes refunded. She will need to file her own return, although you can continue to claim her as a dependent.

Need to Build College Fund Fast

Q: We bought a lot of Series EE Savings Bonds for our children’s college educations when they were small. Now that they’re 14 and 16, we’re realizing that our college fund is going to come up short. What are our options?

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A: Not as numerous as they would have been a few years ago.

You did it backward. You invested in super-safe bonds when the children were little and there was plenty of time to ride out stock market ups and downs. Now that they’re approaching college age, you’re realizing you need better returns--but that requires taking more risk right about the time you should be taking less.

Ideally, you invest in stocks when your kids are wee, then gradually move to bonds and cash when they’re within a few years of needing the money.

(Not to make you feel bad, but a $200 EE Savings Bond purchased for half its face value in June 1989 would be worth about $175 now. A similar $100 investment in Microsoft would be worth around $9,600. Even using a more realistic benchmark, matching the performance of the Standard & Poor’s 500-stock index, would have netted you nearly six times as much growth as the savings bond.)

Rolling the dice in the stock market at this point doesn’t make a lot of sense, however. You could face a market downturn right when your children need their tuition checks. You might consider a conservative stock mutual fund for part of their college money, but the bulk of their funds should be in safer investments. Better encourage the youngsters to boost those grades and look for scholarship money and loans. “Kiplinger’s Financing College” by Kristin Davis is a good place to start.

Finally, if your parents are well off, consider hitting them up for money. Gift tax limits don’t apply when it comes to paying college tuition, so the grandparents could help their descendants and reduce their potential estate taxes in one fell swoop.

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Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at http://161.35.110.226/moneytalk.