Money Management

Weighing the merits of a life insurance trust

QI'm in my early 40s, and the value of my assets is about $600,000. I also have $1 million in life insurance, of which my wife is the beneficiary. Does it make sense to set up a life insurance trust?

A Maybe. While everything you leave to your wife will be tax-free, the amount your wife gets will be added to her estate and might push the total above the amount that will be protected by the exclusion ($675,000 this year, increasing to $1 million in 2002, and phased out entirely in 2010) when she dies. So you need to consider the assets' possible growth and how they're divided between you and your wife, among other things. Be mindful, too, that a life insurance trust is irrevocable and could restrict your financial flexibility. You need professional guidance to help you make the right decision.

Qualifying for a lower capital gains tax rate

QI bought some raw land in 1998, hoping its value would rise sharply as the neighboring area is developed. I understand that the present 20 percent tax on capital gains will drop to 18 percent after 2005 for assets held more than five years. Will I benefit from that tax break if I sell the land in 2006?

A You could, partially. The lower rate technically applies only if the five-year holding period starts in 2001 or later. But the law will let you meet that requirement if you elect to pay 20 percent tax on any increase in the value of the land up to Jan. 1, 2001. (If the land was then worth less than the amount you paid for it, you'd owe no tax but couldn't deduct a loss.) The election lets you start a new holding period as if you'd acquired the land for its fair market value on that date, and you'll be eligible for the 18 percent rate on a profitable sale in 2006 or thereafter. You don't have to make the election until you file your 2001 return next year. But once you do, you'll have to pay the tax currently, on the value through Jan. 1, 2001—even though you won't sell the land until 2006.

When an education IRA contribution may be barred

QMy brother contributes regularly to a state tuition program for his son and says he can't afford to put money into an education IRA for him as well. Can I do that instead?

A Not this year. As the law now stands, no one can put money into an education IRA during the same year when contributions are also made to a qualified state tuition plan for the same beneficiary. Your contribution would be subject to an excise tax.

As of January 2002, however, the new tax law repeals the excise tax and raises the limit on education IRA contributions from $500 to $2,000. So you and your brother can both contribute to your nephew's education beginning next year.

Restored pension rights if you're rehired

QA medical corporation I left three years ago wants to rehire me. I worked there for four years but wasn't yet vested in the profit-sharing plan when I quit. Would the corporation be obliged to include my prior service in determining my eligibility for vesting?

A Yes, because your break in service lasted less than five years. However, your pre-break years of service don't have to be taken into account until you've worked one year after re-employment, so you'd better stay on the job at least that long this time. If you received a distribution from the plan during your earlier stint, you'd be entitled to repay it in order to "buy back" any forfeited benefits.

Edited by Lawrence Farber,
Contributing Writer

Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.

Lawrence Farber. Money Management.

Medical Economics

2001;12:110.