Money Management

How to help an heir keep what you leave him

Q My son can't seem to hang on to money, and I worry that what he inherits from me will slip through his fingers. A family friend suggests I leave the money in a spendthrift trust. How does that work?

A Under that arrangement, also called a discretionary trust, the trustee controls the amount and timing of income and principal distributed to the beneficiary. This would generally put the funds out of reach of your son's creditors, because he has no right to tell the trustee what to do. However, a court could compel the trustee to provide alimony or child support if your son has a family, and to satisfy claims of state and federal governments against him.

You can instruct the trustee to dole out the income at his discretion and distribute the principal in stages—for example, one third every five years, starting when your son is 35. But don't make your son wait so long that your gift will do him little good.

What happens when you switch brokers

Q I've decided to transfer my stock portfolio to a new broker, but I'm concerned that a prolonged delay would leave my account in limbo. What can I expect?

A Assuming that both firms are members of the New York Stock Exchange or the National Association of Securities Dealers, the rules require them to make the switch via an electronic system called ACATS (Automated Customer Account Transfer Service). Barring difficulties, says the NASD, the switch should take no longer than six business days. But you need to be aware that margin and retirement accounts pose special problems. Furthermore, direct transfer may not be possible for some securities, such as shares of mutual funds the new firm doesn't handle.

You may have to leave nontransferable securities with the previous broker, take possession of them yourself, or cash them in. Also, dividends, interest, and sale proceeds involving transferred securities sometimes go to your previous firm. It must automatically forward them to your new account for at least six months, but lags or mistakes may occur, so keep a sharp eye on the paperwork sent by both brokers.

If a Roth conversion involves stock

Q I have $50,000 worth of stock in a traditional IRA at a brokerage firm. I want to convert this to a Roth IRA. I'm told that if I take possession of the stock, I'll have 60 days to complete the rollover. If I sell the stock for more than $50,000 during that period and then put all the proceeds into a Roth IRA, would I have to pay capital gains tax on the excess amount over $50,000?

A Your question is moot, because the rules require the transfer to be made in kind. This means if you take the distribution in stock, you must roll the same stock into the new IRA, whether it's a traditional type or a Roth. Alternatively, you can have the broker sell the stock and pay the proceeds into your existing IRA. Then you can take a cash distribution and roll the money into the new IRA.

Either way, the value of the funds (or stock) on the date of distribution counts as taxable income. The in-kind rule also prevents you from using the cash distribution to buy stock and putting the stock into the Roth IRA.

Getting your money's worth from travel insurance

Q I've signed up for a deluxe tour of Europe and want to buy travel insurance in case I have to cancel the trip or cut it short, but I know very little about such coverage. What's your advice?

A Trip cancellation and interruption insurance is expensive, so buy only enough to cover the nonrefundable portion of your payment for the trip. If the cancellation penalty increases as the departure date nears, you'll need to take that into account to get full protection. Be sure you understand the policy's limitations. For example, will it allow you to cancel or cut short your trip because of the illness of a family member who's not accompanying you? Does the insurer maintain a 24-hour hotline for emergencies?

Keep in mind that a trip cancellation policy sold by a tour operator may not protect you if the company goes under. It's wiser to purchase the coverage from your travel agent or, better yet, directly from an insurance company. For information on types of coverage and where to shop for it, see Financial Beat in our June 5, 2000, issue.

Buying gold coins from the US Mint

Q I'd like to invest in American Eagle gold coins. Can I save by buying them directly from the US Mint, instead of through a dealer?

A No. The Mint sells investment-grade bullion coins only to coin dealers, banks, or other participating private distributors. It does offer individuals a limited opportunity to purchase "proof" coins, struck from special dies and intended as collectors' items, but it charges substantially more for them than the market price for ordinary coins.

For instance, in 2000, you could have bought a proof set consisting of a 1-ounce, 1/2-ounce, 1/4-ounce, and 1/10-ounce coin for $999 directly from the Mint. That's more than double the market price of investment-grade coins of equivalent weight. (For investment-grade coins, dealers generally charge 3.5 to 6 percent more than the gold price, plus tax.) For information on the Mint's current offerings or to order coins, phone 800-USA-MINT or check the Mint's Web site, www.usmint.gov/catalog . For other investment alternatives, see "Time to Invest in Gold?" Aug. 21, 2000.

Salvaging part of a home sale gain

QWe bought our first home in 1999, but had to sell it less than two years later because I took a job in another city. We purchased a more expensive house there. Does that make us eligible to postpone tax on our gain from the sale of the first home?

A No. A new law supersedes the one that allowed such tax-deferred rollovers. The current law lets married couples exclude up to $500,000 of gain on a home they've owned and occupied for at least two of the five years prior to the sale. Even though you don't qualify for the full exclusion, a portion of your gain will still be tax-free, since the sale was due to a change in your place of employment.

To figure the tax-free amount, add the number of days you lived in your old home and divide by 730 (two 365-day years). Multiply your total gain by this fraction. For example, if you lived there 438 days and your profit on the sale was $20,000, the exclusion would equal $12,000 (438/730 x $20,000), so you'd owe tax on just $8,000.

When your tenant breaks the lease

QThe tenant of a rental unit I own is moving out to live with a friend across town, although the lease has six months to go. Must I wait until it expires before suing for lost rent?

A Maybe not. You can sue for "anticipatory" damages, if you can reasonably estimate your loss. Most states require you to make a prompt effort to find a replacement tenant, so you can't simply claim the total rent for the entire period.

Advertise for another tenant. Since the present one apparently intends to remain in the area, you can bring suit to recover any net rent loss plus re-rental expenses. Although you must show the court that you made a good-faith attempt to limit your loss, you don't have to accept a tenant with bad credit or agree to less than a fair market rent.

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;11:129.