Why a couple might not want to own some assets jointly, How a change of ownership affects a pension plan, Achieving true diversity when you invest in funds, Before you invest in a brokered CD, Checking out the "comps" when shopping for a house, Avoiding duty on gifts mailed from overseas, When you make a donation but don't really mean it
Q My wife and I hold a brokerage account in both our names. Since all of the securities in it were purchased with my money, will the entire account be taxed as part of my estate?
A Not if you hold title together as joint tenants with right of survivorship, which is the usual way. Regardless of who paid for the assets in the account, each of you will be considered to own half, so only half the account will be included in your estateor in your wife's, if she dies first. Because of the unlimited marital deduction, no estate tax will be due on the half the survivor inherits.
But there may be capital gains tax later. Say you originally paid $40,000 for stock worth $100,000 at your death. The cost basis for the half your wife inherits is $50,000its market value. But her basis for the part she owns is only $20,000, half the $40,000 purchase price. Accordingly, her total basis is $70,000. In contrast, if all the stock were in your name alone, it would be valued at $100,000 in your estate, and that would be your wife's basis for the entire holding.
Q I have little time to keep track of individual stocks, so I've decided to put my money into mutual funds. I know it's important to diversify, but should I do this within a family of funds or spread my investments among several families?
A You can diversify either way. But whether you stick with a single family or not, avoid buying multiple funds that will react similarly to a given market condition. In any given year, one type of fund may come to the fore while others lag. By keeping several eggs in your basket, you're more likely to achieve consistent returns. So choose a mixture of funds with varied investment philosophies and portfoliosfor example, Berger Small Company Growth, Fidelity Select Biotechnology, and PBHG Large Cap 20.
Q My broker is offering FDIC-insured bank certificates of deposit at higher fixed rates than banks pay. What questions should I ask before I invest?
A Here's what you may need to know, and why:
The issuing bank's name. If you already have funds on deposit with that institution, the CD may put you over the FDIC insurance limit.
The CD's call provisions, if any. For example, if a CD with a five-year term is "one-year noncallable," this means that the issuer can't redeem the CD during the first year. However, the CD can be called any time after that, and if market rates decline, it might be. Then you might have to reinvest your money at a lower interest rate. You may prefer another bank's CD with a lower rate that you can count on for the full term.
Early-withdrawal penalties. In some cases, a broker may be able to sell a CD that you want to cash in prior to maturity, but if the CD's rate is below market, you may receive less than you originally invested. Find out whether the resale option is available and, if not, how much you'll be charged for a premature withdrawal. Also ask whether the penalty is waived if you die.
Additional features. Some CDs pay variable rates according to a preset schedule or a specified stock market index. These and other details should be covered in a written disclosure. Make sure you read and understand it before you part with your money.
Q We're interested in a house that the owner is trying to sell himself. How can we get information on prices for comparable homes in the area, without getting involved with a broker?
A Consult public records of sale data, usually available at the local courthouse or county recorder's office. The kind of information on file isn't the same in every state, though. In some, the sale price itself is entered on the deed; in others, you may have to figure it out from the amount of the transfer tax, which represents a percentage of the sale price.
Even better, drive around the neighborhood to find homes with for-sale signs posted. When you spot one, ring the doorbell and speak to the owner, or call the real estate office if one is listed on the sign.
Q I like to buy gifts for friends and relatives when I travel abroad, but it's a nuisance to carry them around in my luggage. If I mail the gifts instead of bringing them back with me, will the recipients have to pay customs duties?
A Not if the same person doesn't receive more than $100 worth on one day. You can even send a consolidated package containing gifts for several people, provided each gift is individually wrapped and labeled with the recipient's name. But if any item is worth more than the $100 gift allowance, the entire package is dutiable. In that case, the US Postal Service will collect the tariff from the addressee; you can't prepay it.
When mailing gifts, mark the outside wrapper "unsolicited gift" and "consolidated gift package," if appropriate. Show the total value, the recipients' names, and the nature and value of each itemfor instance, "to John Jones: one shirt, $50; one belt, $45." A few items don't qualify for the gift exemption, including alcoholic beverages, tobacco products, and perfume containing alcohol and worth more than $5 retail.
QThis year, my son entered a private school run by a religious organization. The organization states that only 60 percent of the tuition I'm paying covers its secular studies curriculum. The remaining 40 percent finances a religious program that isn't relevant to my son's educational goals. Can I claim a charitable deduction for that part of the tuition?
A No. Although the value of the services you receive from the charity is less than the amount you're paying, the IRS says you can't deduct the excess unless you intend to make a charitable contribution. Your motive must be a "detached and disinterested generosity." A recent Tax Court ruling in a similar case put it this way: "Tuition paid for the education of the children is a family expense, not a charitable contribution to the educating institution . . . . [T]he payment proceeds primarily from the incentive of anticipated [economic] benefits."
QI'm buying a practice from another doctor and have offered to keep the members of his staff in their present positions. Will employees who stay on but withdraw their money from the existing 401(k) plan be penalized for taking a premature distribution?
A No. The penalty provision is subject to several exceptions, including separation from service. In a ruling that took effect Sept. 1, 2000, the IRS held that the exception applies to a change of employer, even though an employee continues to do the same work as before. However, he or she will owe regular tax on the distribution, unless the money is rolled over to an IRA or to a new plan if you set one up. To avoid automatic 20 percent withholding, the old plan's trustee must transfer the funds directly to the trustee of the new plan or IRA.
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 firstname.lastname@example.org (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management. Medical Economics 2001;9:128.