Money Management

Watch for unwarranted fees when you sell your home

Q On top of his regular commission, the broker who sold my house billed me $300 in fees for "processing and handling" and "regulatory compliance." I paid them to avoid a closing delay, but are such charges legal?

A Not unless the broker rendered additional bona fide services justifying the fees, says the federal Department of Housing and Urban Development (HUD). However, two federal court decisions have held that the extra charges violate existing law only if part of the money goes to a third party as a kickback.

Although the last word on the issue remains to be spoken, the general counsel of the National Association of Realtors warns that "brokers should be sure they aren't charging . . . for services that have traditionally been provided as part of the base compensation." You might want to call this to your broker's attention.

How much can go into an IRA if you have no pension plan

QMy wife and I both work, but she's not covered by a retirement plan. How much can she contribute to an IRA?

A That depends on your joint adjusted gross income. The maximum deductible IRA contribution for 2002 is $3,000—up from $2,000 last year—for nonplan participants younger than 50. (For those 50 or older, it's $3,500.) But the limit is reduced 10 percent for each $1,000 of joint AGI above $150,000. Once AGI passes $160,000, no deduction is allowed.

Social Security benefits for more than one spouse

QMy ex says she intends to file for Social Security benefits based on our former marriage. Can she do this, and if so, will it deprive my present wife of her rights?

A If your earlier marriage lasted at least 10 years, your divorced spouse is eligible for benefits, assuming she hasn't remarried and is at least 62. But her eligibility won't affect any benefits your present wife is entitled to.

When you own stock in a firm on the verge of bankruptcy

QAccording to press reports, a company I own stock in is considering bankruptcy. Will the company notify me, and if it files, what will happen to my investment?

A Answers to both questions may depend on whether the company files under Chapter 7 or 11 of the federal bankruptcy code. Under Chapter 7, the company would discontinue operations and its assets would be sold to pay expenses and creditors. Unless it has money left over, stockholders would get nothing—not even notice. It's small comfort, but you could claim a tax deduction for the amount of your investment in the year the stock becomes worthless.

A Chapter 11 bankruptcy may leave you better off. The company would try to work with creditors and shareholders to reorganize and become profitable again. You may be asked to vote on the plan of reorganization. If so, the company should inform you of the plan details and send you a ballot, along with a court-approved disclosure statement to help you make an informed judgment about the plan. You may receive shares in the reorganized company in exchange for your present stock. Ultimately, their value would depend on the market's judgment of the reshaped company's prospects.

If you're dissatisfied with the information available from the company or your broker, check the SEC's computer database, known as EDGAR, at www.sec.gov.

Encouraging tenants to pay rent on time

QAs the owner of a small apartment building, I find that collecting surcharges on late rent payments doesn't make for amicable landlord-tenant relations. Would I do better to raise the rent and offer an early-payment discount, instead?

A A modest reward may be more effective than punishment, but be careful not to violate the letter or spirit of state or local law. Some jurisdictions prohibit early-payment discounts. Even if yours doesn't, it probably limits the size of a late charge to 4 or 5 percent.

Waiving participation in a retirement plan

QA colleague who's closing his practice strongly recommends that we hire his assistant. Trouble is, she's older than 65, the normal retirement age specified in our pension plan. Can we exclude her from the plan?

A No, but she can waive participation. To make sure your plan isn't later disqualified for violating the antidiscrimination rules, have her sign a statement that she "knowingly and voluntarily" agrees not to be covered. But remember that the plan must cover a minimum percentage of your eligible employees. If her nonparticipation would violate this requirement, consider hiring her on a part-time basis. If she works less than 1,000 hours a year, you won't have to count her.

How to buy a home with a reverse mortgage

QMy 76-year-old widowed mother is selling her home at a $200,000 profit and has her eye on a $115,000 condo unit in a retirement community. She'd rather not tie up that much cash, but she doesn't want the burden of monthly mortgage payments either. Is there a good alternative?

AA reverse mortgage may be the answer. Under Fannie Mae's "Home Keeper for Home Purchase" program, your mother could put down $55,000, say, and take out a $60,000 reverse mortgage, leaving $145,000 cash at her disposal. The Home Keeper mortgage allows borrowers 62 or older to finance a percentage of the home's value, subject to Fannie Mae's maximum mortgage limit—$300,700 for 2002. The percentage depends on the number and age of the borrowers, and on current interest rates. The interest rate on the mortgage, which can include closing costs, adjusts monthly but has a lifetime cap of 12 percentage points above the initial rate.

With a reverse mortgage, your mother won't pay interest or principal until she sells the home, no longer uses it for her primary residence, or passes away. She'll never owe more than the value of the home at the time of repayment, even if the loan balance exceeds it. For a list of cooperating lenders, see www.homepath.com .

Insurance coverage for household help

QWe've contracted with a domestic services company for a housekeeper who'll work for us regularly. What do we need to do about insurance?

A That depends on whether she's your employee or the company's. If you pay the company for her services, it should provide the necessary coverage for her. To make certain it will, ask for a copy of the certificate of insurance.

If you're the employer, you'd do well to buy a workers' compensation policy that would pay for the housekeeper's medical expenses if she's injured on the job and for appropriate disability coverage. You may also need a rider on your automobile policy, if she's likely to use your car to run errands for you. In case of doubt, contact your state's insurance department to find out what coverage the law requires.

When your new car can't be fixed

QMy new car is defective, and I can't get satisfaction from the dealer. How do I get help from the lemon law?

A Because state lemon laws differ, you'll need to know what the one in your state provides. You can get such information from several Web sites—www.autosafety.org, www.autopedia.com, www.defect.com, or www.carlemon.com. To bolster your case, find out whether the car manufacturer issued technical service bulletins relating to the defects troubling you. If you can't get them from the dealer, check online at www.alldata.com. For suggestions on how to proceed, go to www.cartalk.cars.com .

What if a trust holds shares of a partnership?

QI've become a partner in a sideline business and want to assign my share to my revocable living trust, which owns all my other assets. Is this legal?

A Yes, but you may need the consent of the other partners to the transfer. Otherwise, it might violate the partnership agreement. There should be no tax consequences, though, since the income of the revocable trust is taxable to you as an individual, just as your share of the partnership income would be.

Whether you must allow loans from 401(k) plans

QI'm setting up a 401(k) plan to encourage employees to save for retirement, but I'm dubious about letting them borrow from their accounts. Must the plan permit this?

A No, but more than four out of five such plans do, according to a survey by the Profit Sharing/401(k) Council of America.

Prohibiting loans might reduce plan participation, especially by younger employees who haven't accumulated enough personal savings to meet cash emergencies and won't retire for many years. However, if you want to discourage borrowing, you might consider imposing more stringent requirements than the law dictates. For example, repayment in equal quarterly installments over the term of the loan is acceptable under the law, but your plan could provide for repayment in the form of automatic deductions from each paycheck.

Make sure, though, that such restrictions apply to all participants, so you don't violate the antidiscrimination rules.

When you give business property to charity

QI'm replacing a lot of office furnishings and may contribute the old items to charity. A second-hand dealer has offered more than the depreciated book value for them. Would I base my charitable deduction on the current fair market value or the book value?

A Use the fair market value, but subtract the "recaptured" depreciation—the difference between book value and your original cost. If you decide to sell the furnishings instead of donating them, any recaptured depreciation will be taxable as ordinary income, not capital gain.

How insurance lowers muni bond risks

QI'm adding municipal bonds to my portfolio, and my broker recommends that I buy only insured issues. What protection does this coverage give me?

A The insurance company guarantees to pay interest and principal on schedule if the municipality defaults. The safety of the bond, therefore, depends on the financial strength of the insurer, not on that of the issuing city. Presuming the insurer meets the highest standard set by the major rating agencies, bonds that carry insurance qualify to be top-rated.

Evaluating investments in rental properties

QA report on a real estate partnership I may want to invest in talks about rent multipliers and capitalization rates. I know these are used to evaluate rental properties for purchase, but just what do they signify?

A The "gross rent multiplier" (GRM) is a property's asking price divided by its annual rental income. When the rental figure is based on current rather than projected revenues, a low GRM is attractive, but this yardstick doesn't reflect operating costs, which could be a deterrent if they're abnormally high.

Unlike GRMs, capitalization rates consider costs as well as income. To calculate the cap rate, you first subtract operating expenses from gross rental revenue, then divide the difference by the asking price to get a percentage. The higher the percentage, the better.

Be mindful, though, that both of these measures provide only a quick initial evaluation and should be supplemented by careful analysis of other key factors.

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

2002;19:131.