Money Management

What's in a name? The SEC wants you to know

QWhen I looked up a health care mutual fund in Morningstar, I discovered that stocks outside this category make up more than 30 percent of its portfolio. Isn't this a deceptive practice?

A The SEC apparently agrees with you. Until recently, it required funds to invest only 65 percent of assets in securities matching the kinds of holdings implied by the fund name, but a new rule raises the minimum to 80 percent. Affected funds have until July 31, 2002 to comply.

The SEC points out that the stiffer requirement is particularly important for retirement-plan investors and others who follow a strategy of allocating their money among well-defined types of holdings. Funds can temporarily suspend the 80 percent policy to avoid losses due to adverse conditions or to handle unusually large cash inflows or redemptions. But funds that prefer to depart from the policy permanently must notify shareholders to that effect at least 60 days in advance, and also must change the fund's name.

The SEC estimates that more than nine out of 10 funds with descriptive names covered by the rule already meet or exceed the 80 percent threshold.

Replacing individual disability coverage with a group policy

QMy new job offers group disability coverage at a lower premium than I'm paying for individual coverage now. Can you help me sort out the pros and cons of switching?

A Think twice about giving up your present coverage if it's noncancelable, since the group policy almost certainly isn't. Some other considerations: Would you be covered if a disability prevented you from practicing your specialty (assuming you have "own occupation" coverage now)? Does the group policy require a longer waiting period before disability payments begin? What assurance is there that the premium won't rise? What would happen to your protection if you were to leave your new job?

One way to solve the dilemma is to keep both policies, if your pocketbook and the insurance companies permit. (For more insights on this subject, see " 'Disability Lite': Your family's new income protector," Dec. 4, 2000.

Watch out for the gap when you lease a car

QI'm shopping around for a good deal on a car lease. One salesman is touting the fact that his company's lease includes "gap coverage." How would I benefit from this?

A If the leased car is stolen or totaled in an accident, your regular insurance might pay less than the car dealer's charge for early termination of the lease. Gap coverage would pay the difference, but you might still be liable for the deductible on your own insurance plus other items specified in the lease. For example, you may be responsible for your monthly payments until the lessor receives the insurance proceeds. When comparing leases, be sure to study the definition of the gap amount in each.

Required withdrawals from a tax-sheltered annuity

QUnder an arrangement with a nonprofit hospital I work for, part of my salary goes toward a tax-sheltered annuity. Will this annuity be subject to the minimum distribution rules that apply to pension plans and IRAs?

A Yes. In general, you must begin withdrawals by April 1 of the year following the one in which you reach age 70 ^1/2. But you can shift that starting date to the year after you retire from the job, provided the annuity allows this option and your employer consents to it. Once you make this election, the more liberal regulations recently proposed by the IRS will allow you to take smaller distributions than formerly required. (See "Your nest egg just got bigger," April 9, 2001.)

"Till death do you part" applies to alimony, too

QMy wife and I are divorcing, and I've agreed to pay her lawyer's fees. Can I deduct them as alimony on my return, so they'll count as taxable income to her?

A Probably not. To be deductible as alimony, payments to your ex-wife or to others on her behalf must stop when she dies. In most states, a divorce lawyer is entitled to be paid even if his client dies before the divorce becomes final. Unless your state's law says otherwise, which is unlikely, you're liable for the fees no matter what. That means your payment doesn't meet the definition of alimony and isn't deductible, the IRS contends. A recent Tax Court ruling upholds this view.

Interestingly, though, the IRS does allow alimony deductions for some types of payments to third parties under the terms of a divorce or separation agreement. These include outlays for the other spouse's medical expenses, housing costs, taxes, and tuition.

You needn't rewrite your will to make a modest change

QMy will takes care of my daughter but doesn't mention her son, who was born after I wrote it. Can I leave him a token amount without drawing up a new will?

A Yes, adding a codicil should be sufficient. If your daughter might have other children, you can simply make the same bequest "to each of my grandchildren who survives me." That way, you won't need to amend the codicil later on.

How incorporation affects pension plans

QI'm in solo practice and have no employees. If I incorporate, will I be allowed to contribute more to my profit-sharing plan?

A Probably very little, if anything. The pension rules generally put unincorporated and incorporated business owners on the same footing, even though permissible contribution amounts are calculated differently for each.

As for other reasons to consider incorporating, one argument—the ability to borrow from the plan—no longer applies, because unincorporated owners can do so, too, starting this year. But benefits such as tax savings on health and life insurance could tip the scales.

If you incorporate, the corporation can maintain your present plan, or you can shift its assets to a new one, if you prefer.

Choosing between two home sale tax breaks

QA couple of years ago, we rented our home to our son and his wife and moved to another area. Now they're buying their own place, so we'd like to sell the house or exchange it for a rental property near our present location. Which is better tax-wise?

A It's probably best to sell the house, assuming you lived in it at least two years out of the last five; in that case you qualify for a tax exclusion on the gain. The home sale exclusion will permanently relieve you of liability for tax on $500,000 of profit, if you file a joint return.

Alternatively, you could make a tax-free exchange for another rental property or other investment realty, provided you've been charging your son and daughter-in-law a fair market rent. However, if you later sell that property, you'll owe capital gain tax based on the house's original cost.

An extra benefit from a working spouse

QI'm told that hiring my wife to help out in my unincorporated practice can boost my medical expense tax breaks. How?

A If she's a bona fide employee, you can deduct the entire cost of health coverage and reimbursements of medical expenses for her, you, and your dependents under a plan operated in the name of the business. As an owner of the business, you aren't considered an employee and wouldn't be eligible for such tax-free family coverage on your own.

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;10:83.