Money Management

When you donate stock to a charitable fund

Q I understand that if I give stock to a "donor-advised" charitable program run by a mutual fund, I can claim an immediate tax deduction even though I postpone deciding when and where my gift will end up. But will I lose part of my deduction if the stock's price declines in the meantime?

A No. A rise or fall in the value of your donation after you make it won't change the amount of your deduction. You can claim the stock's value as of the date you mail or deliver it, provided you owned it for more than a year. Plus, you won't have to pay capital gains tax on any appreciation while you held it. But if your holding period was shorter than a year, your deduction is limited to what you paid for the shares (or to their current market value, if less).

Once the program takes ownership of the stock, it will likely sell it and invest the net proceeds in fund shares for your charitable account. Future growth in value will increase the amount you can donate to charities of your choice, but won't entitle you to additional deductions. (For a list of donor-advised funds, see Financial Beat, April 9, 2001.)

Checking the facts on a franchise investment

QI've been offered a franchise investment that sounds good—if the promoter's claims pan out. But how can I make sure he's telling it the way it is?

A Before investing, study the franchiser's disclosure document, officially called a uniform franchise offering circular, which a Federal Trade Commission rule requires him to provide. He must be able to substantiate any earnings claims. Ask whether the earnings apply to individually owned or company-owned outlets, and find out where they're located. Remember that company-owned outlets may have lower costs, because they can buy equipment, inventory, and other items in larger quantities, and earnings may vary in different parts of the country.

The disclosure document must include the following: names, addresses, and telephone numbers of at least 10 previous purchasers—the ones who live closest to you; a fully audited financial statement from the seller; background and experience of key executives; the cost of starting and maintaining the business; and the responsibilities you and the seller will have to each other once you've invested.

Fifteen states likewise require franchise registration or disclosure. Check with your state's division of securities or office of attorney general for more information. Ask your banker to obtain a Dun & Bradstreet or similar report on the franchiser's financial condition. You can also get guidance from the International Franchise Association (www.franchise.org ), a membership organization of franchisers, franchisees, and suppliers.

How a pension beneficiary may age prematurely

QIn your Nov. 6, 2000, column, you said that someone who named his daughter as beneficiary of his IRA would have to figure their joint life expectancy as though she were only 10 years younger than he was. What's the reason for that?

A The purpose of this rule, called the minimum distribution incidental benefit (MDIB) requirement, is to ensure that the IRA (or other retirement plan) is used primarily to provide benefits for you during your lifetime, leaving only "incidental" benefits for your beneficiary. Because of new regulations on withdrawals required after age 70 1/2, this rule applies regardless of the beneficiary's age (see "Your nest egg just got bigger," April 9, 2001). However, if your spouse is your only beneficiary, you can base your joint life expectancy on his or her true age.

Watch your step on the escalator

QI expect to bid on a house in a very desirable neighborhood, and my agent suggests including an escalator clause in my offer. What's that for?

A The clause could keep you from losing out if the seller receives a better offer after accepting your initial bid. For example, you might agree to match an alternative offer or top it by $1,000.

An escalator clause would commit you to paying the higher purchase price, though, so to protect yourself against manipulation by the seller or his agent, make sure it specifies how high you're willing to go, sets a deadline for the presentation of competing offers, and stipulates that they must not involve any contingencies. You should also insist on seeing copies of the other offers. If this request is refused on the grounds of confidentiality, at least get written assurance that the bid was made at arm's length by an unrelated third party.

Be mindful that an escalator clause that's not precisely worded could invite a lawsuit. Should a dispute arise, you may have to go to court to retrieve your deposit or force the seller to adhere to the contract. If you're using a trustworthy agent, consider authorizing him or her to sweeten your offer in face-to-face negotiations, rather than committing yourself on paper in advance.

When Nasdaq delists a stock

QI keep reading about stocks that get delisted by Nasdaq. What should I do if that happens to a stock I own?

A Plan to cry a lot, but don't shred the certificates. A company whose shares are delisted isn't necessarily about to go bust. Nasdaq will delist a stock that consistently trades below $1 a share, fails to meet certain other minimum criteria, or doesn't file required SEC periodic reports.

If yours is one of the several hundred stocks delisted each year, you may be able to find price quotes for it on either of two Web sites. The National Association of Securities Dealers maintains an Over-the-Counter Bulletin Board service (www.otcbb.com) for the stocks of companies that make reports to the SEC. The Pink Sheets (www.pinksheets.com ) is a centralized quotation service that publishes unverified price data provided by OTC market makers, as well as news and other information from the companies themselves.

If you're unwilling to bet on the company's turnaround, and you decide to unload your shares of a delisted stock, what can you do if you're unable to sell them through an OTC broker or dealer? Ask your regular broker to accommodate you by buying them for a nominal price. That will enable you to claim a tax loss.

Guarding against overcharges on an interstate household move

QI'm relocating to another state and have received widely varying estimates from moving companies. How can I protect myself against being "lowballed"?

A If a mover's estimate is in writing and marked "binding," federal regulations forbid him to charge you more than that amount. A nonbinding estimate is intended to give you a general idea of the cost of the move, but it's not a guarantee that the final cost won't be higher. However, the mover can't require you to pay more than his estimate, plus 10 percent, at the time of delivery. You'll then have at least 30 days to approve and pay any remaining charges.

Don't sign an order for service unless it clearly describes the shipment and all services to be provided. Keep in mind, though, that the mover is entitled to additional compensation if he has to deal with conditions at the destination that he wasn't told about when he made his estimate—even if the estimate was binding. For example, if the moving van can't park reasonably close to the new house or it has more than one story, the mover may tack on "long carry" or stair or elevator charges.

In case of dispute, interstate movers must offer neutral arbitration. When you make arrangements for your move, you should ask the mover's representative for a description of the company's procedure for handling complaints.

How to invest in GNMA bonds

QI'm looking for a conservative investment, and Ginnie Mae home mortgage bonds seem to fill the bill. But I'm wondering whether to buy them directly or through a mutual fund. What's your take on this?

A One advantage of a bond fund is that you can immediately reinvest the interest in additional fund shares. For individual bondholders, dealing with Ginnie Mae bonds' monthly payments can be a nuisance, particularly because they may include unpredictable amounts of returned principal from mortgage prepayments by homeowners who refinance when rates drop.

Also, you're unlikely to get a good price if you have to sell individual bonds later on, because their shrunken redemption value makes them unattractive. The prepayment risk is especially difficult to judge when you buy seasoned bonds with alluring nominal yields. You can, of course, stick with newly issued bonds, but you'll spend $25,000 apiece for them. On average, you can expect a Ginnie Mae bond to be fully paid off in 10 years—well before its 30-year maturity date.

Some Ginnie Mae fund managers mitigate the prepayment risk by diversifying their portfolios with commercial mortgage bonds, which are subject to prepayment restrictions. If you decide to go the fund route, consider USAA GNMA Trust (800-382-8722) and Vanguard GNMA (800-662-7447), both no-loads with low management fees and respectable long-term records.

Beware of banks bearing gifts

QThe month my ATM card was due to expire, the bank sent me a replacement that can be used as both an ATM card and a debit card. Are there drawbacks to the combination card?

A Some. When you pay for a purchase with the card and punch in your personal identification number on the store's keypad, the money comes out of your account instantly. If instead you merely present the card and sign a charge slip, your account won't be debited for two or three days.

Even if you use the card solely for ATM withdrawals, the debit feature may let an unauthorized person who doesn't know your PIN deplete your account by making purchases. Federal law limits your liability to $50 if you notify the card issuer within two business days after learning that the card was lost or stolen.

You might not be aware that your card has disappeared if you seldom use it. So if an account is tied to a debit card, check the balance frequently and report any unauthorized items on your bank statements within 60 days after they're mailed to you. Otherwise, you could lose every penny in the account.

If you sell a home you no longer live in

QOn May 1, 2000, I bought the condominium apartment where I'd been living as a tenant for over a year. After I get married in a couple of months, I'll move into my wife's house and then sell the apartment. Will I be allowed to exclude my gain on the sale?

A Not if you sell immediately. To be eligible for the exclusion, you must generally live in and own your residence for at least two years out of the five preceding the sale.

The occupancy and ownership periods don't have to coincide, however. You've already lived in the apartment longer than two years. If you delay the closing date of the sale until after May 1, 2002, you'll meet the two-year ownership requirement, as well. Then you'll be able to exclude up to $250,000 of gain.

Because your new wife will not meet the requirements, you won't be able to claim the $500,000 tax break available to married couples filing jointly.

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;3:113.