Money Management

Does the new tax law ease Roth conversions?

Q I have $50,000 in a traditional IRA that I'd like to convert to a Roth account. I wasn't allowed to do this in 2001 because my adjusted gross income was too high. Does the new tax law raise the limit?

A No. You're still barred from making the conversion if your adjusted gross income for the year exceeds $100,000, whether you're single or married. Income limits on annual contributions to a Roth IRA are also unchanged.

When you're faced with a poor credit report

QA lender recently turned down my request for a home loan because my FICO score of 670 was the national average. Just what does that score say about my credit standing, and how can I raise it?

A According to Fair, Isaac and Co., which generates FICO scores based on credit reports, 15 percent of borrowers in the 650 to 699 range will default on a loan, file for bankruptcy, or make a payment 90 days past due on at least one account in the next two years.

You can access the report your lender received, plus a personalized explanation, for $12.95 over the Internet at www.myfico.com, or at the credit bureaus' sites (www.transunion.com or www.experian.com). Once you have that information, you can takes steps to improve the picture. For example, your outstanding credit card and other revolving account balances may be too close to the available limits. Fair, Isaac regards this as a strong indicator of risk, so you should make every effort to reduce your balances.

Too many inquiries about your record by lenders in the past 12 months may be another negative, if you've been submitting multiple applications for credit. But shopping for the best rates on a single loan over a short period won't be held against you.

When you lease space to commercial tenants

QI'm buying a small commercial building and have no experience dealing with tenants' leases. My agent recommends using a standard lease form, but I'm leery of a "one size fits all" approach. What should I watch out for?

A Your agent, to begin with; you received poor advice. To help you keep landlord-tenant disputes to a minimum, your leases should address issues such as:

• Who makes, pays for, and owns tenant improvements, and what becomes of them when tenants leave? Be sure to retain your right to approve plans in advance.

• Is subletting allowed? If it is, the lease should stipulate that before you give consent, the primary tenant must provide you with satisfactory information on the subtenant's financial status and how that person intends to use your property. The primary tenant should also be required to reimburse you for any losses if the subtenant violates the lease terms.

• Who'll pay for casualty and liability insurance? Spell out how much coverage each party must carry, what will be insured, and whether each party will waive liability claims against the other.

• Is the rent variable? For example, a retail tenant may be obligated to pay "overage"—an extra amount, based on sales volume—or share in certain common-area maintenance and repair expenses. If so, the lease should detail how the obligatory amounts are calculated.

• Are you willing to give the tenant an option to renew the lease when it expires? If so, specify the deadline for exercising it, the term offered, and how the rent differential is to be determined.

Guarding a partner's assets against joint liability

QA colleague and I want to practice as partners, but we're concerned that each of us might be personally liable for the other's mistakes. We're reluctant to organize as a professional corporation because of all the complexities and the complicated tax regulations. Is there any other way to protect ourselves against this exposure?

A Yes. You can form a limited liability partnership instead of a general partnership. An LLP won't shield the partnership's assets from a judgment against either partner if the LLP was named in the suit. If those assets aren't enough to satisfy the judgment, the offending partner's personal assets could be seized, but the blameless partner's individual assets would be safe. On the other hand, if a general partnership loses a case, both partners' assets might be in jeopardy.

LLP statutes vary, so you'll need to consult a lawyer about the specifics in your state.

When trust beneficiaries have conflicting interests

QMy will sets up a trust to provide income for my widowed sister, with the principal going to my children at her death. What's the fairest arrangement for all the beneficiaries?

A You may want to consider a total-return unitrust. As its name suggests, TRUs are invested for both income and growth. But you have to set up the trust carefully so that you don't restrict the amount available for your sister. Because growth assets like stocks tend to produce little current income, you can have the trustee supplement the payout from principal if it falls below a specified level. Or your sister can receive a fixed percentage of the trust's value annually. To dampen short-term fluctuations in asset values, it's wise to base the payout percentage on an average over several years.

As a further safeguard against unforeseeable economic changes, you can give the trustee discretion to alter payment amounts and ratios, possibly in line with the movement of an economic indicator, such as the cost-of-living index. Some state laws already permit trustees to make adjustments to harmonize the interests of multiple beneficiaries. But rather than rely on that, you'd do better to spell out your wishes in your will. (For a discussion of the merits and drawbacks of TRUs, see "Will your trusts keep your heirs poor—and fighting?" Sept. 18, 2000.)

Following the trail of an old stock certificate

QAfter my grandfather died, we found some old stock certificates among his papers, but the company names are unfamiliar. How can we find out whether the certificates have value?

A Check a source such as CCH's "Capital Changes Reports," Financial Information's "Annual Guide to Stocks: Directory of Obsolete Securities," or National Register Publishing's "Directory of Corporate Affiliations." Your broker or municipal library may have access to one or more of them.

If the original corporation has merged with or been bought by another company, contact the successor's shareholder services department. If those sources don't help, try the corporate records office of the state shown on the stock certificate. As a last resort, you can pay a fee ($35 or more) to a professional securities research firm like Financial Information (800-367-3441) or Stock Search International (www.stocksearchintl.com).

The differences between bonds and preferred stocks

QI'm wondering whether I should put some of my retirement plan money into preferred stocks. How do they compare with bonds?

A Both are fixed-income investments, but a company in financial trouble must pay its bondholders first. And though you get your capital back when a bond matures, preferred stocks have no set term, so you can't predict what they'll be worth when you eventually dispose of them.

Like bonds, preferred stocks have little chance of appreciation unless market interest rates decline or the shares are convertible into common stock. But they normally offer higher yields than bonds of equal quality, to compete with bonds' greater safety. If the extra income appeals to you, choose preferreds of well-known companies rated no lower than BBB, and avoid high-dividend preferreds that the issuer could redeem within a short period.

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;1:105.