Money Management Q&As

Transferring a home into a living trust

Q: I'd like to put my home into a revocable living trust I've set up, but the mortgage contains a "due on sale" clause allowing the holder to demand an immediate payoff of the loan in case of a title change. Do I need to worry?

A:Not if you're the beneficiary of your trust and continue to use the property as your residence. In that case, federal regulations bar the lender from accelerating the mortgage, since you remain responsible for complying with its terms. However, you'd do well to inform the lender or whoever services the mortgage that you intend to make the transfer, and provide assurance that you'll notify him of any subsequent transfer or change in occupancy.

Should you replace your life insurance?

Q: An insurance agent is trying to persuade me to exchange my present whole life policy for a variable life policy. He says the transaction will be tax-free and will give me a bigger bang for my premium bucks by channeling them into growth mutual funds. Is he steering me straight?

A:He's right that the swap is tax-free, assuming you have no policy loans outstanding—but that shouldn't be your main concern. Keep in mind that part of your present policy's cash value may go to pay surrender charges on the old policy and commissions on the new one. Also, your premium may go up if, for example, your health has declined since buying the current policy.

To help you decide, ask the agent to provide a detailed comparison of the costs and features of both policies, as well as growth projections based on reasonable assumptions. Most variable life insurance policies are registered as securities with the SEC, which requires the disclosure of all significant financial information.

If you want to do your own investigating, consider having your existing policy and the proposed new policy reviewed by the Consumer Federation of America's Life Insurance Rate of Return Service (www.consumerfed.org/backpage/evaluate_insurance_policy.html ), suggests New York City independent insurance adviser Glenn Daily. You could also compare the first-year cash surrender value of the policy recommended by the agent with those of low-load policies sold by Ameritas (www.ameritasdirect.com) and TIAA-CREF (www.tiaa-cref.org). "This will give you an idea of how much of your money would go into the agent's pocket," says Daily.

Death is certain, but not the gift tax

Q:My father, who's in failing health, wants to give my son, a high school senior, $50,000 to pay for his college education. To avoid gift tax, would it be best to put the money into a state tuition savings program?

A:No, because part of the gift might be taxable if your father dies within the next five years. Once your son has been accepted to college, your father should consider prepaying his full tuition. If the money goes directly to the school, none of it will be subject to gift tax, even if your father doesn't live to see his grandson complete his studies.

When a seller tries to limit a buyer's home inspection

Q:We found a condominium unit we like and intend to make our purchase contract contingent on a satisfactory inspection. But the seller wants to limit the inspection to the unit's interior, since the exterior is the condo association's responsibility. Does that make sense?

A:It does from the seller's viewpoint, but not from yours. True, if the inspector finds defects like roof deterioration or poor drainage, the seller might not be able to remedy them, but such faults would affect the property's value. You're entitled to know about them before deciding whether to buy the unit as is, to require the association's pledge to fix them, or to withdraw your offer. Don't sign the contract unless it spells out the conditions under which you can cancel the transaction.

If a lender reneges on mortgage terms

Q:I agreed to pay two points for a 6 percent home loan with a 60-day closing deadline. The closing took place on schedule, but the lender said market rates had gone up and forced me to pay an additional point to keep the deal from falling through. If I take him to court, do I have a chance of winning?

A:Yes, provided your agreement locked in both the rate and the points for the 60-day period, and you have it in writing. If the agreement is oral, you may find it hard to prove your case, because it's not unheard of for a lock-in to cover the rate but allow the points to "float," meaning that the number you're charged at closing may be more or less than the lender quoted when you first applied for the loan.

Finding the right lawyer to handle a special case

Q:I have a legal problem in connection with a property I own, and I need an attorney who's thoroughly familiar with that type of real estate. Where should I look for candidates who might fill the bill?

A:Start by checking with the local real estate board to find out who handles its legal affairs, or ask the bar association in your area to put you in touch with the head of its real estate section. If you draw a blank, access the Martindale-Hubbell Law Directory at www.lawyers.com. It provides detailed information on fields of practice and professional backgrounds of attorneys throughout the country. The Web site includes links to many individual law offices, as well as tips on selecting an attorney, information on major areas of law, and an extensive glossary of legal terms.

Smooth the way for IRA contributions

Q:Several participants in our profit-sharing plan have asked if they can make voluntary Roth IRA contributions through the plan. Is this possible?

A:Yes, if your plan trustee is a bank, brokerage firm, or similar institution. The participant can contribute to either a traditional or a Roth IRA, and the contributions aren't taken into account in calculating other plan benefits. You'll need to amend your plan to permit such "deemed IRA" contributions, however. For IRS guidance on the wording of the amendments and on adoption procedures, visit www.irs.gov/pub/irs-irbs/irb03-04.pdf.

Mutual funds that act as investment managers

Q:I haven't the time or know-how to keep adjusting my portfolio mix of stocks, bonds, and other assets so that it reflects changes in market conditions and in my financial situation. Are there mutual funds that can do this for me?

A:Asset allocation funds may serve your purpose. They aim to maintain preselected ratios of stocks, bonds, and other investments to fit different investor profiles. As economic conditions shift, so do the market values of various asset classes. Accordingly, the funds buy or sell within each class to return to the desired ratio, just as you'd rebalance your holdings if you owned individual issues or mutual funds in different sectors.

As you approach retirement, you may want to reduce your investment risk by switching to a fund with a more conservative asset allocation formula. A number of mutual fund companies, including Fidelity and Vanguard, offer fund series designed to help you do this.

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, 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 Q&As. Medical Economics Oct. 10, 2003;80:115.