Money Management Q&As

Renouncing a legacy from your spouse

Q: If my wife dies before me, can I disclaim what she leaves me in favor of my children, to keep it out of my estate?

A: It depends on the wording of your wife's will. If your children are her "residual heirs"—that is, they'll inherit everything no one else does—your disclaimed legacy would go to them. But you can't designate them in place of yourself. The same principle applies to jointly owned property, which can't be disposed of by will, but only to the half you'd inherit if you were to survive your wife. The other half already belongs to you, so you can't disclaim it.

Where to look for hidden fund fees

Q: An investment commentator warns radio listeners to avoid mutual funds with "hidden 12b-1 fees." What's he referring to?

A: Distribution and marketing (i.e., advertising) expenses, which federal law allows funds to pay out of assets. More than 60 percent of funds now do so. In theory, investors benefit from reduced operating expenses as the number of shareholders increases. Unfortunately, some funds claiming to be low- or no-load use the annual fee (which can amount to as much as 1 percent of assets) as a way to add a hidden charge to the cost of their shares.

SEC rules require fund prospectuses to clearly state their fees and illustrate the possible effects on an investment. Investment information services such as Morningstar also disclose funds' 12b-1 fees. Visit www.morningstar.com, or look for a printed copy of Morningstar Mutual Funds in your local library.

How a couple's income affects Roth limits

Q: My wife and I both have Roth IRAs. Our joint adjusted gross income—most of it mine—will probably top $150,000 this year, so we can't contribute $3,000 each (the 2003 limit). Can she contribute the full amount to her account if I reduce the amount I put in mine accordingly?

A: No. Say your joint AGI is $155,000, halfway to the $160,000 cut-off point. This would reduce the limit on your individual contributions to $1,500 apiece (half of $3,000), regardless of who earned the income. Even if you contribute nothing for yourself, your wife can't put in more than $1,500.

Retirement age and Social Security

Q: I've read that people who are relatively young, like me, won't become eligible for full Social Security benefits until after age 65. Does that mean I won't be able to opt for reduced early benefits at 62?

A: No, but because the size of the benefit reduction depends on how many months prior to full-retirement age your benefits begin, you'll take a bigger cut. For instance, if your full-retirement age were 65, your benefit at 62 would be about 80 percent of the full amount. But if your full-retirement age is 67, you'd get only about 70 percent at 62; 75 percent at 63; or 86.5 percent at 65.

Think about hiring an architect

Q: We're ready for a more elaborate house but can't find a suitable one in our neighborhood, so we're thinking of upgrading our present home substantially. What are some of the factors we should consider in making a decision?

A: Wholesale renovation can wreak havoc on your nerves and your pocketbook. You might do well to consult an architect before you take the plunge. He can help you determine the best use for the space you now have and keep costly additions to a minimum. He should be able to foresee and mitigate the problems and expense posed by inadequate electrical and other systems, especially in an older home. For example, a remodeled kitchen or new master suite could involve rerouting and replacement of existing plumbing or even reinforcing a weak foundation.

You may also benefit from the architect's judgment on how the renovations would affect your property's value. If it's much higher than the value of other homes in the neighborhood, you might not be able to recoup the cost of improvements if you have to sell. For more information on engaging an architect, go to The American Institute of Architects' Web site at www.aia.org.

Nursing an anemic pension fund

Q: I began taking fixed annual payouts of $10,000 from my pension account in 2001, when I was 53. Since then, investment losses have severely depleted the account, but I can't reduce the distributions without paying a 10 percent penalty. Is there a way out?

A: Yes. The IRS won't penalize you if you base future withdrawals on the account's changing value and your life expectancy at your current age, even if that results in smaller payouts.

Suppose the account balance is $100,000, and your beneficiary is 50. You'll be 55 this year, so according to an IRS table, you and your beneficiary have a joint life expectancy of 38.3 years. Dividing $100,000 by 38.3, you get $2,611, the payout you must take this year to avoid a penalty.

Liability protection? Beware of dog

Q: We promised our young son a dog for his next birthday, but our homeowners insurance carrier insists that we sign a waiver of liability for dog bites. What can we do to keep our word and still protect ourselves?

A: Some insurers will cover canine liability conditionally; for example, they may exclude certain types of dogs and limit the number of times or the total amount they'll pay for dog bite losses. If you can't find a suitable insurer that does business in your state or you prefer to stay with your present carrier, consider buying a separate canine liability policy. Ask your agent for recommendations or check the Web for companies that write such coverage. The size and breed of dog you choose will affect the price of the policy. It could approach $1,000 for $100,000 coverage (the bare minimum), with a $1,500 deductible. Check local law as well, since it may prescribe the coverage you need.

Sales tax refunds on overseas purchases

Q: We expect to do a fair amount of shopping on our first trip to Europe in a couple of months. What do we need to know about getting value-added tax refunds on our purchases? Are we likely to be fully reimbursed or is there a difference between the tax and refund?

A: VAT rates go as high as 25 percent, but refund percentages are lower. For instance, Britain adds 17.5 percent VAT to the wholesale price, but your refund would come to only 14.9 percent, and you might have to pay a commission to a refund service like Global Refund or Cashback to get it.

For expensive items, it may be worthwhile to deal directly with the shop. Department stores often make special refund arrangements for tourists. The easy way is to have the store credit the refund to your credit card account, where it will be converted into dollars. If that's not possible, get a VAT refund form at the store, show it (and your purchases) to a customs official at the port of exit from the country or the European Union, and mail the certified form to the store.

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 Sep. 5, 2003;80:85.