Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SATURDAY, February 9, 1991 TAG: 9102090035
SECTION: BUSINESS PAGE: B-6 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Long
A: Technically speaking, there is a federal tax on estates of any value.
David Lucas, a Roanoke accountant, explained that under the unified estate and gift tax, a credit is applied. The arithmetic works out so that the credit eliminates the tax on estates under $600,000. He said there is no requirement even to file a return if the estate is under that threshold.
This assumes, however, that the deceased person never used the credit during his or her lifetime. Lucas said the tax is unified because it covers lifetime gifts as well as the estate.
If the deceased person gave more than the tax-free amount of $10,000 in any one year, Lucas said, the surplus counts against the estate. Suppose, for example, that the deceased person made a gift of $50,000 during his lifetime to another individual. In that case, Lucas said, he used up $40,000 of the unified credit. At his death, only $560,000 of the estate would be exempt from federal and state taxes.
Virginia law closely parallels the federal rules. The credit offsets the tax up to $600,000 or the unused amount. There are no local estate taxes.
Try a mutual fund
Q: We do not know very much about stocks and bonds. We have $12,000 in the credit union that we would like to invest for the future.
I am 59 and retired last July 1 on work-related disability. My wife is 58 and plans to retire at 62. We have some stock in Dominion Resources and Public Service Enterprise Group Inc. My wife has a tax-sheltered annuity taken out of her pay at work. We have one IRA, life insurance and our retirement through work. Would Dominion Resources and/or government bonds be our best investments?
A: Advice from Robert Fries, a financial planner with Malcolm G. Fries & Associates in Norfolk, is that you should have enough ready cash in an emergency fund to equal three to six months of your normal income. He noted you may need more than that if your disability requires medical treatment. Your credit union or a money market fund are the best places to keep this cash.
Assuming you already have that much cash set aside, Fries said, you might consider a mutual fund in order to spread your risk among many stocks. Depending on your tolerance for risk, you could range from a relatively safe fund in government bonds to a very aggressive fund in oil and gas. Fries suggested a mutual fund that invests in government and high-grade corporate bonds.
On the belief that everyone should diversify investments, Fries does not recommend putting any more of your money in Dominion Resources, even though he called it a good company.
Shadow catches up
Q: I purchased a $10,000 CATS zero coupon bond June 22, 1984, for $4,750 with interest of 11 7/8 percent. It was due and paid Nov. 15, 1990.
I am of the opinion that the sum of the interest payments reported yearly during ownership for tax purposes, plus the initial cost, should equal $10,000. However, these sums exceed $10,000 by about $800. The interest for 1990 is about 75 percent higher than previous years, out of line with the gradual increase one would expect. I would appreciate any comments on how interest is normally calculated on certificates of this type.
A: CATS is an acronym for Certificate of Accrual Treasuries offered by Paine Webber Inc. CATS are zero-coupon Treasury bonds that are sold at a discount from the face value because you receive no income until the certificate matures. However, you must pay taxes on the yearly "shadow interest."
The amount on which you pay tax rises each year because of the impact of compounding. That means you earn more "shadow interest" every year.
The Paine Webber tax department explained that the high figure at the end means that you purchased your CATS through the secondary market. The value on the secondary market, where people trade previously owned bonds, fluctuates inversely with the direction of interest rates, the company said, and you obviously bought the CATS at a steeper discount than the one of the original owner. This is called a market discount. Paine Webber explained that your gain on this extra discount is recognized only in the year of maturity. Amplification
In a recent column, a couple asked about the need to have durable powers of attorney to handle Social Security and other checks in case one of them should become mentally incapacitated. A spokesman for the Social Security Administration reports that the power of attorney would not help in such a case because the administration doesn't recognize them. He said Social Security requires appointment of a representative payee. That would be the legal way to handle such a crisis. The simple way, if the couple's relationship is built on trust, is to have a long history with a bank of a joint checking account in which both partners handle deposits and write checks with no problems.
by CNB