Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 2, 1992 TAG: 9202290099
SECTION: BUSINESS PAGE: A-6 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Long
My mother recently passed away, and my older brother is executor of her estate. Her savings and personal property were equally divided among the three of us. The buyer of the house will be paying monthly for 11 more years. Each month the executor sends me a check for a third of the payment.
The executor, who engaged a lawyer and a tax firm to finalize the estate, said they told him that inherited wealth must exceed $600,000 to be taxed. They also told him that, because this monthly payment was an inheritance, it need not be claimed on my income tax return.
I wasn't satisfied with this explanation, so I talked with a tax firm specializing in estates and with a specialist lawyer. Both asked if my mother had secured a tax exemption certificate. She had not. Both told me that, because she had not secured the exemption, the heirs were required to show interest earned and capital gain amount even if it is part of an inheritance. This was to be done with the filing of a completed K-1 form.
At this point, I'm confused. I don't want to pay taxes if not required. I don't want to get into trouble with the IRS. I want to do what is required. I would like another opinion on this matter.
A: Your third opinion comes from Bruce Stockburger, an estate and tax specialist with the Roanoke law firm of Gentry, Locke, Rakes & Moore.
He said the matter is confusing because it involves estate taxes on one hand and income taxes on the other. Stockburger agrees with the attorney and firm you consulted.
The fact that the estate was worth less than $600,000 has to do with estate taxes, not income taxes.
The monthly payments are installment sale payments, he said. They constitute income which ordinarily is taxable to the person receiving them. He said they are taxable as income regardless of application of estate tax rules, even though under some circumstances a deduction may be available for certain amounts of estate taxes paid.
"The payments will be taxable in the hands of the three heirs on the same basis as they would have been taxable to their mother had she received the payment during her lifetime," Stockburger said.
You must determine whether your mother chose to exclude any gain on the sale of the house - assuming it was her principal residence. Owners 55 and older may sell their principal residence and elect to exclude $125,000 of the gain. This must be done by the taxpayer (or a personal representative such as an executor) within the time period when an amended return can be filed, usually three years.
If your mother filed with the IRS for such an election, he said, it is possible that the entire amount of the principal payments on the mortgage can be excluded from income taxes. In any event, Stockburger said, the interest component of the installments will be treated as interest income to the heirs.
Check the record to determine whether your mother claimed the exclusion.
Check your birthday
Q: I am 74 years of age and employed full time by an international firm. When reading my benefits manual recently, I discovered the following statement: "Once you reach the age 70 1/2, if you continue employment, the company must begin to pay you pension benefits in addition to your salary. Your pension benefits begin April 1st following the calendar year in which you reach 70 1/2."
When I checked into this, I was advised it did not apply to me because I was already 70 1/2 when payment of the pension became a requirement. I was also told that pension payments made under this arrangement caused a reduction in pension amounts down the road.
Could you possibly give me some information on this since I don't know where I can secure further information? If this is a government requirement, why am I not entitled to receive pension payments when apparently employees younger than I are receiving them. It must affect other people besides me.
A: Whether you are entitled to pension in addition to salary depends on the date of your birth.
Douglas Quick, who is with the employee benefits consulting firm of A. Foster Higgins & Co. in Richmond, said the payout of the pension is required by Internal Revenue Code Section 401(a)(9)(C), which was passed by Congress in 1988. The transition rules in the section, according to Quick, state that it does not apply to anyone who turned 70 1/2 before Jan. 1, 1988. The only exception to the transition rule is a person who owns 5 percent of the company.
If you were 70 1/2 by Jan. 1, 1988, therefore, the company is correct and you don't qualify for the pension in addition to salary. You will have to retire to claim your pension.
If it's any comfort to you, Quick said the rule was added in 1988 to compel people to take their pensions. People were delaying taking the money in order to get more money later or to leave it to their families. But the Internal Revemade the exception for people who had already reached the age of 70 1/2.
Feedback
Norfolk lawyer Carl J. Khalil, with the firm Payne, Gates, Farthing & Radd, believes consumers should insist on car loans with simple interest for reasons that extend beyond the way a loan is repaid. A recent column discussed loans with simple interest and loans with up-front interest in terms of payment schedules.
Khalil said front-loading of interest under the rule of 78 is "absolutely disastrous to an individual who goes to trade in or sell" a car before the loan is repaid. And, he said, anyone whose car is wrecked will find that his insurance payment is much less than the balance remaining under a Rule of 78 loan.
"The only sensible way to get an auto loan is to shop for a simple interest loan ahead of time at a credit union and at several banks to get the best rate while also inquiring about application fees (which I have found often have to be asked about to find out about)," Khalil said. He called Rule of 78 loans one of the worst consumer rip-offs.
Getting credit again
Q: We took bankruptcy in 1978 and have not established any credit since. We have no one to use as a reference or to co-sign for us, so how do we go about getting credit? The Credit Bureau said our credit is clear. If I ask for credit, should I tell them about the bankruptcy?
A: If your current credit record is clear and you have a job or other source of regular income, you should be able to establish credit.
Start by applying for a store credit card. Retailers, because they have the power to cut off charges at any time, usually are the most liberal in granting their cards. Pay your bills on time, and the store will become a reference for further credit. Your next step could be an oil company credit card. You should also buy something you can afford, such as a piece of furniture, and insist on paying by installments. You will build your record by making regular payments.
Meanwhile, form a relationship with a bank. Open a checking account and handle it properly. If you are a valued customer of the bank with a good credit history from your other purchases, you should be able to get a bank card.
You should not volunteer adverse information. If someone asks if you have ever taken bankruptcy, however, you should tell the truth along with any mitigating circumstances. Your subsequent credit record is more important than an old bankruptcy.
Taxes on estate
Q: My wife is an only child, and her mother has a $125,000 home that cost $65,000 to build in 1978. My understanding from your column was that, upon my mother-in-law's death, my wife would inherit the house with a $125,000 tax basis and my mother-in-law's estate would not be liable for the $60,000 capital gain.
Recently a financial planner told me my wife would have to pay taxes from her mother's estate on $60,000 in capital gains on her death. He said it would be much better for the house to be sold before her death to get the $125,000 exemption.
A: James Taney, a certified public accountant with the Roanoke firm of Anderson & Reed, said there is no reason related to taxes for your mother-in-law to sell her home.
When your mother-in-law dies, Taney said, the tax basis will be stepped up to the market value on the date of her death. Her beneficiaries could sell the house immediately and escape all tax consequences from the capital gain. Or, if they sell later, they would pay tax on the gain subsequent to her death.
If your mother-in-law's estate is worth less than $600,000, Taney said, the heir would not even have to file an estate tax return. If the value of her estate exceeds that figure, he said, it doesn't matter if the $125,000 is in the house or in some alternate investment.
Insurance complaints
Q: I put $27,000 into an open-end annuity that matured last July. The insurance company told me when I called that there would be no penalty if I moved all the money into a new company annuity, which I did.
I'm a person who tries to keep up with my business. When the money was rolled over, I insisted they had shorted me. After two months of my persistance, they admitted they held out over $3,000, which I have not yet received. If I get it, how about the interest on the $3,000-plus? How do I know what they really owe me to begin with?
I have written for a complete accounting of how they have handled my money, step by step for the past 11 years and how much interest they were paying me because it never was on the annual statement. What recourse do I have to get this much money settled to my satisfaction? We are talking about the neighborhood of $54,000 or $55,000.
A: F. Anderson Stone of Shenandoah Capital Advisors of Roanoke, who has worked in the insurance industry, said your best course is to complain to the Virginia Insurance Commission.
He said it would bolster your case if you have the no-penalty promise in writing because many companies charge a fee for rolling over annuities.
To complain about insurance problems, write to Steven Foster, Insurance Commissioner, State Corporation Commission, P.O. Box 1197, Richmond 23209. Describe your problem and enclose copies of your records. Or you can call the Insurance Commission at 1-804-786-3741. There is a charge for the call. Be sure to have your records in front of you.
Mag Poff covers banking and finance for the Roanoke Times & World-News. She will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke 24010.
by CNB