ROANOKE TIMES
Copyright (c) 1995, Roanoke Times
DATE: Monday, December 11, 1995 TAG: 9512110020
SECTION: MONEY PAGE: A-8 EDITION: METRO
COLUMN: MONEY MATTERS
SOURCE: MAG POFF
Q: I have just returned from a scheduled meeting with my IDS (now American Express) planner. I have done business with them for 30 years, and all those years I have been told by them to maximize my IRA and 401(k) plans so the money can accumulate tax-free until I am in a lower tax bracket at retirement. I have read this repeatedly, even from other sources.
Now I am told they have "new thinking" and want me to divert my sheltered funding to "flexible premium variable life" because my taxes will not be lower at retirement. They said I will be able to make withdrawals from this insurance with its zero cost loan provisions which I do not pay back, and that this will lower my provisional income to protect my Social Security benefits and prove beneficial to my estate. Supposedly these withdrawals are also tax-free.
Please advise if you are familiar with this new thinking among the agents in Roanoke.
A: P. Wesley Hambrick Jr., a fee-only financial planner with Hambrick Investment Advisors in Roanoke, is not certain what your adviser is offering, but he believes it sounds like a Universal Life II policy, a generic term. Such policies have been on the market for about 10 years and combine a variable policy - with fixed premiums but a variable face amount - with a universal policy - with flexible premiums and face amount. Hambrick said those policies are very complex and very specialized.
Almost any product meets someone's needs, Hambrick said, but this policy meets the needs of few people. Farmers, for instance, might profit from this policy because of their specific tax structure. He said it is especially not a good choice for money that has been in sheltered retirement plans such as your IRA and 401(k). Nor should it be used to tax shelter an investment that is already tax sheltered by moving the plans themselves inside such a policy.
"New thinking bothers me some," Hambrick said. He recalled an article in Money magazine some time ago in which some banks were encouraging people to switch investments on that basis. The red-flag words, the magazine said, were "new thinking." It is, he said, often used as a sales gimmick to get people to switch into products that carry a high commission, like this one.
Hambrick said most fee-only planners recommend buying insurance for protection of life, health or whatever. But you invest outside a policy. In other words, you insure risks but have a separate means of investing because the two concepts do not work well together.
As to withdrawing without paying taxes, Hambrick said people who buy such policies can withdraw taxed money that they put into the policy. Earnings that have been tax-deferred are subject to taxes when withdrawn. Hambrick said the agent is presenting you with an assumption that you will not outlive the money (on which you have already been taxed) that you used to buy the policy. If you live long enough to withdraw the earnings, you will be taxed.
Bypassing children
in favor of niece
Q: I am a 71-year-old widow with three children. I wish to deed my home and property to a niece who has been kind to me over the years.
She is afraid to accept for fear of what the family will say or do after my death. Do I need to discuss this with them? Or, if I go ahead with my plans, can they later sue for their part of the property? I cannot afford an attorney.
A: Your children do not own "their part" of your property. What you own belongs to you alone, and you are free to dispose of it as you wish.
That said, your children can still sue. Anyone can sue anyone else at any time, regardless of the justification, and such suits cause everyone a lot of trouble. They can allege that your niece exercised undue influence over you.
Even if they don't go that far, your children could obviously harbor bitter feelings toward your niece. How important is their opinion to her? To you? These questions are more important than the money aspects. Would it clear the air or cause hard feelings if you discuss this openly?
You will have to see a lawyer in order to draw a proper deed that would withstand attack. In the alternative, you can do your niece a favor by willing the property to her instead of giving it to her now, and this would also require a lawyer's help.
Under the latter course, she would avoid a lot of taxes because her basis in the property would be the value on the date of your death. The capital gain during your lifetime would never be taxed. If you give her the property now, your niece would take your tax basis of many years ago.
Your question concerns human relations, not money. You and your niece know your family situation best, and you must decide in these terms.
LENGTH: Medium: 84 linesby CNB