ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, May 27, 1996 TAG: 9605290006
SECTION: MONEY PAGE: A-6 EDITION: HOLIDAY
COLUMN: Money Matters
SOURCE: MAG POFF
Q: I frequently receive mail offers for bank charge cards which offer very low interest rates for the first six months or so. I'm tempted to transfer accounts when the low rates expire to take advantage of the offers from different banks. Would this kind of account hopping damage my credit rating?
A: Ronald Ernest of the Credit Marketing and Management Association said credit bureaus do not rate people, providing only credit information to businesses that subscribe to the service. He said the reaction might vary from lender to lender.
Craig Henry, vice president of marketing for the card products division of First Union Corp., agreed with Ernest. He said there is no such thing as a single credit rating. A business will rate applicants when they apply for credit based on information available at the time.
The result might vary according to the type of credit sought, such as a home loan, credit card or mortgage. Multiple credit cards might hurt you more in applying for a home mortgage than in applying for another card, Henry said.
Most creditors will look at your total of credit lines rather than just at the amount you owe, Henry said. Thus, if you have two credit cards, each with a $5,000 line, a creditor will see $10,000 rather than just the $750 you may owe. That's because you could run each of the cards up to the limit.
Henry said it's hard for a creditor to determine whether you are looking for the lowest rate on a card or whether you are living on the cards and paying off one card with another. Different creditors might look at the situation in different ways.
If you try the route you suggest, you might consider closing the old account as soon as you transfer the balance. You should control the number of credit cards you have so that your potential for spending is limited. You can have too much credit available to you.
Best for daughters to inherit properties
Q: I have a number of rental properties that I have acquired over the years. I would like to divest myself of them because of my age and the effort it requires for me to manage the properties.
I am considering placing the properties in a trust for my two daughters and have the income come to me and my wife until we pass on. Then the trust would pass to my daughters without the heavy burden of the inheritance tax, which is one of my objectives.
My other objective would be to minimize any capital gains tax. My problem is that the tax basis of my properties is very low, even including the maintenance, upgrades, etc., that I have put into them over the years. To sell them outright would cause a heavy capital gains tax.
If I place the properties in a trust fund, what is the basis for the trust fund: the value at which I purchased them or the current market value, which is considerably higher? Could the trustee sell the properties and reinvest the proceeds into other, more liquid investments for the trust and, if so, would there be a capital gains tax to the trust fund, and at what basis?
A: Bruce Stockburger, a specialist in estate and trust law with the Roanoke law firm of Gentry, Locke, Rakes & Moore, said the trust you propose, with the income flowing to you and your wife, would not accomplish your objectives. You would be subject to income taxes, and you would not avoid estate (inheritance) taxes.
If you and your wife have a joint estate of less than $1.2 million, Stockburger said, you would not be subject to estate taxes if your wills are properly prepared. You would, therefore, do better to allow your daughters simply to inherit the property. Their tax basis would be stepped up to the value at the date of your death, and all of the capital gain in the intervening years would escape taxation completely.
If your joint estate is more than $1.2 million, Stockburger said, you should see a lawyer who is a specialist in estate planning. There are ways to minimize estate taxes and capital gains taxes, but it is not through the type of trust that you suggest.
In answer to your second set of questions, Stockburger said properties placed in a trust would assume your tax basis. The trust, therefore, would be subject to the same capital gain tax that you are. The trustee would have the power to sell the properties, but the trustee would be subject to the same capital gains tax that you would face.
Stockburger suggested some other alternatives.
One is to sell all of the rental properties and roll over the investment into commercial real estate. He said commercial real estate, if you choose wisely, should be less of a burden on you.
Another alternative, he said, is to format the ownership of the properties so that you (and your wife, if she is an owner) can give $10,000 worth of the ownership every year to each of your daughters. These gifts would escape gift tax. Any share that is not distributed at your death could be willed to your daughters. They would receive the step-up to a new tax basis on that inherited share.
People who are concerned about estate taxes because they have an estate of high value should see an experienced lawyer immediately. Like you and your wife, they need tax planning and up-to-date wills.
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