ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, October 7, 1996 TAG: 9610070115
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: MONEY MATTERS
SOURCE: MAG POFF
Q: My father left a $50,000 life insurance policy with me as the beneficiary. The intent was for me to divide the money among me and my five siblings. Do I have to worry about paying any taxes on this money? I want everything clear before I distribute the money.
A: Joseph Simmons, a management and tax consultant with Simmons, Wilson and King Inc. of Christiansburg, said he assumes your father owned the policy at the time of his death. Most people do own their own policies so that they can retain control over naming of the beneficiaries.
If that was the case, the value of the insurance proceeds would be included in your father's estate for tax purposes. If all of the assets in the estate, including all insurance, exceed $600,000 in value, the estate would be subject to taxes. If the total estate was smaller, no estate taxes would be due.
Because the insurance passed directly to you, Simmons said, any taxes would have to be paid out of other resources in the estate.
When you distribute the money to your siblings, Simmons said, you will actually be making gifts to each of them. If any gift is more than $10,000, you must file a gift-tax form with the Internal Revenue Service, and the amount of the excess will be deducted from the $600,000 tax-free allowance for your own estate. If each gift is less than $10,000, no action is required on your part.
Simmons pointed out that your father placed great faith in your integrity. Absolutely nothing requires you to distribute any money to your siblings, so Simmons advised other people against following your father's course of action.
'Contemplation of death'
Q: If a person makes an irrevocable assignment of his life insurance policies (both term and whole life) to his children, is there a three-year waiting period (referred to as in "contemplation of death") that must pass before the proceeds of these policies are removed from the taxpayer's estate?
A: Bruce Stockburger, a specialist in wills and estates with the Roanoke law firm of Gentry, Locke, Rakes & Moore, said the answer is yes. The three-year rule applies to irrevocable assignment of life insurance policies.
The three years begin to run after the assignment of all of the proceeds to other people before the assets are removed from your estate, Stockburger said.
He said you can prorate the policies in some cases. Such an instance might occur if you own a policy, pay the premium for one year and then assign it to another person, such as a child. Suppose further that you die the day before the three-year period expires. If your children have paid the premium for three years, they can exclude 75 percent of its value from your gross estate because their payment of the premiums has increased the value of the policy.
Lawsuit possibility
Q: I saw in the news that Prudential Securities had settled a class-action suit with its customers who bought shares in limited partnerships. I also read in The Roanoke Times that class-action suits may be allowed to be brought against Dean Witter and Merrill Lynch for selling limited partnership shares without giving the shareholders adequate information on the possibility of a catastrophic fall in the value of shares and their lack of liquidity.
I bought $10,000 of these shares from both Merrill Lynch and Dean Witter. At that time, in 1985, I considered them to be very stable from a principal point of view. The prospectus from Dean Witter said the value would likely go up even if the government withdrew the tax benefits.
What is the likelihood a class-action suit will be filed against Dean Witter or Merrill Lynch? How long would it be before a settlement is reached? On my total investment of $20,000, what would be the high and low expectation award hoped for?
A: Don't spend any of the money yet because a long road may lie ahead for you.
People are always ready to sue these days, so the chances of a lawsuit are probably good. If such a suit is ever filed, you will be notified if you are a member of the class. The law requires that attorneys filing such suits must notify all of the potential plaintiffs.
You must watch your mail for such a notification, then fill out and return any forms they send you. No other action is required of you if you are a member of the class in a class action suit.
Discovery and negotiations could take years. There is no way to predict the course of such a suit.
The history of such suits would indicate that the lawyers make a lot of money, but the members of the class will receive little. For guidance, you might consider the suit brought in Roanoke by some shareholders who claimed they were misled into investing by the former Dominion Bankshares Corp. That case dragged on for six years before the money was paid. In the end, the lawyers received $1.75 million plus expenses. The disgruntled shareholders were paid 7 percent of the amount of their claims.
LENGTH: Medium: 90 linesby CNB