ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, December 2, 1996 TAG: 9612030137
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: MONEY MATTERS
SOURCE: MAG POFF
Q: I will celebrate my 70th birthday in March 1997. I will, therefore, be required to begin withdrawing funds from my Individual Retirement Account next year. My three children are equal beneficiaries. I do not need to live on these funds at this time.
I wish to leave as much of my principal as possible in the IRA and minimize my tax liability for 1997 and future years.
My IRA totals $194,000 and is invested in six funds.
My thought is to deposit the income and capital gains distribution to be earned in 1997 in a money market account to be set up in the IRA. The minimum required distribution would be made from the money market account in December 1997. Any shortage would be made up by redeeming shares in one account.
A: P. Wesley Hambrick Jr. of Hambrick Investment Advisors in Roanoke said he found your question to be an interesting one.
He said you have the correct understanding that the withdrawals are mandatory for you upon reaching the age of 701/2. The first mandatory withdrawal will have to be made not later than April 15 of the year following your reaching the age of 701/2. But waiting until the following year to take the first withdrawal may not be a good idea, he said, because that would put two annual withdrawals into the same tax year.
Hambrick saw no need for you to have a separate money market account to collect income and capital gains distributions during the year and then to make a money market withdrawal near year-end.
He suggested that you continue to have the income and capital gains distributions reinvested. He believes that your best course is to determine the required amount of the withdrawal and sell the required number of mutual fund shares near year-end or as needed.
The important issues associated with your inquiry, he said, are the determination of the amount of the withdrawal and the actual management of IRA assets.
The amount of the annual withdrawal is based on the life expectancy of the person and the named beneficiary of the IRA. Withdrawal amounts may be reduced by naming of a younger person as the beneficiary. If this person is not the spouse, the age reduction is limited to 10 years younger than the owner.
Hambrick said the choice to name a person other than the spouse as beneficiary to obtain a lower required withdrawal amount is a decision that must be carefully thought out on an individual basis.
The most important issue, he said, is the actual management of the IRA assets. With the aging of the population, retirement assets must last longer. It is important, Hambrick said, that a financial plan for these assets be as carefully developed for the retiring individual as for younger people.
Putting the assets into only income-producing assets and overlooking growth assets could lead to a financial disaster if the person lives a longer time, Hambrick said. The asset allocation should be designed to meet the goal of lifetime financial security.
See lawyer about
gift's tax ramifications
Q: My parents put their land and house in my name. It is written up as a gift. But I have four brothers, and their will says for it to be divided among us. Must I get a lawyer to do this for me?
A: You should see a lawyer immediately to help you sort out the legal ramifications of the actions taken by you and your parents.
If your parents had willed their property to the five of you, your tax base would have been the value as of the date that the second of your parents dies. That would have meant all the gain during their lifetimes would never have been taxed.
But now they have given a gift to you, so you have taken their tax basis. That is the original cost of the property plus improvements. You will pay high taxes when you sell.
Presumably your parents have filed the required gift tax return for the gift in excess of $10,000 - or $20,000 if both of them contributed to the donation. The excess over that amount must be added to the value of their estate for tax purposes.
Their action in making the gift to you alone showed great faith in you. Their will no longer controls the property because they don't own it. You are free to either follow their wishes or ignore them.
If you divide the property with your brothers, you will be making a gift to them. They will take your tax basis, which is the same as your parents' basis, and you will have to file a gift tax return if the gift exceeds $10,000 per person.
Your parents may want some kind of contract obligating you to divide the property after they die. In any case, you should see a lawyer to determine your present legal status and to help you handle the affair.
LENGTH: Medium: 88 linesby CNB