ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, March 17, 1997 TAG: 9703180090
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: MONEY MATTERS
SOURCE: MAG POFF
Q: I am 66 years old and plan to retire on July 1. I need advice on how to get retirement income in addition to $738 a month in Social Security.
My company will give me about $60,000 in cash to reinvest at retirement. I also have about $100,000 in stock mutual funds.
How should I use this $160,000 to produce $1,000 a month more than Social Security? I need that much to live on. I have no debts or property.
A: Andrew M. Hudick, a certified financial planner with Fee-Only Financial Planning in Roanoke, said it is by no means certain that you can accomplish your goal. You have too little money to produce the income you want with an investment that has any degree of safety for your principal.
If $1,000 a month is the amount of additional money you need, Hudick said, he would suggest that you take a part-time job for a portion of your needs. You would then settle on an investment yielding $750 a month.
One option, Hudick said, is to buy a single premium immediate annuity. In most cases, he said, such an investment is not a good decision. But he said, in your case, it would provide you with a guaranteed monthly income.
An immediate annuity is basically a return of the premium (the principal) with some provision for regular income. In this case, 81 percent of the money you'd receive will be a tax-free return of principal, and you will owe taxes on only $190 per month.
The cost of the annuity contract that Hudick priced from a reputable company was $97,212. The return will total of $120,000 (120 months at $1,000 a month). You may be able to shop around for a better deal.
That would take care of 10 years, in your case to the age of 76.
Hudick would roll the balance of your $60,000 investment in the retirement account into an Individual Retirement Account. By doing this, you would be hoping for good growth on the $60,000 over the next 10 years. If it grows enough, you would repeat the process of buying another annuity, although it is hard to predict what it might cost a decade hence.
Hudick said this technique obviously needs to be refined depending on how your $100,000 is invested and the tax considerations for the sale.
If you lowered your expectations, perhaps to $750 a month, you should get a longer deal on the annuity that might take care of you for your lifetime. Hudick said you might also supplement this with part-time work.
Q: My wife and I own a farm worth approximately $75,000. We are both in our late 60s, and the upkeep of the farm is becoming difficult. Therefore, we would like to deed the farm to our son, who will make it his permanent residence.
What is the tax implication for my wife and me? Can we treat it as a gift and deduct it from the $600,000 tax exclusion on our estate? Also, how can we word the deed in order for the farm to be passed on to our grandson?
A: Ross Hart, a real estate specialist with the Roanoke law firm of Hart and Hart, said you can't write a deed restricting further transfers as you suggest. You cannot give it to your son and then provide for its transfer to your son's son.
Your only option to carry out your wishes, Hart said, is to give your son a life estate in the property with the remainder ownership in the name of your grandson.
He warned that you must be careful in deeding this property to a relative because of new laws that make it a felony offense, punishable by prison, to transfer assets in contemplation of receiving Medicaid assistance for nursing home care. The deed must be worded properly to overcome this hazard if either you or your wife should be forced into a nursing home.
You can give the property as a gift. The first $10,000 from you and $10,000 from your wife will have no tax consequences. The other $55,000 can count against the exclusion on your estate at your death.
Hart said the tax implications will affect your son or, if you leave him the property, your grandson. In the case of a gift, the recipient takes the donor's tax basis. That means his tax basis will be the cost to you of the property, which is presumably very low. If you leave the property in your will, the heir will use the value on the date of your death as his tax basis.
You are facing complicated questions in this situation, so you should consult a lawyer who is experienced in property law, wills and estates to assist you in handling this transfer.
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