For Love or Money: Widow’s Benefit Rules
QUESTION: I married my current wife only to ensure that she will get part of my Social Security benefits. She lives in another city and has been drawing Social Security payments based on her own earnings as well as mine since she turned age 62 two years ago. I am wondering if she will be stuck with that payment level when I die or if it will increase to full widow’s benefits?--J. P. G.
ANSWER: We’ve heard of marrying for money, but never for Social Security benefits. What a novel basis for a marriage! However, a word of warning: According to a spokesman for the Social Security Administration, if the agency uncovers evidence calling your situation into question, you could be prosecuted for fraud.
Now back to your question. Even though your wife began taking Social Security benefits at age 62, she will be entitled to full benefits as your widow upon your death. According to the Social Security Administration, a beneficiary is always entitled to the highest level of benefits for which they are eligible.
Limited Partnerships and Tax Writeoffs
Q: Five years ago, I invested $5,000 in a public limited partnership that bought and operated a cable television system. The partnership has been successful, providing me with tax writeoffs and regular quarterly payments which were classified as “return of capital” and therefore not taxable. Now, the general partner has notified me that the system is being sold. My proceeds will be about $14,000. What are the tax consequences of this? Is there some way for me to defer paying the tax on this gain, perhaps by rolling over the investment?--H. A.
A: We’re sorry to tell you this, but you’ve already received as much of a tax benefit as you’re entitled to get from this investment, and it’s time to pay up to Uncle Sam. We can’t tell you what portion of the $14,000 will be taxable because you haven’t told us how much of your initial investment has already been returned to you in capital payments. Further, you haven’t said how much of your initial investment you wrote off on your earlier tax returns.
However, we can tell you this: Unless you invested more in the partnership, you are entitled to receive a maximum of $5,000 of tax-free return of capital payments and tax writeoffs. So, for example, if you have already received $2,500 worth of return of capital payments and taken $2,500 worth of tax writeoffs, the entire $14,000 settlement will be taxable income to you. You may not roll over the proceeds on a tax-deferred basis into another investment. The taxable portion of your settlement will be taxed at the rates applied to ordinary income.
Simplifying Your IRA, Keogh Plans
Q: I want to keep my bookkeeping as simple as possible when I begin withdrawing funds from my individual retirement and Keogh plan accounts next year. Currently, I have my funds invested in certificates of deposit. I am wondering if I can merge the accounts in the two plans into a single account. To whom should I turn for help? Do I need to see an investment broker? Are there any disadvantages I should be aware of?--W. A. C.
A: If simplicity and ease are your primary goals, there should be nothing stopping you from merging your IRA and Keogh accounts, and our advisers say the process is relatively straightforward. However, timing is important. The entire process should be completed before you turn age 70 1/2 and begin taking mandatory distributions.
First of all, you should terminate your Keogh plan and move the funds from that plan into your IRA. You can probably do this by yourself without the help of an investment broker. The staff at your bank can probably answer any questions you might have, and they don’t charge--at least directly--for their assistance. Just remember, when you begin taking distributions from your IRA after turning age 70 1/2, your minimum withdrawal will be based on the total amount in your IRA, an amount that now includes the proceeds from the Keogh plan.
According to our advisers, your proposal poses only one relatively minor disadvantage. Once you merge your Keogh plan funds into your IRA, you will lose the ability to take advantage of a special tax break available to holders of Keogh, but not IRA, accounts.
This tax break allows Keogh account holders to take a large distribution from the account and pay income taxes on the withdrawal based on five- or 10-year forward averaging of the disbursement. Whether you are eligible for the five- or the 10-year forward averaging depends on your age.
To invoke the more favorable 10-year averaging provision, you must have turned age 50 by Jan. 1, 1986. If you turn age 50 after that date, then you may average the gain over just five years. However, once you roll Keogh plan proceeds into an IRA, this forward averaging feature is lost.
Inheriting Problems Along With Real Estate
Q: I recently inherited some money and a house. I find that I am going to have to pay federal estate taxes of about $275,000 six weeks before my Treasury bill investment matures. What can I do to raise money to bridge this gap?--A. M. M.
A: Frankly, your question baffles our experts. Based on the information you’ve provided, our advisers don’t believe you have a problem that should have you worrying about raising money to cover the six-week gap.
The estate of the deceased--not any individual heirs--is responsible for paying the estate taxes on the assets in the estate. And the heirs do not actually inherit any property in an estate until it is settled and all the taxes are properly paid.
If the estate consists largely of illiquid assets, such as real estate, the executor of the estate may obtain an extension of up to a year on the filing of the estate’s return. During this time, the executor may sell any assets to raise money to pay taxes on the estate. The remaining assets are then divided according to the terms of the will and distributed to the heirs.
You should check with a qualified accountant or attorney for further information and guidance on your individual case.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
