QUESTION: In 1978, I opened a $25,000 Keogh retirement account at a major stock brokerage and was assured my investment would "do better" than the certificate of deposit I had previously held. However, 11 years later, my account shows just $650 in a money market fund and 1,500 "unpriced" shares in the liquidating trust of a bankrupt company. If I had left my money in the certificates of deposit, I would have nearly $90,000.
I will be turning age 59 1/2 soon and will want to start taking my retirement funds. Is there any insurance coverage available to recover my investments?--J. F. J.
ANSWER: Unfortunately, no. Our advisers know of no insurance protection you can tap at this time. It is true that most brokerage houses are members of the Securities Investor Protection Corp., a Washington securities insurance agency that insures each trading account held in the broker's name for up to $500,000. However, SIPC coverage is available only when a brokerage house that is holding your investments in its name goes out of business. It does not offer coverage of the performance of the investment portfolio.
That said, our advisers also say you might be able to recover your investment by suing the brokerage. A lawsuit could be of value if you think that you can prove your broker failed to follow your investment directions or goals, or if you have evidence that your account was a victim of fraud or negligent mismanagement.
If you turned over responsibility for your account entirely to your broker, he should have kept you informed of details of its performance over the years. He should also have told you of any management or investment fees deducted from your account. Finally, if you can prove that you were misled as to the risks or nature of the investments in your portfolio, you might have a claim. In addition, you might search for others who invested with the brokerage to determine if there is a pattern of behavior at the brokerage that warrants further scrutiny.
Mark Batetian, president of Prudential-American Securities in Pasadena, suggests that you could be successful in court if you argue that your Keogh account was not as prudently invested as it should have been given the fact that it represented your retirement funds. "Retirement funds should be invested in a safe, secure portfolio," Batetian says. "This is not the time to get into speculative issues. I think there's an argument to be made here that this man was the victim of bad investment judgment."
Nevertheless, our advisers still caution that the likelihood of recovery from a lawsuit is not great. Further, you stand to incur substantial legal fees if you pursue court action, and this may not be the time for that.
Copy of IRS Notice Is Hard to Come By
Q: A few weeks ago, a reader inquired about how to value shares in the "Baby Bell" telephone companies acquired as a result of the breakup of American Telephone & Telegraph in 1984. You referred to an IRS notice, No. 86-8, but my local IRS office has never heard of it. The lady at the IRS told me to ask you to figure it out.--G. E. W.
A: We did figure it out, but it wasn't easy.
IRS Notice 86-8 is contained in the Internal Revenue Bulletin of June 30, 1986. However, actually obtaining a copy of this notice from the IRS may be next to impossible. The Los Angeles branch office has access to a copy, but won't make it generally available to the public--even if taxpayers send a self-addressed, stamped envelope--because officials don't want "to set a precedent for this type of thing." Furthermore, the IRS notes that it sent a copy of a similar notice to all AT&T; shareholders of record as of Dec. 30, 1983.
It may be possible to get a copy from your local library if it stocks the Internal Revenue Bulletin and its files date back to 1986. Your accountant may also have a copy. If you are absolutely desperate and you send me a self-addressed, stamped envelope, I will send you a copy of the notice I have managed to secure from our trusted tax adviser, Margaret Bumcrot. (However, be warned: This is a one-time offer and it expires in two weeks.)
Son Would Benefit From Inheriting Condo
Q: My husband and I are over age 65 and own a condo with a value of about $70,000. Should we make our only child a co-owner of the condo now by adding his name to the deed? He will inherit the condo when we die anyway. We want to do what is best for him so he will not have to pay taxes on the inheritance. Our total net worth is less than $150,000.--M. D.
A: If you make your son a co-owner of your condo now, it would be considered a gift of one-third of the original basis of the property. And this gift would be subject to reporting to the IRS if it exceeded $20,000. (Remember, one individual is allowed to give another $600,000 over the course of a lifetime, tax free. You and your husband would be allowed to give a total of $20,000 a year to your son without filing a gift tax return and using up a portion of your $600,000 lifetime exclusion.)
Our advisers recommend that you leave things exactly as they are. When your son inherits your condo, its value will be the fair market value on the date of death of the surviving spouse. So, if the condo is worth $100,000 as of this date, and your son sells it for that amount, he would not be subject to income tax on his proceeds. If he holds on to the property and sells it for more than its fair market value on the date of your death, then he would be taxed on the difference between the net sales proceeds and the $100,000 fair market value.
However, income taxes on inherited property are entirely separate from probate fees and inheritance taxes. Under current law, your estate would be subject to probate, and any applicable fees would be deducted from the assets of the estate. As for inheritance taxes, current law allows each of you to give away $600,000 in cash or equivalent assets over your lifetime. So, unless you have given away more than $1.05 million in assets so far, your son, as sole heir, should not be subject to inheritance tax if he receives your $150,000 estate.