T-Bills, CDs Hold Few Mysteries for Investors

Q: I have some very basic questions that I can’t seem to get answered by the folks at my bank. Are Treasury bills and T-Bills the same? Are they insured? What about certificates of deposit, or CDs? I know nothing about them. Are they insured as well? --M.G.G.

A: Shame on your bank! These are hardly state secrets.

The term T-bills is just an abbreviation for Treasury bills, which are simply debt notes issued by the U.S. Treasury to finance the government’s operations. When you buy one of these, you are in effect lending the government money. The promissory notes it issues in return are backed by the “full faith and credit” of the U.S. government.

You can buy Treasury bills through your bank, or directly from the Federal Reserve Bank, which does not charge fees as many private banks do.

Certificates of deposit are types of “timed” savings accounts offered by banks and savings and loan associations that cannot be withdrawn until they mature.

There are a variety of CDs available. However, they all share basic characteristics: They require a minimum deposit--as low as $100 or as high as $1,000--and their interest rates increase depending on the length of maturity and size of denomination. For example, a one-year, $100,000 CD will earn more interest than a one-year $25,000 CD.

Certificates of deposit are insured by the banks issuing them according to the rules of the Federal Deposit Insurance Corp.

Deed, Promissory Note Needed for Mortgage

Q: My sister is considering paying off my home mortgage and then charging me 8.5% on that money. In effect she is becoming my mortgage lender. She feels that this is a good investment for her, and the interest rate is good for me as well. What sorts of documents do we have to sign and record for this deal to pass the scrutiny of the Internal Revenue Service? --C.W.L.

A: You need two documents: a trust deed and a promissory note.

The trust deed is your security for the loan that you are receiving from your sister. If you should default on your loan, the trust deed gives your sister the right to foreclose on the loan and take your house in lieu of repayment. This document must be signed, notarized and filed with the county Recorder’s Office where your home is located. Standard trust deed forms are available from legal stationery stores or a title company.

The second document you will need is a simple promissory note stating the terms of your loan agreement, such as interest rate, payment terms and payment schedule. This document should be signed and held in the safe deposit box of the lender--and, if you want, the borrower as well. The note does not have to be notarized.

With these documents properly signed and filed, you should be able to pass muster with IRS requirements for deducting mortgage interest on your income taxes. Be sure to remind your sister that she must declare the interest as investment income.

Assessing Value of Community Property

Q: Several weeks ago you discussed how the cost basis of a house held as community property between husband and wife is automatically reset to the market value as of the date of death of one of the spouses. Can you take that a step further?

Let’s say the widow remarries and puts the house as community property with her new husband. Then the widow herself dies, leaving the house to her second husband. Is the husband allowed to value the house as of his wife’s date of death? --R.D.E.

A: The simple answer: yes.

In cases such as these, the surviving spouse, who may not have invested a dime in the house, is allowed to set his tax basis in the property as of the date of death of the spouse. If the survivor should sell the house immediately after the death, that spouse would not have a taxable gain.

This can be a lucrative deal. Let’s say that husband and wife No. 1 bought a house 20 years ago in Southern California for $40,000 and held it as community property. If the house is worth $350,000 when the husband dies, the widow is allowed to value her share--as well as her husband’s--as of the husband’s date of death.

If she remarries and allows husband No. 2 to hold the house with her as community property, then, when she dies, husband No. 2 is allowed to value the property as of her date of death. If that value is $500,000 and he sells it for that, he has a tax-free gain, minus selling costs, of half a million dollars!

But remember, for this scenario to come true, the house must be held as community property in both marriages.