$750 May Be Too Much to Shift Title to Trust
Q: My husband and I recently established a living trust and set about transferring title of our home, bank accounts and various other investments from our names to that of the trust. In most cases, a transfer fee of $25 to $35 was charged. However, one limited partnership demanded $750.
An attorney representing the partnership said that their thorough procedure was the only legal way of making this kind of title transfer and that the other partnerships were just making an unofficial change. Should we believe this? Is the process that was performed for $25 legal and binding? Is there any way around that exorbitant $750 fee? --E.P.
A: Without knowing precisely how title to your various partnerships was changed, our legal advisers cannot tell you with certainty that the new vesting is legal and binding. However, they did offer to explain what generally happens when limited partners want to change title to their holdings.
To transfer title to a living trust, the partnership agreement must be amended to reflect the substitution of partners. It’s no more complicated than that, and in some cases, the general partner has the authority to make that sort of change.
In other cases, the general partner accumulates the various requests for changes that come in throughout the year and makes the necessary amendments to the partnership agreement at once with the concurrence of the required parties. This is probably what you get for $25 or $35.
What do you get for $750? Without knowing for sure, our experts suspect that the general partner takes the requested change to a private attorney, who then draws up a separate amendment and charges his basic hourly rate of $250 to $350.
Even our experts--all attorneys--agree that this is an awful lot to spend for what you’re supposed to get, and they offer one potential way around the fee. You can simply name your trust as the beneficiary of your partnership interest rather than substitute the trust as the actual partner. The effect, say our experts, is the same. And while a change of beneficiary is likely to generate some sort of paperwork fee, it is likely to be considerably lower than $750.
IRS Can Tax Excess Contribution to IRA
Q: I purchased an annuity for $6,751.40 in February, 1987, for my individual retirement account. The idea, foisted on me by the insurance salesman, was to apply $2,000 of the amount to my IRA for each of the 1986, 1987 and 1988 tax years. The remaining $751.40 was applied to my 1989 IRA contribution. Now the Internal Revenue Service says I owe them back taxes plus interest and a penalty. Can this be true? --J.G.S.
A: Unfortunately, it is true. Although your insurance salesman probably told you that you were simply prepaying your IRA contributions for 1988 and 1989, you were actually making what is known as an “excess contribution” to your IRA. And that, under Section 4973 of the Internal Revenue Code, generates a tax penalty. Based on the figure you’ve supplied, our experts say you will be liable for a penalty of about $210, plus interest.
Here’s how the penalty was calculated: You were fully entitled to make an IRA contribution in February, 1987, for both 1986 and 1987, for a total of $4,000. But in 1987, you put in an extra $2,751.40, and at a 6% penalty rate, the fine is $165. You were entitled to apply $2,000 of the leftover amount to your 1988 IRA, leaving you with an excess contribution in 1988 of $751.40. The penalty for the 1988 excess contribution would be $45.
It May Be Wise to Get Loan to Regain Pension
Q: My current job is covered by the federal Civil Service Retirement System. I was covered by the system years ago, but when I quit my old job, I withdrew my contributions to the retirement system.
Now that I have rejoined the government, I have been told that I must repay the money I withdrew from the system, plus the interest it would have generated--in order to regain my previous retirement pay standing. The problem is that I don’t have the $5,000 to make the payment and am unwilling to borrow it because the interest on a personal loan is quite high and not deductible. However, I do have some money in an individual retirement account. May I take some money from the IRA and put it in my civil service retirement account? --M.G.
A: Although both your IRA and your civil service pension are retirement plans in the general sense of the word, they are distinct systems and funds cannot be automatically interchanged between them on a pretax basis. If you want to put money from your IRA into your civil service pension account, you will have to pay taxes on that money first. Furthermore, if you are under age 59 1/2, you will be assessed a 10% penalty for early withdrawal from your IRA.
Your desire to regain your previous standing in the civil service retirement system is understandable because the longer you are in the program, the greater your benefits. Knowing this, you may decide that it is worth taking out a loan for the $5,000 and repaying it as rapidly as possible to keep your interest expenses to a minimum.
With interest rates near their lowest point in a decade, you could also decide that this is a good time to refinance your house. Refinancing a home just to pull out $5,000 doesn’t make a great deal of sense--but it could be wise if you have uses for other cash that could be pulled out, such as financing a child’s college education.
