Blended Family Seeks Right Financial Mix

Registered nurse Amy Reynolds has one word to describe her family’s finances: muddled.

Reynolds, 40, is divorced from the father of her three children and is married to Tom, 49. The couple and Amy’s youngest, age 14, live with Amy’s 80-year-old father, Andrew Carter, in his Huntington Beach home.

The Reynoldses are unclear if they’re saving enough for retirement and about how they will afford to send Amy’s children to college. They share her father’s concern about estate taxes and want to know if there are things that can be done now to reduce the tax burden when he dies. They are thinking about buying Carter’s rental home to give themselves some future income, but aren’t sure of the best way to go about that.

Complicating matters is the fact that Tom was injured on his former job as a plumber and is studying for a new profession--installing and managing computer networks.

Tom’s lack of a full-time job means that the Reynoldses’ long-term goals should be put on hold, said Glenn Woody, a Costa Mesa certified financial planner. The couple also must be more careful with their spending, which is expected to exceed their income by $2,000 this year.

Although the Reynoldses don’t pay rent and are responsible only for the utility bills, groceries and such amenities as cable service and newspaper subscriptions, they spend $331 a month--nearly $4,000 a year--for time-share resort properties in Whistler, Canada, and Mount Hood, Ore. That accounts for more than 7% of their annual income and is an extravagance the couple can ill afford.

But the Reynoldses love the time shares and don’t plan to give them up.

The cash-flow problem is only temporary, Tom and Amy contend, a reflection of Amy’s decision to quit a second job last year and Tom’s choice to stop working part time as a handyman to focus on his studies. Travel is valuable to them, and the time-shares get them close to nature, they say.

Woody views time shares as investments that almost always lose value, but he would not advise the Reynoldses to sell if the expenditure is truly important to them.

“People spend money in different ways,” Woody acknowledged. “As long as the Reynoldses don’t waste one of their weeks and [they] stay at places they like, I have no quarrel.”

Still, the couple need to watch their budget closely so they don’t deplete their $11,800 cash savings. And once Tom is working--he expects to make $40,000 a year when he finishes school in January--he should start saving religiously for retirement, where he is drastically behind, Woody said. Tom has just $2,000 in a Roth individual retirement account.

Amy’s financial objectives also hinge on Tom’s future employment. She has amassed about $96,000 in a 401(k) plan invested in stock mutual funds and will soon be eligible to contribute to the 403(b) retirement savings plan of her employer, Orange Coast Memorial Hospital. Until Tom is working, however, she should put off tying up any more money in retirement funds, Woody said.

Fortunately, Amy is off the hook for college savings at the moment. Her ex-husband, Guy Murphy, recently volunteered to foot the bill for their eldest, Beth, 18, who enters Fresno State University this fall.

Once Tom is working, Amy can begin to contribute to her 403(b) and set aside any extra money to help pay for college for Paul, 16, and Kyle, 14.

But retiring in 10 years, as the couple had once hoped, is probably not an option. Even without college expenses, Tom’s late start at saving and investing would prevent the couple from quitting work early.

Amy’s father, meanwhile, got some good news about estate planning: Given the amount of his assets and changing laws, his estate is unlikely to owe any taxes.

Carter’s five-bedroom Huntington Beach home is worth $370,000, and his Long Beach rental is worth $200,000. Adding in some stocks and certificates of deposit, his assets are worth roughly $650,000.

Currently, each person can leave heirs up to $675,000 tax-free. Estate taxes are not due until assets exceed that amount, says Luis Magdaleno, an estate-planning lawyer in Seal Beach.

The $675,000 threshold is scheduled to rise annually to reach $1 million by 2007 and will probably outpace increases in the value of Carter’s estate, Magdaleno says. Congress is also talking about eliminating the estate tax entirely, although the fate of that proposal is unclear.

If Carter is intent on keeping the value of his estate well below the current threshold, he could give Amy and her brother, Kirk, 38, of Colorado Springs, Colo., gifts of $10,000 each year in either cash or property without running afoul of IRS gift or estate tax rules.

The Reynoldses still might decide to buy Carter’s four-bedroom, three-bath Long Beach rental, however.

The tax-deductible mortgage interest payments would shelter some of the Reynoldses’ income from tax after Tom returns to work, while giving Carter extra monthly income as well. The Reynoldses could rent out the home or live in it after Carter’s death.

Although Amy is expected to inherit half of Carter’s Huntington Beach home, the Reynoldses probably could not afford to purchase the other half from Amy’s brother and maintain the sprawling home as well, Woody said.

But the Huntington Beach house will continue to be their home for the foreseeable future. The Reynoldses and Carter say they enjoy living together. The couple help Carter maintain the otherwise too-large home, and Carter relishes the time spent with them and with his grandchildren.

If they do buy the Long Beach house, it’s important that they structure the deal as an arm’s-length transaction, Magdaleno said.

Carter had been inclined to give Amy the rental or share ownership with her, but Magdaleno said that is not a good idea. Giving the house to Amy in part or entirely would decrease the amount of Carter’s estate that is sheltered from estate taxes.

If he gave her the house outright, for example, his unified tax credit amount would be reduced from $675,000 to $475,000. Even putting her name on the title would constitute a $100,000 gift and would reduce his exemption accordingly. Such a gift would also contradict Carter’s living trust, which stipulates that Amy share his estate with her brother.

Instead, Amy and her father should draw up a sales contract containing conventional terms and interest payments, which Carter would have to report as income on his tax return. The price should be based on fair market value, otherwise the IRS might view it as a gift potentially subject to taxes, Magdaleno said.

*

Suzy Hagstrom is a regular contributor to The Times.

To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012 or to money@latimes.com.

You can save a step and print or download the questionnaire at https://www.latimes.com/makeoverform. Recent make-over columns are available at https://www.latimes.com/makeover.

Information on choosing a financial planner is available at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

Investors: Amy and Tom Reynolds, 40 and 49

Gross annual income: About $53,000

Goals: Save for retirement; help finance college education of Amy’s children from a previous marriage; decide whether to buy a home from Amy’s 80-year-old father; understand tax consequences of father’s estate.

Current Portfolio

* About $11,800 in cash savings and certificates of deposit

* $96,000 in Amy’s 401(k) plan, mostly invested in Fidelity stock mutual funds

* $2,000 in Tom’s Roth individual retirement account invested in certificates of deposit

Other assets:

* $1,500 total in three educational IRAs, all invested in CDs

* Two time-share interests with roughly $2,500 in net equity

Recommendations

* When Tom enters the work force next year, create an emergency reserve equaling at least $10,000, or three months of living expenses.

* Invest additional money in no-load stock mutual funds.

* Switch Tom’s Roth IRA and the children’s educational IRAs from CDs to no-load stock mutual funds.

* When they have the money, Amy should begin contributing to her 403(b) retirement savings plan. When possible, both Tom and Amy should contribute to Roth IRAs too.

* Amy’s father should consult a lawyer to make sure his will, living trust and other estate-planning documents are current with applicable laws and conform to his wishes.

* Amy and Tom should formalize any agreement they reach to buy Amy’s father’s rental home in Long Beach.

Meet the experts

Glenn D. Woody is a fee-only certified financial planner in Costa Mesa. Woody is a past president of the Orange County units of the International Assn. for Financial Planning and the Institute of Certified Financial Planners. He has appeared on Worth magazine’s list of the nation’s 200 Top Financial Advisors for the last four years. Luis Magdaleno is an estate-planning lawyer in Seal Beach.