Schemes for Sheltering Cash May Incur Something Worse Than Taxes

Q My wife and I have about $60,000 in a certificate of deposit that we consider our emergency cash reserves. We would like to avoid the tax on the interest we receive by putting this money in the names of our two young children. How much can we transfer to them without triggering a gift tax? If we need the money for an emergency, can we use it without incurring any tax consequences?

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A For Pete’s sake, put the money in a tax-exempt money market fund and stop trying to get cute with the IRS.

What you’re proposing is basically tax fraud.

You want to pretend that you’re giving a gift to your children, but the money is actually for your own emergencies. If you give your children the full $60,000, you might create a future gift tax problem because each person is allowed to give each recipient only $10,000 a year before gift tax returns are required. You could give each child $10,000 and so could your wife, but the money above the $40,000 total would be a potentially taxable gift. (The tax might not be an issue because the gift/estate tax doesn’t kick in until you’ve given away more than the limit, which is currently $675,000 and is rising annually to $1 million in 2006.)

Besides being slimy and potentially stupid, what you want to do is totally unnecessary. There are hundreds of tax-free money market mutual funds out there that would be happy to have your business. The bank where you have your CD probably has at least one, and so does every brokerage. These funds are not federally insured, but your money is safe, liquid and accessible. If you use a state-specific fund (it will say something like “California Tax-Exempt Fund”), your interest is free from both federal and state taxes. Best of all, you don’t have to lie to anyone about whose cash it really is.

So now that your question is answered, do me a favor. Next time you’re tempted to bend the rules like this, think first about the message you would be sending your children. That should have stopped you before you even got started.

Net Result of Social Security

Q I enjoy reading your column, particularly the snappy answers you give to some of your correspondents who complain about the unfairness of the Social Security system. I hope you will listen to some snapping back, though, because I disagree with your statement that Social Security was meant to be a safety net for the poor. From the day I started working at the age of 23, I counted on Social Security as one source of income when I retired. Today, I receive $21,000 in pension income, $20,000 from our investments and $15,000 in Social Security benefits for myself and my wife. I do not believe my case is all that unusual, nor do I believe in the concept of Social Security being a safety net for the elderly poor.

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A You misquote me, dear man. I said the best we may be able to hope for in the future is that Social Security exist as a safety net.

You can look at it this way: Currently, it requires six workers making $40,000 each to cover the annual benefit you and your wife receive. When I retire, there is likely to be only two workers for each retiree. There is simply no way to sustain the program as it is now structured (barring a huge and unexpected inflow of immigrants to counter the retiring baby boomers, or massive increases in wealth and productivity). So that’s why the best we may be able to hope for is that the system continue as a benefit for the elderly poor.

I’d encourage you to read about the history of Social Security for some insight into its roots as a safety net. Business leaders strongly opposed its creation; the only way supporters were able to get the Social Security bill passed into law was by making it a bare-minimum benefit, with the idea that private companies could choose to supplement Social Security with their own pensions.

Your own situation is a classic demonstration of how the system was intended to work. Social Security provides about one-quarter of your income, with your pension and investments providing the rest. Were you forced to survive on Social Security alone, you would be in poverty, but at least you wouldn’t starve (or so we hope).

My generation has little faith that the benefit will continue to be as generous in the future. We pay into the Social Security system thousands of dollars a year--6.2% of our incomes, up to a maximum income level of $76,200 this year, or up to $4,724 each. But we strongly doubt we will see more than a token benefit, if anything, at retirement.

Be Picky in Choosing Card Issuer

Q I’ve been following your discussions about credit cards, and was particularly interested in your advice about choosing your credit card issuer with care. But if you pay your balance off every month, does it make any difference which bank you use?

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A Absolutely. It used to be that you generally didn’t have to worry about interest rates or punitive charges if you paid on time and in full, but some credit card companies have developed terrible reputations for slapping on undeserved late fees and having poor customer service. You can read more about this issue and read about other consumers’ experiences at Bankrate.com’s Web site: https://www.bankrate.com.

It’s also not a bad idea to have at least one low-rate card in case of financial emergency; many families find a job loss or other financial setback will require them to carry a balance, at least temporarily. Keep up those good fiscal habits, by the way. Staying out of credit card debt is one of the smartest ways to financial freedom.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. She regrets that she cannot respond personally to queries. For previous Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.