Blindsided by a Bankruptcy? You Missed Warning Signs
Question: I own stock in a company that filed for bankruptcy. Several months ago, I got a letter from them saying that the company had been liquidated, its assets sold, and that I would get no money for the $1,000 in shares I held. How can they sell the company but give no money to stockholders?
Answer: That’s what typically happens when a company goes bankrupt--some creditors might get paid, but investors often get stuck with worthless stock.
It’s unfortunate that you were still holding the shares when the company went under. Most of the time there are plenty of warning signs that a company is on the decline.
If you’re going to invest in individual stocks, you need to keep on top of what’s happening to them. There are plenty of Internet services that will notify you about news affecting your stocks, so there’s really no excuse to be in the dark.
If you don’t want to track your investments that closely, you probably should stick with the diversification and professional management offered by mutual funds. You’ll still need to review your portfolio occasionally, but you’re less likely to lose your entire investment if your attention wanders.
Annuity Investing Comes With Risks
Question: This is a follow-up to your column about variable annuities in individual retirement accounts. As a certified public accountant, I believe you were right to urge readers to be cautious with financial advisors who recommend annuities for IRAs. My mother’s bank sold her a variable annuity for her IRA--even though she’s retired, can’t withstand much in the way of losses and intended to purchase certificates of deposit. (I took precautions and wrote out instructions for my mother to take with her to the bank, but these apparently were ignored.) The annuity included a heavy weighting in stocks and had far more risk than was appropriate for her situation. With the recent slide in the market, I expect we will hear about more investor losses because people did not understand the risks they were taking, especially when they relied on the advice of commission-driven financial advisors.
Answer: Many banks have branched out into selling annuities and other investments in addition to CDs--and some of these banks’ employees haven’t been very good about informing consumers of the risks and disadvantages of these alternate investments. At the same time, some consumers have focused only on the higher gains they could make from investing in stocks and have been shocked--shocked!--to learn that the equities market can fall as well as rise. In either case, your prediction is probably accurate--people will blame whoever sold them the poorly performing investment, whether the investors were actively misled or simply greedy.
If you believe your mother was sold an unsuitable investment, don’t let the matter rest. Consider contacting banking and insurance regulators in your state. In some cases, you can get the deal undone without having to pay a surrender charge--the penalty for early withdrawal that comes with most annuities.
Figuring Cost Basis of Inherited Stocks
Question: My parents purchased small amounts of stocks in both their names. When my dad died about 12 years ago, my mom took his name off the stocks and added the names of my sister and myself. When we inherit them, what will be our cost basis for figuring our taxable profit? I once read that if we can prove we had nothing to do with the original purchase (in other words, if we don’t have canceled checks showing the purchase, or if we have canceled checks from my parents’ account), then we can inherit the stocks at their market value at the time of my mother’s passing. Is that true?
Answer: Attempting to prove a negative--that something didn’t happen--is always tough. Trying it with the government is particularly challenging. The IRS is, shall we say, unlikely to accept lack of documentation as proof of anything; quite the opposite, in fact. And your parents’ canceled checks would mean nothing, because they could always make a gift of the stocks later--which is exactly what your mother did when she added your names to her shares.
As it stands, you won’t be eligible to receive the so-called step up in basis on your portion of the shares upon her death. Her portion--presumably one-third, if all three parties’ names are on the shares--will be revalued at her death to reflect the current market value, but the other two-thirds--the portion now owned by you and your sister--will get your mother’s cost basis.
What that basis is could be tricky to determine and depends on whether your parents lived in a community property state such as California. At best, all the shares were revalued so your cost basis will be the stocks’ fair market value as of your dad’s death 12 years ago. At worst, part of the holdings may keep the original cost basis--what your parents paid for the shares in the first place.
Confusing? You bet. But you can learn more about the taxation of inherited assets by reading such books as Denis Clifford’s “Plan Your Estate.”
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Questions can be sent to Liz Pulliam Weston at moneytalk@ latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.
