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Tax Obligations on Jointly Owned Mutual Funds Depend on the Source of Capital


Q My mother and I are joint tenants in a mutual fund. I am 38 years old; she is 73. I am an only child and will be her sole heir. What are the tax implications for me upon her death and my inheritance of this account? Would it be better for her to be the sole owner of the fund when it passes to me? Her estate doesn't exceed $600,000.



A Any income tax implications to you will depend on the source of the funds used to make the mutual fund investment. If your mother used her own money exclusively and has merely added you as a joint tenant for estate planning purposes, the tax basis of the fund investment will be treated as a full step-up to its value as of your mother's date of death, thereby significantly reducing your exposure to taxation on any investment gains when you sell. If, however, you are truly joint tenants and jointly invested in the fund, the tax basis of only her half of the asset will be treated to the step-up and the basis of your half will remain unchanged.

If your mother is truly the sole source of the money used for the investment, then it shouldn't matter whether it is in her name alone when it passes to you. Of course, you should be prepared to prove this position, because the vesting certainly implies otherwise. But if you can prove it, you are better off leaving the situation unchanged, because the joint tenancy vesting allows the asset to bypass the probate process, thereby speeding its transfer to you.

You Can Leave 401(k) Proceeds to Anyone

Q I want to designate my 13-year-old son as the beneficiary of my 401(k) account with the stipulation that he must be at least 18 before he can withdraw any funds from it. Is this legally possible? Will he face a penalty on any withdrawals he makes from the account at that age?



A You are entitled to designate whomever you wish as your 401(k) beneficiary, and upon your death that person will be entitled to the funds in your account regardless of age. If you want to restrict you son's access to this money until he reaches a specific age, our experts suggest that you set up a trust and designate it as the beneficiary of your 401(k). Then the trustee can be instructed not to disburse funds until your son reaches a specific age. Your son may inherit funds from your 401(k) at any age without incurring the 10% federal and 2.5% state penalties levied on disbursements before age 59 1/2. But the withdrawals are still subject to income tax.

Forgiven Debts May Be Taxable as Income

Q My ex-husband left me with an unpaid bill for $4,000 to a nonprofit institution. I was told it was my obligation to pay this bill. By the time it reached my attention, a collection agency was handling the account. I negotiated a settlement with the agency for $2,000, which the note holder accepted. I paid the $2,000. Now I have received a letter from the institution saying that the unpaid $2,000 will be reported as income to me unless I pay off the balance. What is this, a strong-arm tactic to get me to pay the rest?



A Our experts say recent reporting requirements for nonprofit institutions require them to report debt forgiveness as income to the debtor. You might be able to escape this hit if you can successfully argue that the debt was really not yours to begin with and that you only paid a portion of it in an attempt to either help your ex-husband or keep your name clear. The only other possible way to avoid the tax consequences facing you is to be able to prove your insolvency, which sounds unlikely given your ability to repay half the note. Otherwise, it appears you must declare the $2,000 as ordinary income and pay taxes on it.

There Are Limits to Social Security Benefits

Q I am a divorced 53-year-old woman. I was married for 31 years. I am now engaged to a man who is already drawing Social Security. When we marry, on whose Social Security account will I be able to draw spousal benefits--my ex-husband's or my current husband's? If I don't remarry, on whose account will my payments be based?



A If you remarry and are able-bodied, you will be entitled to begin drawing spousal benefits on your current husband's account at age 62. You would not be entitled to make a claim on the account of your ex-husband because of your remarriage. If you don't remarry, however, you would be able to claim spousal benefits on the account of your ex-husband. Spousal benefits are available to divorced spouses as long as the couple had been married at least 10 years.

For more information about ex-spouse benefits, order the Social Security Administration pamphlet No. 05-10084, titled "Survivor's Benefits," by calling (800) 772-1213.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to

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