Handling your own finances is difficult enough. Throw an elderly parent into the mix, and things can get downright confusing.
Such is the dilemma facing John. His mother is 97 years old and resides in an assisted living center. John wrote to say she is in excellent health for her age, but her financial situation is a bit sickly.
"Since she keeps losing money on her stocks," John wrote, "should we sell them now and put the money in her money market account that pays for her care? What would be the tax implications?(She has about $50,000 in Pfizer, Bristol-Myers Squibb, Exxon and Philip Morris.) She bought the shares between 1997-1999."
I ran this query past David King, president, and Kyle Thompson, senior planner, at Senior Care Advisors & Insurance in Salt Lake City.
They agreed that now is the time for John's mother to sell her stocks.
"Your mother's broker will determine at the time of the sale whether there will be a taxable gain or a loss," David and Kyle wrote in response to John's question. "The loss can be used to offset future gains on her other investments. A quick check of her stock values between the purchase dates and now indicates that paying capital gains tax may not be a concern."
However, David and Kyle are not sure a money market account is the best place for her money.
"Simply transferring the money into your mother's money market account to pay for her care presents a big problem — the money could run out before her need for care does," they wrote. "There are better strategies that provide income and tax advantages."
David and Kyle recommend that John use money from the stock sale to buy a single pay immediate annuity with an "installment refund" feature. If the stock sale brings in $50,000, they say, such an annuity could pay John's mother $822.92 per month for the rest of her life. The guaranteed interest is 5.25 percent for the first 10 years of the annuity, and 4.5 percent after that.
The installment refund feature means that, when John's mother dies, the principal amount will be returned to her heirs, less the total of installment payments made to that time.
David and Kyle say such an annuity has an exclusion ratio of 87 percent, which means John's mother will pay taxes on 13 percent of her annuity income.
"The savvy reader may wonder why your mother is better off paying taxes on 13 percent of her annuity income, rather than pay tax on just the interest earned at money-market rates," David and Kyle wrote.
To address that, they ran some numbers.
At the end of the first year of such an annuity, John's mother will have earned $2,625 in interest and would pay taxes on $1,283.78 of that. The additional $1,341 in interest would continue growing tax-deferred in the next year.
The money market account, on the other hand, would pay $1,000 per year in interest, assuming current 2 percent interest rates. John's mother would pay tax on the full $1,000, decreasing the amount of money on which interest would be paid the following year.
"The lower amount of interest earned on the money market results in less tax being paid," David and Kyle wrote. "However, the annuity provides a much better interest rate. The tax-deferred interest earned with the annuity provides greater gains than the slight increase in taxes paid."
So, John, it sounds like selling that stock is a good idea no matter what. What you do with the proceeds is up to you, but the advice from Senior Care Advisors seems pretty sound.
If you have a financial question, please e-mail it to me at gkratz@desnews.com or send it to the Deseret Morning News, P.O. Box 1257, Salt Lake City, UT 84110. I'll answer as many as I can.
E-mail: gkratz@desnews.com