Minimizing taxes in the wake of a divorce
Q: As part of a divorce settlement, I will receive 50 percent of all shares held in various mutual funds. Three are taxable funds. One is a tax-sheltered Roth IRA account. I had no choice in choosing the current funds, and would like to take a more active role in future investing. If I decide to roll current investments directly and immediately into new funds, I assume I may have to pay capital-gains taxes. Am I correct? Any way to avoid this?
M.M., Champaign, Ill.
A: You will not have to pay capital-gains taxes on the Roth IRA, but you may have to pay them on the taxable funds, says David Bendix, who heads up Bendix Financial Group, in Garden City, N.Y.
"Look to the divorce decree to see how the cost basis of your holdings will be allocated between you and your former spouse," Mr. Bendix says.
Your cost basis is based on the days you bought your shares, the prices you paid, and, in the case of married couples, the joint participation in the purchases.
Determining the cost basis will pinpoint the extent of any tax that you might have to pay.
If the divorce decree has not been finalized, have your attorney seek a favorable cost-basis treatment, he says.
Q: We own some stock that was a gift to us from a relative. He bought it so many years ago that his cost basis is very low. If we give this to our young son at $10,000 a year, can he sell it later to pay for college expenses without incurring the large taxes that we would have to pay if we sold it?
R.R., via e-mail
A: "You and your spouse can gift up to $20,000 annually," Bendix says, "based on the existing fair market value of the stock."
But yes, you are right, he says: "Your son would presumably pay a lower tax, because of his lower tax bracket."
Q: What are security funds? My investment adviser says that I should invest in a few.
L.T., New York
A: Security funds are sector funds, that is, funds that invest in specific industries or themes, such as financial institutions, precious metals, or computers.
They are discussed in Stephen Pollan's "The Die Broke Complete Book of Money" (Harper Business).
Questions about finances? Write:
Guy Halverson
The Christian Science Monitor
500 Fifth Ave., Suite 1845
New York, NY 10110
E-mail: halversong@csps.com
