Reallocating the holdings of an elderly parent

Q: My father is in his 80s. In June, I helped him invest $100,000 in a Vanguard joint account after the sale of his house. We put $75,000 in a money market fund, $20,000 in a GNMA (Ginnie Mae) fund, and $5,000 in a value fund.

He also has $30,000 in a bank account. Each month he withdraws $600 from the money market fund to cover his rent. He pays for other things, including $1,200 a month to cover assisted-living expenses for my mother, with his Social Security check. The Vanguard account now amounts to $97,000. Do you see any reason to alter his investments?

Name withheld, Boston

A: "You need to generate far more income from your investments than you are currently earning, both to offset inflation and to ensure that you will have adequate resources for your parents as they get older," says Rich Chambers, a certified financial planner with Investor's Capital Management, Palo Alto, Calif. "Expenses for your mother, for example, could rise substantially in the years ahead."

Mr. Chambers would shift an additional $15,000 from the $75,000 in the money fund into the value stock fund, bringing that total up to $20,000. He would also shift $10,000 into a Vanguard growth fund, linked to the S&P 500 index.

Additionally, he would move half of the $50,000 or so left in the money fund into an ultra-short-term bond fund, which pays a higher return than the money fund. Strong, he says, has an excellent ultra-short-term bond fund (800-368-6860).

Of the $30,000 in the bank account, he would take as much as possible out and shift it to the Vanguard money market account; that should boost the rate of return over the bank's payment, he says.

Finally, "leave the GNMA account intact," Chambers adds.

Q: Do any companies sell annuities besides insurance companies? If so, could you please list a few.

M.H., Hallandale Beach, Fla.

A: Annuities are insurance products, but many financial firms market them. Examples: Fidelity Investments (800-544-2442), Vanguard Group (800-462-2391), and TIAA-CREF (800-842-2733, extension 8108).

Q: I currently have company stock in my 401(k) account and am retired. If I take the stock, sell some of it, and pay taxes on the cost basis, will my heirs have to pay capital gains on the remaining unsold stock based on its value when I originally took possession of the stock, or will they pay taxes on the stepped-up value upon my death?

B.B.J.G., via e-mail

A: They will pay income taxes on the unrealized appreciation between the time of the original cost to your company's plan and the actual lump-sum distribution to you, according to "Ernst & Young's Retirement Planning Guide," (2001).

The tax will be paid by your heirs when they actually sell the stock. Any appreciation after the distribution to you and the date of your death would not be taxed. Tax law provides special treatment for company stock.

If you have any doubts, be sure to check with an accountant or tax attorney to protect your special tax treatment, experts say.

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110


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