Q: I am 83, retired, and live on Social Security and a US Air Force pension. I own, fully, a small California corporation and recently sold its single asset a piece of land. In return, I accepted a 25-year promissory note. (Yikes! I'll be 108 by then.) Now I'd like to have all of the money to live on. What's the best way to get all of the money back now without paying taxes more than two or three times? I was told that if I closed the note out I'd have to pay taxes on the entire 25 years.
D.T., location withheld
A: "The issue here is how does the writer 'monetize' the note, that is, turn the note into instant cash," says Gary Schatsky, an attorney and fee-only financial planner in New York.
Mr. Schatsky suggests you consider the following options:
Sell the note in the secondary market. This can be tricky, warns Schatsky, since you will probably have to "sell it at a discount." And finding a buyer, probably through a broker, means you'll have to pay a commission.
"Ask the note holder if he would like to prepay the note, perhaps at a discount."
If the terms of the note allow it, "call the note, and pay the capital gain."
"Sell it to a family member, probably at a discount."
Each of these scenarios means you will likely face a one-time large capital gain. Alternatively, leave the arrangement alone, taking the return of principal and interest annually. You will pay capital-gain taxes on the return each year, but since you live on just Social Security and a military pension, the tax "is perhaps not that onerous," Schatsky says.
Q: I am 74, and living on Social Security. I have a brokerage account, including municipal bonds, government securities, stocks, preferred stocks, and I own a home. I would feel more comfortable moving some stocks into short-term bond funds. How do I do that? Where can I park cash if inflation heats up?
M.M., Lebanon, Ky.
A: According to several mutual-fund industry experts, see if you can shift assets into a short-term bond fund through your brokerage account.
Or you can tell the brokerage to sell your stocks and shift the money into a bond fund at a fund company of your choice, such as Fidelity or Vanguard.
In case of rising inflation, not currently a problem, consider moving your money into I-bonds, sold through the US Treasury. They provide a special provision to help offset inflation.