by Archie M. Richards, Jr.
June 25, 2007

Samantha writes, "Our family lawyer suggested that my mother (now in her mid-80s) include me as co-owner of her investments. Mother has granted me a power of attorney. The lawyer thought that with joint ownership, I could cash in the accounts at her death and avoid having them probated. Is this a good approach?"

No, Samantha. Here's why:

• On the portion of the property that's a gift to you, there's no stepped-up basis. Your mother's costs carries over to you. When you sell, you pay capital gains taxes. But if you inherit the property directly from your mother or from her living trust at her death, the capital gains are wiped out altogether.

• While the property is in joint name, you might be sued, go bankrupt, or have an accident that leaves you incapacitated. If so, the power of attorney would have no effect, and the securities might become unavailable to your mother, leaving her destitute.

• If you have siblings to whom you're expected to divvy up the assets when your mother dies, the transfers are gifts, subject to gift tax (providing all of the gifted assets exceed $1 million).

• If you die before your mother, the IRS wants proof that the stocks and bonds were bought by your mother. Otherwise, they're taxable in your estate (providing your taxable estate exceeds $2 million).

None of these problems occurs if your mother places her stocks and bonds in a revocable living trust. It could enable you to take control of her assets if she becomes disabled. Contact www.naela.com to find a knowledgeable estate-planning attorney.

Ella writes, "My husband, who will soon be 62, recently lost his job. He currently has a 401(k) worth $60,000. Our outside income is about $7400 a year. I'm 59 years old, still working, with a 401(k) of $60,000, an annuity worth $57,000, and Variable Universal Life insurance with cash value of $40,000. Except for the car, we have no debt. My husband starts taking Social Security this summer. Any advice?

Your financial assets amount to $217,000, with little debt, Ella. You're still working, and your husband could get another job. Presumably you could both work another 10 years. Things could be a lot worse.

Are you sure you need life insurance at all? If you have grown children, why sacrifice your own needs to provide for them at your death? Consider exchanging your life policy for a variable annuity with Ameritas, Inc..

The best investment advice I can give is contained in my book, "Understanding Exchange-Traded Funds." Good luck to you both.

In connection with my column dated 4/9/07, May writes, "I'm still confused about rollovers to a traditional IRA. My 401(k) plan holds mutual funds of Fidelity, Oppenheimer, Pimco, Franklin Mint, and others. Wouldn't capital gains taxes be payable when these funds are sold?"

No, May. The 401(k) plan and the traditional IRA are tax-free environments. The sales in one plan and the transfer of funds to the other are both tax free. Tax is postponed until the money comes out of the IRA.

To avoid tax difficulties, request a direct transfer. The 401(k) custodian transfers the money directly to the IRA custodian. The funds never pass through your hands.

www.irs.gov provides explanations. For 401(k) plans, see Publication 575, page 25. For 403(b) plans, see Publication 571, page 15.

Economists Mike Ferguson and Hugh Douglas Witte have found that if you had invested $1 in the Dow Jones Industrial Average stocks in 1897 and held until 2000 only on the days Congress was in session, you would have ended up with $2.

But if you'd held the Dow Jones stocks only on the days Congress was not in session, you would have ended up with $216. Quite a difference!