Persfi

By Scott Burns How do you help your child who is mentally impaired? How do you help your parent who is disabled? It isn’t easy. You can find yourself in the position of having to pay taxes on money that would be a charitable deduction if it were given to a charity that provided the same benefits to a stranger. Still worse, some help can close down other sources of money and expose you to medical expenses. So if you are in this situation or know someone who is here’s an important tip: The biggest lever for help is shelter. A dollar invested in shelter can do the work of many more dollars spent in any other way. This happens because of the way our social safety net works. If someone has a work record, even one that is short and modest, he or she may be eligible for Social Security disability. The amount of benefits will depend on the work record. In addition to cash benefits, a disabled person is eligible for Medicare insurance. If Social Security disability or retirement benefits are less than certain amounts, the child, parent or relative may also be eligible for Supplemental Security Income (SSI). While the amount varies from state to state because of supplements, the lowest figure is just more than $500 a month. A person eligible for SSI is also eligible for Medicaid, and some states will pay the Medicare premiums. What’s the catch? Just this: SSI money can be used only for food, clothing and shelter. You can’t just add some extra money, willy-nilly. Yes, you can help the relative by paying a telephone or cable bill, and you can provide magazine subscriptions, movie tickets and other (non-cash) benefits. But you can’t help with food, clothing or shelter. If you do, a person can lose their SSI benefits with all its ramifications for medical insurance. Except for one thing. The person can own a house or condo, free and clear. Suppose you wanted to help a mentally impaired adult son or daughter who received $200 from Social Security Disability and $300 a month from SSI. You know of a condo that can be rented for $500 a month, including all utilities. You also know that the condo owner pays $200 a month in association fees, including utilities. You’d like to help by contributing $300 a month toward the rent, leaving $300 a month of Disability and SSI income for food and clothing. But you can’t. If you do, the child will lose their SSI benefits ($300 a month) and Medicaid coverage of Medicare. As a result, you’ll wind up spending $600 a month, after taxes, to provide a $300-a-month benefit to your child. You can, however, buy the condo and either gift it to the child or make it their life estate with you or someone else as residual owner. Let’s say you buy the condo for $20,000, cash. Your child will still receive $500 a month in Disability and SSI income, and the condo costs will be only $200 a month, leaving $300 a month for food and clothing. In this example, you will receive a tax-free return on your investment of 18 percent a year. Rather nice. The exact return will depend on the value of the condo or house purchased. Condos are available in much of the country for less than $50,000. Now consider the alternative. If you wanted to provide a $300-a-month cash benefit, you would need to have at least $72,000 invested at 5 percent. But if you gave it in cash, you’d need another $72,000 invested to replace the $300 in lost SSI benefits, a total of $144,000. If you failed to create a trust and the income was taxable to you, you’d need to have an investment fund of $208,700 to deliver $600 a month, assuming you were in the 31 percent tax bracket. In other words, a dollar invested in housing for a disabled child or parent can do the work of as much as $10 invested to create income. I call that very powerful money. And for someone you love, it’s money very, very well spent. Questions and answers Question: I am a married woman. My husband is retired, with good pension benefits. I am still working, but I have accumulated a bit of debt over the years. The debt: a $40,000 home equity loan (payable for the next 13 to 15 years), $5,000 on a 14 percent Visa card, and $9,000 on an 11 percent Visa card. I have a 401(k) worth $100,000 and an IRA worth $54,000. I want to get rid of the high-interest Visa balances and cut down on the home equity obligation. I don’t need the IRA for financial security. My husband is financially secure and does not need the cash, and I will have a good pension when I retire in a year or two. I want to cash in the IRA and cut down the debts. I know I will have to pay about $18,000 of the $54,000 in taxes, but I need to have these debts under control for peace of mind. Just yesterday, I made a payment on the home equity loan of $403, of which $332 went to interest and only $71 to the principal. I’m sick of paying this. If the home equity loan were down to about $20,000, it would be manageable and more would be going to the principal. What are your suggestions? M.L., by e-mail Answer: It’s a shame to lose the benefit and flexibility of tax-deferred investing, but your plan is reasonable since both your other resources appear to be adequate. This is particularly true if the monthly payments are so burdensome that you can’t make regular and large contributions to an employer-sponsored 401(k) or 403(b) plan. It is a reasonable thing to do, however, only if your debt starts to shrink rapidly once you have made the adjustment. One of the disturbing things about home equity loans is that they have become a dumping ground for credit card debt: Borrowers convert credit card debt into home equity debt and then continue to borrow on their credit cards. Q: My husband and I are nervous about the stock market. We would like to cash in our mutual funds and individual stocks so we can keep the profits we’ve earned. We currently have $145,000 in a money market account and $380,000 in an assortment of mutual funds. Would it be wise to put this money in an index fund? What alternatives do you suggest? Our investments include $35,000 in international funds, which are now worth less than the original purchase price. Should we hang onto these until those markets turn around? We are both employed and have income from rental property, so our investments do not cover any current expenses. Our house will be paid for in four years. The investments include college funds for our three children, and retirement is at least 10 years away.-M.H., Richardson, Texas A: You won’t avoid a market decline by moving from managed equity funds to an equity index fund. If stocks fall, all stock funds will fall. In addition, you didn’t say whether these investments were in taxable or tax-deferred accounts. If they are in taxable accounts, the tax bill from selling could hurt as much as a minor market correction. Instead of trying to time the market, I suggest dealing positively with things you know. Start by estimating how much cash you will need, year by year, to pay for your children’s education. Then you can slice off portions of your money market fund to match the need and invest them in Treasury obligations or bank CDs with competitive yields. Depending on where the kids go to college, your current cash holdings are likely to cover the commitment. Having done that, you have a long investment horizon and can “tough out” a market decline. My suggestion is that you do just that, and relax about your international holding. While most have done poorly in the last one to three years, that may not be true in the future, and your international commitment is less than 7 percent of your financial assets. Syndicated columnist Scott Burns can be reached by fax at (214) 977-8776 or by e-mail at [email protected].