RTC Allows Interest Rate Changes

Q: A couple of years ago, the bank in which I had an account was taken over by another as part of a government rescue. At that time, the interest rate on our account was dropped by 1.25%. The government, we were told, sanctioned the drop. Is this true? Can we take out our money without any early withdrawal penalties? --I.R.G.

A: What you were told is correct. Most of the failed banks and savings and loans were paying interest far above prevailing rates in order to attract new deposits to boost their already weak reserves of capital. When the Resolution Trust Corp. stepped in to manage the faltering institutions or arrange their sale to healthy ones, those high-flying interest rates were brought back in line with the prevailing market. In fact, the RTC allows new owners to pay as little as the passbook rate for their assumed deposits.

In many cases, the acquiring institutions have allowed depositors the opportunity to move their timed accounts without incurring an early withdrawal penalty. However, usually these offers must be accepted within a few weeks of the depositors being notified of the interest rate change. Of course, nothing is stopping you from trying to move your account now, but unless you can show that you were not properly notified of the interest rate change, a penalty will probably be imposed.

By the way, the interest you would have earned on your original account cannot now be declared an investment loss and deducted from your taxable income. This question has been asked before, and all we can say is, you can’t deduct something you never had.

Survivor Must Prove Community Property

Q: I am a 60-year-old married man with no children. My wife and I hold our home as joint tenants. Our mutual funds and savings and checking accounts are held jointly with right of survivorship. My individual retirement accounts have my wife listed as my primary beneficiary. Nevertheless, my wife insists that I write a will. Must I? --W.N.M.

A: Technically, you need not write a will as it would appear that your wife already stands to inherit everything in a clean and clear fashion. However, your estate planning may not be as effective as it could be.

For example, if your estate is valued in excess of $600,000, there could be estate tax savings from putting your assets in a living trust.

Furthermore, there remains considerable debate over the question of whether property held in joint tenancy will be afforded a full step-up in its tax basis upon the death of one spouse. Many estate planning experts argue that Revenue Ruling 87-98 confers community property status upon assets held in joint tenancy if the surviving spouse can prove--and state law permits--that the property was truly community property.

These experts say an agreement, or declaration, signed by both spouses attesting to the fact that their assets are community property should be attached to their wills.

Not all attorneys agree with this position, however. You can check with your advisers before deciding which position to take.

Past Payments Affect Widow’s Benefit Draw

Q: My wife has not yet started drawing Social Security benefits and I am already on Social Security. If I should die before she begins drawing her benefits, what is she entitled to receive? My wife has worked all her life and is entitled to benefits on her own account as well as spousal benefits. --E.L.T.

A: A surviving spouse or surviving divorced spouse who is at least age 62 and has accumulated benefit credits on his or her own account faces a choice:

* The surviving spouse may begin drawing benefits on his or her own account at age 62 and then switch to full widows/widowers benefits at age 65.

* The surviving spouse may elect to receive widows/widowers benefits at age 62, which are 82.9% of the deceased spouse’s full benefit, and switch at age 65 to his or her own full benefits.

The difference between the choices will depend on how much each of the spouses has paid into Social Security. Work patterns and earning power being what they are in our society, it is likely--though not necessarily the case--that the man has paid more into the system. So, a widow may find herself better off taking her own benefits at 62, then switching to full widow’s benefits at 65.

However, the choice obviously depends on which strategy pays you more. Your local Social Security representative can help you make this important determination. By the way, only widows and widowers who have accumulated benefits on their own accounts are entitled to make this choice.

‘Money Market’ Names for Same Old Accounts

Q: In a recent column you stated that money market accounts carry no federal deposit insurance. My bank says this is incorrect. Can you explain? --G.D.

A: Traditional money market funds, which are sometimes called money market accounts, are not insured by the Federal Deposit Insurance Corp. These accounts are offered by financial institutions, primarily brokerage houses, that are not a part of the FDIC system.

Your confusion is over terminology. Over the last several years banks have added the “money market� label to some of their traditional savings accounts. Strictly speaking, these bank accounts are not money market funds or what are usually known as money market accounts. They are simply bank savings accounts with a fancy name. However, as your bank officer told you, they are covered by the FDIC up to the maximum allowed limits.