Editor's note: The Money Manager column answers readers' questions about personal finance with the help of members of the Buffalo Chapter of the Institute of Certified Financial Planners.
Dear Money Manager: If a stock is jointly owned, and one of the owners dies, does ownership pass automatically to the survivor, or is a formal transfer necessary? And if so, what does this cost? Is it better to keep stocks in one name to avoid probate fees?
-- J.M., Grand Island
A: If the stocks are held in a joint brokerage account, send a letter of instruction and a copy of the death certificate to the broker. If you hold the stock certificates yourself, you'll need to send the letter and a certified copy of the death certificate to the stock transfer agent -- the bank or financial company that handles your dividend checks.
You may also need to send "letters testamentary," surrogate court documents verifying that you are eligible to take over the assets, according to Robert W. Romeo, a certified financial planner with M&T Bank's private client services division. There's no fee for changing title to the certificates. The only costs are those associated with getting the paperwork and certified documents together.
As for the costs of joint ownership -- transfer fees shouldn't make a big difference in the costs of settling the estate. But there are other things to consider.
"Holding stock in one individual's name has advantages and disadvantages," Romeo said. With a large estate it makes sense to split assets between each spouse's name for tax purposes. The deceased spouse can use his or her $600,000 personal exemption to offset estate taxes.
But the disadvantage is, only the named spouse can make withdrawals or close out accounts. So if one of the pair is incapacitated, the other must get a power of attorney to manage the assets. That can mean an expensive and time consuming trip to court.
Romeo recommends drawing up a power of attorney ahead of time, designating a spouse or other family member to act on your behalf when you're ill.
And a power of attorney isn't just for couples, he said. For example, a widow could designate one of her children to pay bills from her accounts when she's unable to.
Sorry, looks like you lose
Dear Money Manager: Several years ago I invested in one-year certificates with Equipment Leasing Corp. of America. This year two of the certificates came due, worth $9,758 plus interest. I planned to cash these out later in the year. But in August, I received notice that ELCOA had filed under Chapter 11 of the U.S. Bankruptcy Code. I am on a fixed income and the loss of this money could affect me. What are my options?
-- V.H., Niagara Falls
A: Too bad you didn't read the Your Money section of Jan. 22, 1992, when these "certificates" were discussed.
These risky instruments were paying 9.1 percent when bank CDs were paying 4 percent, and ELCOA had ads plastered at Rich Stadium and at the airport to lure people to buy them. Here's what David Robinson in his Taking Stock column said back then:
"A bank CD is guaranteed by the federal government, but these fixed-rate certificates are high-risk debentures -- in effect, unsecured loans -- for ELCOA, a Pennsylvania equipment leasing firm with a parent company that has run up big losses during the last three years.
"Unlike with a bank CD, investors who buy these fixed-rate certificates could lose all their money if ELCOA runs into financial trouble."
Richard E. Minekime, a financial planner at Advest Inc. in Buffalo, explains that because debentures are "unsecured" debt, owners of the certificates will have to wait in line behind higher-priority creditors. "Even if the company comes out of bankruptcy, you probably will not get your money back," he said.
Unfortunately, you won't even know how much of a loss you can claim on your taxes until the company's bankruptcy case goes through, according to Romeo at M&T. About all you can do is keep an eye out for letters about the bankruptcy and claim the loss when the court decides how much your certificates are worth.
Everyone should be mindful of the risks in buying corporate securities. Don't automatically compare their yield to a bank CD and assume you're getting a better deal. Anything with a yield two to three percentage points higher than a bank CD or a one-year Treasury certificate indicates that you're putting your principal at risk. For most people in retirement, the return of your money is more important than the return on your money.
If you have a question that you would like answered by a local financial planner, write to The Money Manager, in care of the Business Editor, Buffalo News, PO Box 100, Buffalo N.Y., 14240.