VARIABLE ANNUITIES WON'T SOLVE AN ESTATE TAX PROBLEM

Q: I am 75 years of age and my wife is 70. I have $867,000 in rollover IRAs, and my wife has about $52,000 in IRAs. My total estate is about $1.2 million. An estate planner has advised me to buy a variable annuity with one-half of the money in my IRA and withdraw it over the joint life expectancy of both of us.

We realize we have a problem with the income taxes on the amount of our IRAs and the effect it would have on our estate. Would it be advisable to take an accelerated withdrawal and pay taxes on the withdrawal at 31 percent, rather than put one-half of the IRAs in the variable annuity? We realize that the estate tax exemption will grow to $1 million in a few years. Would it be advisable to convert the additional withdrawal into a Roth IRA each year? -- T.H., Dallas

A: The first thing you need to know is that a variable annuity is irrelevant to the issues you are facing. It won't change your current or future taxes. What it will do is add a level of expense to managing your financial assets.

Variable annuity salespeople usually justify the higher cost by explaining that the benefits of long-term, tax-deferred compounding overcome the additional cost. This is reasonable for people in their 40s and 50s who are looking at high tax rates on their investment income and the need to accumulate retirement assets. In your case, however, you already have tax deferral because the money is in an IRA rollover. And at age 75 you are already making legally required annual withdrawals, so much of the benefit of tax-deferred growth is unavailable.

Fortunately, there are other ways you can take better advantage of having two estate tax credits. First, you can transfer assets in taxable accounts to your wife. You can also give her full title to your house. Basically, what you want to do is come as close to having an equal division of assets as possible. If you do that, very little of your estate will be exposed to estate taxes.

Of the amount exposed to estate taxes, you could make IRA withdrawals, pay income taxes and start a Roth IRA account in your wife's name. This would be another step toward equalizing assets and would provide future income for her, tax-free.

Q: Would you be kind enough to help me get my brother off my back? When I moved to Dallas in 1975, he came to visit. We made the mistake of parking in the wrong spot. The tow truck charged my brother $50 to get this car back, but my brother said not to worry about it. Well, now he has decided that I should worry about it, 24 years later!

How much do you suppose that original $50 would be now if he had it in his savings? He isn't seriously mad, but I would like to put an end to the ribbing by writing him a check. -- M.R., by e-mail

A: Anything to restore sibling serenity. The annualized compound rate of return on Treasury bills from 1975 through 1998 was 6.9 percent, according to Ibbotson Associates in Chicago. The $50 would have grown to $248 at that interest rate. But if it was in a taxable account and your brother was in the 28 percent tax bracket, his after-tax growth rate would have been 4.97 percent, and the original $50 would have grown only to $160.

Just be glad he wasn't a stock investor because the same $50, invested in a stock index fund, would have grown at 17.1 percent a year, compounded, over the same period. As a result you'd need to write a (pretax) check of $2,210.

(Questions about personal finance and investments may be sent to: Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas 75265; or faxed to (214) 977-8776; e-mail to scott@scottburns.com Check the Web site: "www.scottburns.com." Questions of general interest will be answered in future columns.)