ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, February 12, 1996 TAG: 9602130050
SECTION: THE MONEY PAGE PAGE: 6 EDITION: METRO
COLUMN: Money Matters
SOURCE: MAG POFF
Q: I have a question concerning my sister's estate. The lawyer handling her estate has made three distributions as follows: Dec. 30, 1994: $10,000; June 30, 1995: $20,000; and Dec. 14, 1995: $7,000. This is a total of $37,000. His letter stated that a fiduciary tax form has been filed.
Do I have to turn this in as income on my taxes? I was advised last year that the $10,000 was not taxable income.
A: Money you inherit is not taxable to you. The estate's executor (if your sister had a will) or administrator (if your sister died intestate) is responsible for paying all state and federal estate taxes before distributing the balance to the heirs. Presumably the lawyer serves in this capacity and took care of that obligation.
There is one caveat. If the estate earned any money since your sister's death, you owe income tax on those earnings. This might have happened if a certificate of deposit had interest paid after her death or if a stock paid dividends. You should ask the executor or administrator if any of the distributions included any such earnings since your sister's death. The amount involved, if any, should be very small.
Records pertaining to mutual funds a must
Q: I understand that if I buy individual shares of a particular stock and later sell them, I have to keep track of when I bought and sold each share for purposes of calculating capital gains.
I assume that I don't need to track this information if I invest in a mutual fund, because I'm buying shares of the fund, not shares of individual stocks. Is this correct?
A: It is urgent that you retain all records pertaining to transactions of every mutual fund you own. Taxes on mutual funds are very complex, especially if you follow the typical course of routine periodic investments. People who sell shares in mutual funds are often driven to use tax preparers because of these problems.
You have two types of gains in mutual funds.
One is the dividends paid by the funds, which most people reinvest. The other is the gain in the value of the fund shares themselves.
You are taxed as you go on the dividends the funds pay to their investors. You should get a 1099 form for these dividends for declaration on your tax form. You are not taxed on the fund's gain until you sell the shares.
When you sell, you are taxed on the money you receive less the amount you invested and the portion that has already been taxed each year. This is complicated if you invest routinely.
You should save your annual statements until you sell the fund. The annual statement should show the transactions for each month within the year. You should save the most recent month's statement until you receive the annual statement so that you have cumulative records from the time you bought the fund.
Prospectus satisfactory way of evaluating fund
Q: I'm interested in investing in Pax World Fund. I know that I need to read the prospectus, but I also realize that a fund's own materials may not be totally objective, and I'd like to be sure of Pax's integrity and stability. Do you have any opinion on Pax World Fund? Aside from the market-based risks involved in investing in any mutual fund, how can prospective investors evalulate a particular fund's safety? What financial publications do you recommend to help investors make intelligent decisions about where to invest?
A: The prospectus is usually a very satisfactory means of evaluating a fund. Funds must adhere strictly to rules of the Securities and Exchange Commission in publishing a prospectus and, if anything, it probably overstates the risks. The earnings reports must be accurate. A prospectus is dull to read, but it is a good source if you want to learn about a fund in detail. Advertising, on the other hand, can be misleading.
The best source of information about a mutual fund is the Morningstar service, which rates most funds. This is too expensive for the average investor to buy, but you should find it in most public libraries.
Another good source is such financial magazines as Money and Forbes. These rate many funds once or twice a year, usually based on information compiled with the help of Morningstar.
There is a book called "The 100 Best Mutual Funds You Can Buy," written by Gordon K. Williamson (Adams Publishing).
That book does not mention Pax World Fund.
Money recently described Pax as a mid-risk fund compared to its peers that invests in larger stocks. It performed well compared with like funds in 1994 but did not do as well in earlier years.
LENGTH: Medium: 85 linesby CNB