Question: Lately I have been noticing advertisements for repurchase agreements offered by banks. They claim high interest rates for short periods of time. Can you explain what these are?
Answer: What you're talking about are "retail repurchase agreements" available at both banks and savings and loans, and called various catchy names by different institutions.
In simplified terms, it works something like this: A savings institution, say an S&L, buys a short-term, high-value security, perhaps for $1 million or more, from the federal government or a government agency.
Then the S&L turns around and offers participation shares at "retail" to its depositors, usually for an 89-day term. The shares yield a return that is typically one or two points lower than the S&L is receiving on the underlying security, which turns out right now to be a lot higher than is available on either passbook accounts or many certificates of deposit.
That small point spread doesn't provide much room for profit for the bank or S&L, considering the bookkeeping involved. But the savings institutions hope that high volume will help the payoff; more important, they hope it will keep some of their customers from running to the money market funds, and maybe even attract a few new accounts.
These repurchase agreements are not deposits and they are not insured by either the Federal Deposit Insurance Corp. or the Federal Savings and Loan Insurance Corp. But the underlying security is pretty safe, being an obligation of the federal government or a federal agency.
If you're interested, you have to shop around. There are different purchase minimums. Some institutions will permit you to redeem your shares before maturity for principal plus accrued interest, while others will not.
Some banks and S&Ls require you to have a savings or checking account with them to be eligible, while others welcome all comers. And there may be differences in other terms as well.
These retail repurchase agreements are not really mutual funds, but there is certainly a resemblance. The fact is that the lines of demarcation between savings institutions and brokerage houses are becoming blurred.
It was just months ago that many of the distinctions among banks, S&Ls and credit unions disappeared. Those changes, and others like Merrill Lynch's new Cash Management Account and the acquisition of Shearson Loeb Rhoades by American Express, are part of a continuing evolution toward full-service institutions offering a complete range of financial services under one roof.
Q: Our student daughter has a part-time summer job for which she must buy her own uniforms. Since she is still our dependent, can we deduct her uniform expenses on our tax return?
A: No. Expenses related to a dependent's employment can only be deducted on the dependent's own return.
I assume your daughter will not have enough income to create any tax liability. In that case, the deduction for the uniforms is lost. Sorry about that.
Q: My mother, age 89, lives with me. She receives a railroad pension (from my father, who is dead); in addition, she has Treasury bills, Series H bonds and S&L and bank savings accounts, all of which are in both our names. I have been told that she doesn't need a will, since everything would be considered mine automatically if she predeceases me. Is this correct? Would her estate be subject to estate and inheritance taxes?
A: If all your mother's assets are jointly owned, then she probably can get along without a will. Upon her death all jointly owned property does pass to the surviving co-owner automatically (except for the necessary paperwork to change ownership).
Joint ownership, however, will not take the assets out of her estate. They would be subject to estate tax, but whether there would actually be any tax due, or even whether a return would have to be filed, would depend on the total value of her assets.
For federal estate tax purposes there is a $47,000 unified (estate and gift) tax credit. This means that up to $175,000 in assets can pass without tax liability.
State inheritance tax exclusions are often lower than federal. Check with your local tax office to find out how much of an estate can pass to a surviving child without state tax liability.