Shift to Class A shares lowers cost

Money Talk

Your Money

February 06, 2005|By MATT LUBANKO

About nine years ago, I invested $20,000 in Merrill Lynch Large Cap Value Fund Class B shares (ticker symbol: MBLVX). Not too long ago, I checked out my monthly statement and noticed they switched to Class A shares. They did this without telling me.

When I asked why it was done, my broker gave me an unsatisfactory explanation. Why did this happen?

- H.N., Chicago

You've probably witnessed a conversion: a time-release changeover from Class B shares to Class A shares.

There is nothing sinister about this change. It's a standard brokerage industry practice and, at Merrill Lynch, typically follows a pattern like this:

You bought Class B shares about nine years ago and did not pay a commission at the outset. The Class B shares, instead, carry what is known as a back-end load: a commission charged to those who sell their mutual fund shares.

That commission, had you sold in the first two years you held the fund, would have been fairly steep - 4 percent for these particular shares. But the back-end load declines as time passes and eventually vanishes at the end of six years.

At the end of eight years, the Merrill Lynch Large Cap Value Fund B shares are converted into Class A shares.

"If your financial consultant did not clearly explain this process to you, then you should ask to speak to the branch manager," said Erik Hendrickson, a spokesman for Merrill Lynch in New York.

You should also realize that a move from Class B to Class A shares is hardly a raw deal. Class A shares charge lower annual operating and maintenance expenses.

With the Merrill Lynch Large Cap Value Fund, for example, the Class B shares take 2.05 percent of assets ($205 a year for every $10,000 in assets held in your account) in yearly fees. The Class A shares take just 1.28 percent ($128 for every $10,000).

Even for those who pay the upfront commission commanded by Class A shares (5.25 percent with many Merrill Lynch funds), the difference in yearly operating fees often, but not always, makes Class A shares a lower-cost choice compared with Class B shares.

To compare a fund's expenses, and how it would affect your returns, visit the Securities and Exchange Commission Web site (www.sec.gov/investor/tools/mfcc/mfcc-int.htm).

I inherited 10 acres of undeveloped land from my grandfather when he died in 1965. My husband and I sold this plot in 2004.

How can we calculate the capital gain on the sale of that land? How can we determine the cost basis on land my grandfather purchased 50 or 60 years ago?

- A.F., Haddam, Conn.

Even if town records show your grandfather paid $5,000 in 1945 to buy 10 acres of land, that purchase price would not apply to you. Under the current tax laws, inherited property takes on the "date of death" value; some estates follow a "six-months-from-date-of-death" formula for valuing inherited assets such as land, or stocks or mutual funds held in taxable accounts.

How can you estimate a 1965 price for 10 acres of land?

Look up the assessed valuation of that land in the town assessor's office. Try to find the assessment as it appeared in 1965 - or in the year closest to 1965, said William Bilchek, a real estate lawyer in Madison, Conn.

The assessed value - often lower than a property's fair market value - is not a final number; it merely provides a baseline from which to create a more credible number for the cost basis of your property.

The IRS, in theory, can reject your concocted figure but, in practice, accepts "good faith efforts" to determine the cost basis of an asset that has no supporting documentation.

You might also look over that town's property transaction records from 1964, 1965 or 1966. Your goal, Bilchek said, would be to find the sale of a parcel that most closely resembles the 10 acres you sold in 2004.

In the end, Bilchek said, all you can do is make a good-faith effort toward an accurate cost basis for land you inherited in 1965.

Be sure to include any improvements you might have made to that land, such as the installation of a paved driveway, as part of the cost basis.

Matthew Lubanko is a Your Money columnist. E-mail him at yourmoneytribune.com.

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