Smart Money: Business partnership should have breakup details in writing

Bruce Williams is a national radio talk show host and syndicated columnist

Dear Bruce: My wife entered into a restaurant partnership with two other women. Each put up $40,000 to start, and all three own and operate the business. Now, one of the partners wants out. How do we decide what this business is worth? John, via e-mail

Dear John: The problem is that a partnership agreement should have been entered into prior to getting involved with one another. It would have answered the buy-out question. At this point, it's unlikely that the business can afford to buy her out for cash, and the person who wants out should be advised that she'll have to wait for her money. Hopefully, the partners can work out an amicable arrangement.

The party wanting out will likely be unhappy about not getting her investment and/or profit back immediately, but I don't see where any profit is deserving at this moment. It is unreasonable to expect the business to cough up a large sum of money so she can walk away with her investment. The lesson here is that solutions to all of the possibilities of a breakup should be agreed upon and reduced to writing beforehand. In the absence of this detail, many a friendship can go right down the drain.

Dear Bruce: Our golf club collects a 15 percent service fee for each food and bar purchase plus an additional 7 percent tax. Not only are we being charged for the food and the bar, they collect tax on the 15 percent service fee. In my opinion, this is not correct. The club treasurer says it is. Who is right? L.H., Ventura, Calif.

Dear L.H.: In most cases, if the service fee is termed a "gratuity," it should be passed on to the server. There would be no sales tax on the "gratuity" any more than if you charge a meal in a restaurant, and you add gratuity to your charge card.

If, however, they call it a service charge, which seems to be the case here (service charges are taxable in your state), then the tax would be appropriate. Call the sales tax office in your state. Possibly by changing the name of the fee to gratuity, the taxability would be changed. This assumes that this money goes to the bartender or waiter. It may be that the club collects this and then pays them a salary.

Dear Bruce: The newspaper that carries your column had information on why it is better to go with rebates for automobile purchases rather than the zero-percent financing. Of course, I didn't save it, and now I need it to explain the rationale to my husband. E.A., via e-mail

Dear E.A: There are no absolutes here, despite what the article may have said. This is not a one-size-fits-all proposition. The size of the rebate is a consideration. In many circumstances, a big rebate may be the way to go because of the relatively small value of financing. Compare the amount of the discount that you would receive in a rebate accounting for the sales tax reduction against paying the larger amount of money but having the use of it during that investment period. As often as not, the rebates win out, but not in every case.

Dear Bruce: Every month we seem to get further into debt. Frequently, we can do no more than make minimum payments on our credit cards. We have two car payments, but we each work and have to get there. We have college loans, a mortgage and, of course, the usual expenses for having three children. Maybe this is typical, but I feel like I'm drowning. What can you suggest? E.J., Midland, Mich.

Dear E.J.: It appears that you spend more than you bring in. Given that you are working, raising children, etc., it's unlikely that you can increase your income. However, your husband might be able to take a part-time job. If there is any way to increase your income, do it, even if it means a temporary disruption of family life.

In the meantime, take a close look at your budget; you will likely find purchases that you can do without. Get on a very strict budget and spend money more wisely. For example, buy bulk foods rather than packaged foods. Eating out has to go. Very astute shopping for children's clothes must be the order of the day.

I know how difficult it is to raise children on a limited income, but trust me, this, too, shall pass. Find a way to make more than minimum payments on your credit cards.

Dear Bruce: I bought a mutual fund when it was at $12.32 a share. I invested $40,500. The shares are now at about $9.30. Through credit card promotional deals, I can get interest-free cash advances for six months with no fees. I can raise about $50,000. Is there a downside to buying shares of this fund which pays a good monthly dividend at its current price, then selling an equal number of shares just before the six months are up to pay off the credit cards? S.M., via e-mail

Dear S.M.: Is there a downside? Of course, there is. You're assuming that at the end of this six-month period that you should be able to sell your shares for $9.30 or more. What happens if those shares go for $5? Not likelihood, but a possibility. You will then take a huge hit.

You are trying buy on margin using your credit cards rather than the traditional margin account. A very risky activity! There is no way I would recommend such a strategy.

Dear Bruce: Will the state a person resides in take their home after their death to be reimbursed for the medical expenses paid by Medicaid? My daughter says that we should take our names off of the deed to our house so she will be protected. R.L., Middlebury Center, Pa.

Dear R.L.: If you have exhausted your resources and collect under Medicaid, it is very possible that the state will seek to recover some of the money expended on your behalf upon your death. Does that not seem fair? If you wish to impoverish yourself, you are free to do so, but you have to meet a 2-1/2 year "look back" requirement. That means that you have to do it early enough so Medicaid won't look to your estate for reimbursement.

Medicaid is charity/welfare. Why should the public bear the cost of providing this service to protect your children's inheritance? Tough question. I don't have the answer.

Dear Bruce: In one of your recent columns you mentioned reverse mortgages. I'm trying to get information on this subject, but I am not getting anywhere. I've been to two banks and a credit union. No one has ever heard of it. My grandmother is age 85, still remains at home but requires home care. Her money is starting to run out. She doesn't qualify for Medicaid because of her assets. B.B., Michigan

Dear B.B.: I can't imagine why a knowledgeable mortgage person at a bank would not be well informed about reverse mortgages, which allow a person to borrow against the equity in their home as long as there is no other mortgage in place. Given your grandmother's advanced age, she should be able to borrow a very substantial portion of her equity, which the lender will be able to recover upon her death and the subsequent sale of the home.

Dear Bruce: My husband and I are retired. We're not rich, but comfortable. Our home is currently worth about $165,000, and we owe $42,000. Our mortgage rate is 8 percent with 24 years remaining. If we refinance, do we have to refinance the original $45,000, or can we just refinance $42,000? M.C., via e-mail

Dear M.C.: Other things being equal, you can refinance whichever principal amount you choose, although you may have a little difficulty in refinancing such a small amount. Since mortgage rates are around 6 percent, you would save a little more than $800 a year, which is certainly worth exploring. With refinancing, keep in mind the expenses associated with it. At approximately $800 a year, you need to determine how long it will take you to recover those expenses. This assumes you are refinancing the minimum amount that you mentioned, $42,000.