by Brad Jenkins
Life is hectic. Dealing with jobs, friends, family, and everything else you have on your plate contributes to that rapid pace. When you add children to the mix, it doesn’t get any easier. At some point, we run out of time to accomplish everything on our to-do list. Eventually, every one of us will run out of time entirely. Before that happens, if you have children, there are some things you should consider.
Questions to Ask
What happens to your minor children? Have you provided the necessary assets to get them to a point of self-sufficiency? Who will look after those assets until they can do so for themselves? Most importantly, who will look after your children until they can do so for themselves?
These are all very important questions — and very personal ones. They are all questions that require more than just a passing thought that can and need to be addressed by you and your spouse as soon as you can.
Necessary Assets
Providing assets for your children has a simple solution: life insurance. Many people use term life insurance as a tool to create a legacy to replace any lost income earning ability and to provide for their family. You can work with an advisor to determine what amount is appropriate.
Looking after the assets and looking after the children involve a trustee and a guardian, respectively. Whom should you choose to fill each role? Should it be the same person or persons? Should it be a friend, a member of your family, or a member of your spouse’s family? As an example, I’ll describe how my family chose different trustees and guardians.
Trustees and Guardians
Both my family and my wife’s extended family live more than a few hours away from us, and from each other. We wanted to ensure the two families would be involved with each other and remain close to the children. With that in mind, we decided to name one member of my wife’s family as the guardian while appointing members of my family as trustees of the assets.
Many people wonder what might happen if the guardian and the trustee are the same person, and they ask, “Couldn’t they spend my assets on anything they want, including themselves?” The answer to that question is “yes.” However, if that is a lingering concern, there’s a follow-up question you should ask: “If you don’t trust the guardian with your money, why would you trust them with your children?”
More often than not, parents find their answer to that question is that while they do trust the guardians, they like the idea of taking any conflict of interest out of the equation.
To be clear, in our personal situation, we didn’t anticipate the guardian would do anything improper with the assets. Actually, our concern was quite the opposite. We were worried the guardian would do everything possible to avoid touching the assets, so the children would have more of a nest egg, even if that meant struggling financially. Our trustees have been encouraged to inform the guardians of our intentions — through the language in our documents and other written instructions from us — that they should use the assets to maintain a good quality of life.
An Action Plan
There are a few steps you should take after you’ve made these decisions, but before you have your trust and/or will drafted.
Perhaps the most important thing to keep in mind is that you can always amend your documents. This means it is critical for you to have something in place, even if it isn’t perfect. Personally, I’d rather make these big decisions now and be able to change my mind down the road, instead of letting a court make those decisions for me.
Copyright © 2014, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.
by Brad Jenkins
Life is hectic. Dealing with jobs, friends, family, and everything else you have on your plate contributes to that rapid pace. When you add children to the mix, it doesn’t get any easier. At some point, we run out of time to accomplish everything on our to-do list. Eventually, every one of us will run out of time entirely. Before that happens, if you have children, there are some things you should consider.
Questions to Ask
What happens to your minor children? Have you provided the necessary assets to get them to a point of self-sufficiency? Who will look after those assets until they can do so for themselves? Most importantly, who will look after your children until they can do so for themselves?
These are all very important questions — and very personal ones. They are all questions that require more than just a passing thought that can and need to be addressed by you and your spouse as soon as you can.
Necessary Assets
Providing assets for your children has a simple solution: life insurance. Many people use term life insurance as a tool to create a legacy to replace any lost income earning ability and to provide for their family. You can work with an advisor to determine what amount is appropriate.
Looking after the assets and looking after the children involve a trustee and a guardian, respectively. Whom should you choose to fill each role? Should it be the same person or persons? Should it be a friend, a member of your family, or a member of your spouse’s family? As an example, I’ll describe how my family chose different trustees and guardians.
Trustees and Guardians
Both my family and my wife’s extended family live more than a few hours away from us, and from each other. We wanted to ensure the two families would be involved with each other and remain close to the children. With that in mind, we decided to name one member of my wife’s family as the guardian while appointing members of my family as trustees of the assets.
Many people wonder what might happen if the guardian and the trustee are the same person, and they ask, “Couldn’t they spend my assets on anything they want, including themselves?” The answer to that question is “yes.” However, if that is a lingering concern, there’s a follow-up question you should ask: “If you don’t trust the guardian with your money, why would you trust them with your children?”
More often than not, parents find their answer to that question is that while they do trust the guardians, they like the idea of taking any conflict of interest out of the equation.
To be clear, in our personal situation, we didn’t anticipate the guardian would do anything improper with the assets. Actually, our concern was quite the opposite. We were worried the guardian would do everything possible to avoid touching the assets, so the children would have more of a nest egg, even if that meant struggling financially. Our trustees have been encouraged to inform the guardians of our intentions — through the language in our documents and other written instructions from us — that they should use the assets to maintain a good quality of life.
An Action Plan
There are a few steps you should take after you’ve made these decisions, but before you have your trust and/or will drafted.
Perhaps the most important thing to keep in mind is that you can always amend your documents. This means it is critical for you to have something in place, even if it isn’t perfect. Personally, I’d rather make these big decisions now and be able to change my mind down the road, instead of letting a court make those decisions for me.
Copyright © 2014, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.
Q: What are the benefits of buying higher coupon bonds?
A: A higher coupon or “premium” bond has a higher coupon rate than the current market interest rate and will trade above par. These bonds sell for more than 100 percent of their par value, so the dollar value is greater than the normal $1,000. These are the reasons we generally recommend higher coupon bonds for our clients:
• They reduce duration risk and market volatility. All else being equal, if interest rates rise, bond prices will fall and vice versa. The longer a bond’s duration, the more sensitive it is to rate changes. Premium bonds, however, help guard against possible rate increases and price decreases. The higher coupon provides a cushion against price declines because the price has further to fall before it becomes a discount bond. Premium bond prices tend to change less compared with bonds of similar maturities, reducing the price sensitivity of the fixed income portfolio. For an example, let’s look at two New York City municipal bonds:
|
|
Maturity |
Yield |
Coupon |
Price |
Duration |
|
Bond 1 |
Aug. 1, 2023 |
2.80 % |
3% |
101.632 |
8.07 |
|
Bond 2 |
Aug. 1, 2023 |
2.80 % |
5% |
117.974 |
7.58 |
Bond 2, the premium bond, has a lower duration, making it less sensitive to interest rate changes.
• When interest rates are rising, higher coupon bonds generate more coupon cash flow than lower coupon bonds. This means investors can reinvest more in bonds that will pay even higher yields.
• They can help avoid onerous tax implications. The term de minimis essentially states that investors must pay capital gains taxes for any bond bought at a discount to face value (original issue discount excluded) in excess of a quarter point per year to maturity. This can significantly reduce the bond’s after-tax yield. This concern also exists in low coupon bonds that aren’t subject to this tax at time of purchase. If the owner wants to sell the bond and rates are higher at the time of sale, the market will treat the bond as de minimis, and the client’s bid price will be significantly lower than for the same bond with a higher coupon not in de minimis territory. Many investors are unaware of this situation, but we take strong measures to avoid it.
• Their availability is often better. Most trust companies have strict buying parameters that limit what they can buy, with prices ranging between $98 and $102. Also, many retail brokers put their clients in these same types of par-priced bonds. These two types of buyers help create a strong market demand for low coupon/low dollar bonds. It’s Economics 101: A strong demand for a limited product means costs will go up (and yields will go down). With higher coupon bonds, investors can pick up incremental yield over similar bonds with lower coupons, while getting access to the largest number of issuers.
Copyright © 2014, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.