by Archie M. Richards, Jr., CFP^®
April 12, 2004

Mildred holds $60,000 of Series E Bonds that have accumulated substantial interest. She wants to give them to her four adult grandchildren. What are the tax consequences?

Emotional needs, Mildred, outrank taxes. If your grandchildren are starting families, they may need the money more than you do. If they're responsible and you love them, by all means, give them the bonds.

If you cashed the bonds yourself and gave your grandchildren the proceeds, you'd pay income taxes on all of the interest. But if the grandchildren sell the bonds, they'd pay tax on only their share of the interest. Their top tax bracket might be lower than yours if you cashed the bonds yourself. By giving the bonds before they're sold, the net taxes for the whole family might be less. (Sorry, the tax advice in this paragraph is wrong and is corrected in a subsequent column.)

Federal transfer taxes on gifts and estates, which are altogether different from income taxes, may not affect you at all. In 2004 and 2005, you'd pay no transfer tax because of gifting the bonds unless your lifetime of gifts (in excess of $11,000 annual exemptions to each individual) totals more than $1 million. If you die holding the bonds, you'd pay no federal transfer tax unless the value of your estate exceeds $1.5 million. If your wealth is greater than these numbers, see a financial planner. If it isn't, you might see a planner anyway, but you can forget about federal transfer taxes.

Wilson, 76 years old, wonders whether he should convert his investments to cash. He also wonders how he might enable his daughter to take over his affairs.

At 76, Wilson, your life expectancy is 9 years. During that time, I expect stock prices to rise a bunch. Retain at least 60 percent of your money in stocks.

See an estate planning attorney about giving your daughter a power of attorney. The powers given to her should probably be substantial, enabling your daughter to do just about anything with your money that you could do. The powers should also be "durable," meaning they would remain in effect even after you're unable to handle your own affairs.

If your assets are sufficient, spend about $2000 to have an experienced estate planning attorney draft a living trust for you.

Here are additional financial tidbits resulting from reader letters.

• Your long-term investment results will disappoint if your portfolio isn't sufficiently diversified. Divide your U.S. holdings not only between big and small stocks, but also between stocks whose prices are high in relation to earnings (growth stocks) and those whose prices are low in relation to earnings (value stocks). Even U.S. stocks alone are insufficient. Place half of your stock portfolio abroad. Diversify among regions, including Europe, the Pacific region, and emerging markets. Yes, some nations have more political risks than others. But the prices of stocks in riskier nations are generally lower in relation to earnings, compensating for the risk.

• Assume you have a 401(k) plan, an IRA, and other investments held outright. Plan the allocations of your securities as if all of them were in one pot. In ArchieRichards.com, the column dated 6/30/03 presents appropriate allocations. Since the income earned in qualified retirement programs are not currently taxable, the 401(k) and the IRA might hold most of the securities that pay high taxable income, such as bonds and real estate investment trusts. (The dividends on REITs were not reduced in the recent tax bill.) Hold outright most of the stocks and mutual funds that pay low dividends. The long-term capital gains they generate would be taxed at low rates.

• Early in 2003, the New York Times profiled a 401(k) investor who had grown weary of the market going down and felt "the market's not really picking up anytime soon." He cut back his contribution from 15 percent of his paycheck to a mere 5 percent. Bad idea. By the end of 2003, large-cap stocks had rallied over 25 percent and Nasdaq rose about 50 percent. Don't try to outguess the market. Most of the time, it will make you a fool.