by Archie M. Richards, Jr.
May 7, 2007

Peggy writes, "I'd like to start a 529 plan for my two grandchildren, ages 10 and 7. But the stock market is in record territory. Is there time to build a college nest egg?

Yes, Peggy, there certainly is. Every dollar invested in the U.S. stock market when it got started in 1802 would be worth $11 million now. During those 205 years, stock prices spent a lot of time in record territory. It's a place stocks visit frequently. The best time to buy stocks is when you get the money. People who avoid stocks at new highs are long-term losers.

What makes you think that America's creation of wealth is coming to a halt? Oh yes, stock prices didn't rise during big wars and big economic downturns. But those conditions don't prevail now, as follows:

• We're in a small war we're going to win. Annual costs for national defense amount to only 5 percent of the nation's economy. Compare this with 38 percent in World War II, 14 percent in Korea, 9 percent in Vietnam, and 6 percent in the Cold War.

• The kinds of government policies that caused big economic downturns are not in effect now. Congressional liberals seem to want to enact such policies, but they can't override Mr. Bush's vetoes. In 2009, Congress may well swing back to the side of free markets.

What's the alternative to investing in stocks, anyway? Your oldest grandchild will attend college in 7-to-11 years. The youngest will attend in 10-to-14 years. Projecting that CDs will outperform stocks in the next 7-to-14 years is preposterous. CDs won't even come close. Bonds won't perform as well either.

Foreign economies are growing smartly. Russia and 9 members of the former Soviet block now have income taxes with a single, flat rate. So do 4 other nations. All are forging ahead. Some sub-Saharan African nations are adopting free market ideas. Even the French are turning toward free market capitalism.

In the column I submitted to newspapers on April 30, I predicted that the U.S. would soon suffer a recession. I added that any market decline wouldn't last long and that the market would reach new highs by year end.

So all right, if you think I walk on water about such matters, delay the 529 investments for a few months. But by September, if not before, get that money into stocks.

The earnings from investments within 529 plans are not taxable. Distributions out of the plans aren't taxable either, providing they're used for higher education. 529 plans are a good deal.

In the next decade or two, stocks of the world will be good deals, too.

Peggy also writes, "I'd like to leave money for my grandchildren to inherit when they reach 25 and 30 years old. My lawyer says a living trust should not be used, because it would be subject to probate and because I'd have to file taxes on the trust's income. What's your opinion?

Your lawyer is dead wrong, Peggy. Living trusts avoid probate jurisdiction.

Many attorneys get this wrong, because they make a lot of money from probate work. Your lawyer would earn more dealing with the probate administration of assets owned outright at your death (not in trust) than he would from drafting a living trust for you.

But don't ask that same lawyer to draft your trust. Visit www.naela.com to find an estate planning lawyer who knows what he's doing.

The earnings from assets in a living trust are indeed subject to income taxes. But during your life, those earnings would be taxable to you even if the assets were not in trust. The trust would have your Social Security number; for income tax purposes, it's invisible.

After your death, heavy taxes are avoided as long as the trust earnings are paid out to the grandchildren and taxable to them. The payment of principal, however, can be delayed until they reach maturity. A trust is the best way to accomplish this.

Your lawyer is leading you down a garden path to a pot of gold - for him!