Money & Investments

Estate Planning
By Yvonne Messer

Investments Insights
By Joey Watkins

Today, you may be well off financially after a lifetime of hard work and luck. With the higher costs of college today and a very competitive job market grandchildren may find the going rough when they step out into the world. You want to help them financially, but how?

Here’s some tax-wise ways to do so. Tax-wise because you’re concerned about gift and estate taxes that may be due if you give away too many assets. The federal CD estate tax, for example, is a tax on property transferred at death. Depending on the size of the estate, the tax can substantially diminish an inheritance. (No tax applies to individual estates valued at under $625,000 in 1998.)

Each person can give away up to $10,000 every year to any number of recipients-a way to avoid a gift tax and also to save on future estate taxes by reducing the assets left in your estate. This $10,000 amount will be indexed for inflation in the future.

You may have heard of a financial concept called the generation-skipping transfer of assets. Generally speaking, there’s an IRS exemption that allows a total of $1 million in assets to pass to a grandchild or great-grandchild ($2 million for a married couple) during the grandparents’ lifetime or at death. The $1 million amount will be indexed for inflation after 1998. This is a way to keep assets within a family and to lower the number of times those assets are taxed through gift or estate taxes. That’s because the grandparent’s assets "skip over" their own children’s taxable estates, and go right to the grandchildren. The money would be included in a grandparent’s taxable estate, but would not be subject to estate taxes again when the parents die.

Generation-skipping transfers are complex. Use the advice of a competent tax advisor, because any gifts that amount to more than that $1 million exemption are subject to the Generation Skipping Transfer Tax (GSTT) in addition to any federal gift or estate tax, Avoid the GSTT!

Incidentally, there’s no GSTT or gift tax for gifts to grandchildren that are payments for medical expenses and/or college tuition if the check is made directly to those institutions.

Passing along an inheritance to a future generation in your family may require a little homework right now, but it can be a way for you to give someone you love more than your happy memories.

Yvonne Z. Messer is a Personal Financial Advisor for the American Express Financial Advisors Inc. You can reach her at 279-1174.

Don’t chase last year’s winners.
Usually, top-performing mutual funds and money managers in one year tend to be the "best sellers" and under performers the following year. My advice is to examine the fund’s three-, five- or 10-year annual performance. How has the fund performed in down markets? Is it highly volatile? Always remember to choose a mutual fund based on your investment objectives and your risk comfort level, and avoid joining the chase for last year’s winners.

Think long term.
In the midst of the stock market’s performance during the last three years, many investors have shifted the focus from their long-term goals to short-term returns. Still, it is your long-term goals that will provide a comfortable retirement or fund your child’s education expenses. I believe most mutual funds should be considered a five-year or more investment. Don’t let short-term activity sway you from maintaining a sound long-term investment strategy.

Know what you own.
Some investors select mutual funds based on name recognition. Instead, select a fund based on its investments strategy (particular industry, stocks or bonds, etc.) and whether it fits onto your investment strategy. After all, if you don’t know what you own, how can you know whether you should own it?

Use dollar cost averaging for investing consistency.
This strategy lets you regularly and automatically invest a predetermined amount of money into the mutual fund of your choice. Dollar cost averaging eliminates the need to time the market and helps you enjoy systematic investing. And when stock prices fall, dollar cost averaging helps you purchase more shares.

Dollar cost averaging does not guarantee a profit or protect against loss. Consider your financial ability to continue purchases through periods of low price levels.

Diversify, diversify, diversify.
Most successful investors will tell you about the importance of good portfolio diversification. Determining the right asset mix of funds managers can help buffer your investments against market volatility and help you maintain a strategic long-term plan. Without proper diversification, your portfolio is susceptible to disproportionate market risk if prices drop.

Reinvest your dividends.
Chances are you have already heard you should reinvest your dividends. Over a period of time, reinvesting your dividends can substantially increase the size of your portfolio and put "extra" money to work for you.

Joey Watkins is an Investment Broker for A.G. Edwards in Prattville and can be reached at (334) 271-1200 for further information.