Your Finances

Identity Theft...It's Closer Than You Think

Identity theft has become so prevalent that there are frequent television programs and magazine articles with case histories and warnings. Think it can't happen to you? Guess again. Grandboomers are a prime target. Why? We've got assets, we travel, have more medical appointments, do more shopping...all items that lead us to use credit cards and to have to give our social security number and other personal information to complete strangers.

Both my husband and I have been victims. In my case, someone halfway across the country got a cellphone by using my personal information. I found out about it when we got a call looking for $6,000 in past due bills. My husband got a call from a utility company thousands of miles away looking for payment on an electricity account. The person used his identity to get credit. In both situations we had to file police reports, call the credit bureaus, and even contact the federal government consumer protection agency.

What can be done? The government recommends the following:

Don't give out personal information on the phone, through the mail, or on the Internet unless you initiated the contact and are sure who you are dealing with. Identity thieves are clever and pose as representatives of institutions you do business with to steal your information.
Deposit your outgoing mail in a post office mail box or at the post office itself rather than leave it in your mail box for pickup. If you're going to be away from home, have your mail held at the post office until you return.
Buy a shredder and shred bills, medical, insurance, and other personal information. Even shred those charge card offers you get in the mail. They have your name imprinted on the application. Easy pickings for a thief.
Do not carry your social security card on your person. Leave it in a safe place. Do not write or have your social secuity number printed on your checks.
Give your social security number only when absolutely necessary. See if another form of identification will do.
Carry only the identification and credit cards with you that you intend to use that day.
Be extremely cautious responding to promotions. Thieves use phony promotions to get your information.
Keep your purse or wallet in a safe place at work
When ordering new checks, pick them up at your bank rather than having them mailed.
Get virus protection software for your computer and keep it updated to protect you from intrusions and infections that can lead to the compromise of your computer files or passwords.
Do not open files sent to you by strangers, or click on hyperlinks or download programs from people you don't know. Opening these files may expose you to spyware. You can also put a program on your computer to check for and eliminate spyware.
Use a firewall to protect your computer from uninvited access, especially if you have a cable, DSL or T-1 connection.
Use a secure browser, one that encrypts or scrambles information you send over the Internet. When submitting such information, look for the "lock" icon on the browser's status bar to be sure your information is secure during transmission.
Try not to store financial information on your computer...especially a laptop. If you do, use a complicated password to gain access to the information.
Before you dispose of a computer, delete all personal information. Doing this through mouse commands or reformatting the hard drive may not be sufficient. Use a "wipe" utility program.

While these are good precautions you can take, Grandboomers, based on our personal experience, would call on companies that are issuing credit to also exercise caution. For example, in both our cases, a simple check of our addresses would have raised a red flag that the person applying for credit had an address many states away. Contacting us to confirm the information before issuing credit would have stopped the thieves in their tracks. Companies should also go after thieves. The way it stands now, and we were told this by one of the companies involved in our case, it is considered "the cost of doing business". It may cost them more at the outset to prosecute these people, but it will save them (and us) in the long run.

You can also contact the three major credit services and have them put a flag on your account stating you need personal contact before any new account is opened. This feature is free if you renew it every three months. For a small fee, they will flag your account for a full year.

This has been one of our longer Grandboomers articles. But it is a very important topic.

Low-Cost Health Insurance for Your Grandkids

One of the roles Grandboomers are taking on at an increasing rate is the care and raising of their grandchildren. You want the best for these young ones, but often your resources are limited and while you give the children all the love in the world, your financial situation prevents you from providing them with medical coverage. Grandboomers contacted the U.S. Government and learned that if you are a grandparent with custody of your grandchild, the child may be eligible for free or low-cost health insurance.

Every state in the nation has a health insurance program for infants, children and teens. The insurance is available to children in working families, including families where the grandparents have custody of the child.

For little or no cost, this insurance pays for:

Doctor visits
Prescription medicines
Hospitalizations

States have different eligibility rules, but in most states, uninsured children 18 years old and younger, whose families earn up to $34,100 a year (for a family of four) are eligible.

To learn more, go to the Your State's Program page at Insure Kids Now! or make a free call to 1-877-KIDS-NOW for more information.

Credit Cards and Grandchildren...Lessons Learned?

As Grandboomers, we all want to do what we can to make our grandchildren happy. Shopping in the mall, a day at the amusement park, a sporting event, buying them something special. It's great to be able to provide these extras and see them so happy.

And, how do you pay for them? For many, you simply do what you always do. You pull out a credit card. It's automatic. You know that next month an invoice is going to show up and it's time to pay real money for your purchases. However, does a small child have the same perception? When they get home, do they realize "cash" you worked to earn has been spent or do they think that a credit card is a magical piece of plastic that brings all good things without any subsequent responsibility?

Take your grandchild to the mall, and you can spend (literally) the entire day without taking cash out of your pocket. Clothing, toys, lunch, parking, you name it, it can all go on plastic. According to TIME magazine, the average credit card balance is $7,200. That seems high and frightening to this Grandboomer who prefers to pay balances in full each month. But we'll accept it so we can continue with the point. The article goes on to say that if you pay only the minimum due each month at 18% interest (the national average), it will take you 52 years and an additional $20,531 to pay off your debt...if you have no additional charges.

The young mind may think "I want one of those cards because you just put it down and it's good for anything you want." Is this the lesson you want to provide your grandchildren? Better that they should learn the responsibilities of using a credit card now; before they're over their heads in debt at an early age. When you use your credit card, tell them what is happening. Tell them this is a substitute for cash and that you will receive a bill for all your purchases at a later date, that must then be paid. Point out that a credit card is a convenience that must be used responsibly.

Remember, part of being the best Grandboomer you can be is to share your knowledge and life experiences with your grandchildren. Clear guidance now will help them have better lives in the future.

For Grandboomers Selling a Home, Consider This...

For many Grandboomers, thoughts of retirement, and hopefully, "the good life" are moving to the mind’s forefront. You’ve paid, or almost paid, the mortgage on the homestead.

Much as you hate to leave this place that’s been such a part of your life, it’s too big, too expensive to maintain, or in a location that no longer suits your needs, just to name a few reasons to sell. Maybe you want to travel and need only a smaller place as a home base, or you want to live in a different climate, or simply move into a smaller home.

Today, there are new wrinkles on how to sell your present home. One of the most interesting, and a good deal for all, is to see if any of your children want to move into the house. The home of their childhood might just be a place they’d like to return to now that they can afford it.

Here are some things to consider:

Offer the home to all the children. If more than one is interested, you’ll have to work out a way to complete the transaction and not alienate the children who don’t get the house.
At the outset, establish that this is a business deal.
Have the house appraised by an independent appraiser. Encourage your child to do the same. If there’s a difference in the value, settle in the middle.
Because this is a business deal, make sure your child can afford the home.
Your child should finance the transaction through a lending institution. However, if you’re confident that you’ll get your money and it won’t lead to a devastating rift in your relationship, you might want to hold the mortgage yourself. The interest would give you additional income.
If you need all the money now, don’t even consider holding the mortgage.
Whichever road you take, consult a tax or financial advisor.

You also have to remember that once you "sell" the house to your child, that person is the owner, with full rights to change the look inside and out. Can you accept changes to what was your house?

The benefits include keeping the family homestead in the family rather than having strangers tracking though the home while it’s for sale. And positives that are more tangible like no real estate agent commissions.

Speaking of real estate commissions, if you decide to put your home on the market, you may want to negotiate with the real estate agent about the commission rate. More and more because of the high price of homes, this fee is negotiable. In addition, there’s a new type of agent who will sell your home based on an hourly fee for his or her time. On the sale of a $400,000 home at the traditional 6%, you can get a lot of hours before it eats up the $24,000 commission on that sale.

Is Long-Term Care Insurance Right For You?

by Louis F. Mosca

As the baby boomer generation ages, long-term care insurance has recently been receiving a lot of attention from the media. Of course, like many insurance products, it serves a particular market very well, but it is not necessarily for everyone.

Long-term care insurance is not just one service, but several services aimed at assisting individuals with serious prolonged physical illness, disability or cognitive impairment (such as Alzheimer's disease). Services covered by this type of insurance may include, but are not limited to, help with daily activities at home, such as bathing and dressing, respite care, home health care, adult day care and care in a nursing home.

Who should be looking at purchasing this type of policy? Unfortunately, there is no simple answer. However, a good start is to evaluate your needs by taking your age, health status, overall retirement objectives and income into consideration.

Many people begin looking at these policies when they are already retired, but the cost for insurance is much less the younger you are. In addition, when you are younger, you most likely will not have the health concerns of an older person. If you already have potential long-term care health problems, you probably will not qualify for a policy because of the medical underwriting standards used to keep the cost of long-term care insurance affordable.

Long-term care insurance can be expensive. You should probably not purchase a policy if Social Security or Supplemental Security Income (SSI) is your only source of income. Nor should you do so if it will cause you to have trouble meeting other financial obligations, such as utilities, food or medicine.

The ideal candidate to purchase a long-term care policy would be an individual who can comfortably pay the insurance premiums. Even if this individual has substantial assets, they may feel their assets would be depleted if they had a prolonged stay at a nursing home; that is, their assets are not large enough so that the income produced will cover their expenses.

Although it is difficult to think about or even imagine, the fact is 60 percent of us will require long-term care at some point in our lives, and of that 60 percent, more than 40 percent will be over 65 years of age. In other words, the older you are, the greater the probability some form of long-term care will be required.

This realization is further compounded by statistics that show there is a 1 in 4 chance you will pay $100,000 or more in long-term care expenses in your lifetime. Compare this to a one in 1200 chance of a $100,000 loss from a fire or accident in your home; a one in 240 chance of a $100,000 or greater liability suit arising from an automobile accident; and a one in 15 chance of encountering major medical expenses of $100,000 or more.

Surprised? Well, you are not alone. Most people do not even consider long-term care until they have a need for it. Even then, the assumption is that Medicare or Medicaid will pay the expenses, but this is not always the case. Medicare covers less than two percent of nursing home expenses. Medicare only covers skilled care. Medicare does not cover custodial care (95% of people in nursing homes are receiving care at the custodial level). Medicaid, on the other hand, will pay for nursing home expenses but only after an individual has exhausted his or her assets and needs financial assistance.

Currently, the cost of a year in a nursing home in the Washington area is approaching $60,000 a year, a figure not uncommon for large cities. Nationally, however, the average cost for nursing home care is $40,000 to $45,000 a year. Home or custodial care—the care you receive when you need help with day to day tasks—could be a little less but not much. So, as you can see, even with the help of Medicare and Medicaid, long-term care can quickly deplete your savings if you are not prepared.

For some, especially those who want to maintain their independence and have the most choice as to where, when, and how care is provided, long-term care insurance exists as an option. Long-term care insurance covers the costs of home health care, community-based care and nursing home care, and can work in conjunction with Medicare or private health insurance to help handle the cost of a lengthy illness.

Long-term care insurance can provide you or a loved one with the financial protection necessary during a period of serious prolonged physical illness, disability or cognitive impairment. It can also help you safeguard your assets and protect your financial stability.

[Notice to our readers: The article by Louis F. Mosca does not necessarily represent the views and opinions of Grandboomers.com. This posting is for informational purposes only and should not be considered an endorsement or recommendation by Grandboomers.com.]

Louis F. Mosca is Vice President of Investments at Legg Mason Wood Walker, Inc., a diversified financial services and securities brokerage firm that is a member of the New York Stock Exchange and SIPC. He may be contacted by phone at 1-800-888-6673, or by mail: Legg Mason Wood Walker, Inc., Mellon Bank Center, 10th Floor, 1735 Market Street, Philadelphia, PA 19103.

Fixed Income Investments For Your Retirement Years

by Louis F. Mosca

Practically every investment article you read these days mentions fixed income investments. One article will tell you to keep a balance between stocks and fixed income investments in your portfolio. Another will stress fixed income investments for the conservative investor. And still another will advise you to reduce growth-related investments while increasing fixed income investments as you prepare to retire.

But what exactly are fixed income investments? How do they work? And why are they so important to those about to retire or to those already retired?

A fixed income investment is essentially a loan. You agree to "lend" your money — to the government, for example, or to a bank — in return for repayment with interest. The repayment schedule varies from one type of fixed income investment to another, but you can generally expect to be repaid in full and also receive interest at a previously agreed-upon rate.

Safety, then, is one of the key reasons why financial advisors suggest that you shift some assets over to fixed income if you're thinking about retirement. After all, once you retire, you'll be primarily spending your retirement resources. You may have limited opportunity to add to your nest egg.

Here are some popular fixed income investments to consider:

Savings Account — If you keep your money in a typical savings account, the bank will pay you a certain annual rate of interest. Such accounts are ideal for small investors since there is so little risk of losing your investments because savings accounts with a covered institution are insured by an agency of the Federal Government for up to $100,000. However, the rate of inflation may outpace the interest rate of the savings account.

Money Market Account — A money market account is not literally a "fixed" income investment because the interest rate varies depending on the range of short-term government securities in which it invests. Often, though, a money market account will pay a higher rate of interest than a regular savings account and is also federally insured. However, you may have to maintain a minimum balance and meet certain minimums when making deposits and withdrawals. As long as you meet the minimum requirements, you can typically withdraw your money at any time without penalty.

Certificates of Deposit - The interest rate on certificates of deposit ordinarily outpaces that of money market accounts and is guaranteed as long as you leave your money on deposit for a specific amount of time. If you need to withdraw your money early, however, you may face a substantial penalty. CDs, too, are insured by an agency of the federal government.

U.S. Savings Bonds - U.S. Savings Bonds are usually considered a very safe investment because they are backed by the federal government. Series EE Savings Bonds held for less than five years pay a pre-determined rate of return compounded semiannually. If you hold them longer than that, you'll earn an even higher rate -- 85% of the average yield on five-year Treasury securities. In addition, these bonds can be replaced for free if lost, stolen, or destroyed; they are exempt from state and local income and personal property taxes; and they may be exchanged for current-income HH Bonds for continued tax deferral on accrued interest.

Treasury Bills, Notes, and Bonds Also issued by the federal government, these investments generally pay a higher rate of interest than savings bonds. Treasury bills mature in three-, six-, and twelve-month periods; Treasury notes mature in two to ten years; and Treasury bonds mature in ten or more years. Typically, the longer you're willing to commit your money, the higher the interest rate on the investment will be.

Municipal Bonds Municipal bonds are issued by state and local governments. They usually pay a slightly lower rate of interest than federal bonds, but typically you don't have to pay any federal income tax, or in many cases, state income tax, on municipal bond interest. This feature is especially appealing to people who want to reduce their taxable income.

Corporate Bonds These are bonds generally issued by large and mid-size corporations. As such, they may pay a higher rate of interest than government bonds, but they are also regarded as more risky since they are only as good as the company issuing them. Bonds issued by new companies or by companies that have excessive debt are often referred to as "junk" bonds. While these junk bonds carry a high interest rate, they may also carry a very high risk of default.

Should you place part of your portfolio in fixed income investments? Maybe. Most professional advisors recommend some fixed income investments simply for diversification. The actual percentage, though, will depend partly on your particular circumstances and on your investment philosophy. Consult with a professional financial advisor when making this decision.

The Charitable Remainder Trust May Be a Wise Investment

If you have anything left after the recent market downturn, you may want to consider the Charitable Remainder Trust. It's a government approved transfer of your assets to a recognized charity that carries significant estate planning benefits for you.

The parameters of the trust were approved by Congress in 1969 to encourage philanthropic giving. Starting slowly, use of the trust has accelerated as American personal wealth has grown over the years.

The prime advantages are:

You have the pleasure of making a sizable donation to the charity of your choice. The trust is set up in a manner that the charity will not realize the value of your donation until after it helps you and your family. In later years, it will be a lasting legacy in recognition of your philanthropy.
You'll immediate capital gains taxes on the sale of highly appreciated assets. Your donation to a tax-exempt charity allows that organization to sell your assets without immediate capital gains taxes.
At the same time, you have the advantage of being able to write off your donation as a tax deduction in the year you make the donation. Your gift is irrevocable, therefore it qualifies for federal and state (check your own state for its conditions and limits) deductions.
Transfer of your assets to a charity means they are no longer counted against the value of your estate. This means, your action reduces and possibly eliminates estate tax liabilities. Its greatest impact is on estates with a value above $675,000 (based on 2000-1 tax year).

Up to this point you may be saying that you've given everything away...what's the benefit to me?

When you make the donation, the principal amount of the gift is held by the charity. However, you and those you appoint are allowed to draw income from the account. Income interest is available in two ways...annuity interest or unitrust interest.

As an example, if the value of the trust is $500,000 and you select 10% annuity interest, you would receive an annual payment of $50,000. The unitrust pays out $50,000 the first year, but in succeeding years the amount is based on the value of the fund. If it has increased, you receive more money. If not, you may receive less.

For complete details, contact any recognized charity, or your financial advisor.

How Much Will You Be Earning From Social Security?

Now that those strands of grey that made you look distinguished are broadening, you may want to take a moment to examine the value of all that money you've poured into your FICA (social security) account over the years. Grandboomers can obtain a "rough estimate" of your anticipated benefits by going to www.ssa.gov/retire where a "quick" calculator allows you to input some information and responds with a projection.

On another government front, you may want to know what those US savings bonds you've had for years are worth. You can get that information instantly by going to www.publicdebt.treas.gov/servlet/SBCPrice. Yes, your bonds are actually public debt. This URL takes you to the exact page for the calculations. If you need a tutorial, start with www.publicdebt.treas.gov.

You may be interested to know that the government pays interest on your bonds semiannually. June 1 is one of the two dates. Therefore, you may want to consider redeeming some of those old bonds now. With Alan Greenspan increasing interest rates at each Treasury meeting, the value of bonds has diminished to the point where you're better off investing the funds. in a CD at your local bank.

A word of warning. If you don't redeem your bonds on or around a dividend date, you lose whatever you would have earned between the last dividend and the upcoming dividend. Bonds may be returned for their original cost, plus interest, any time after you've owned them for at least six months.

Social Security Rules Have Changed

Grandboomers may not be old enough to enjoy this new Social Security benefit, but great grandparents certainly can, and Grandboomers will...soon enough.

Until now, retirees 65-69 who earned more than $17,000 in the year 2000 had to forfeit $1 in benefits for every $3 they earned over that amount. If you are 62-64 and earn over $10,080, you have to return $1 for every $2 earned over $10,080.

Now, the penalty has been removed for those in the 65-69 category. Unfortunately, it still stands for the "youngsters".

For those who have already lost benefits this year, you will receive a rebate check from the government and your full allowance from now on.

You might want to check with your legislator to see if there are future plans to waive the penalty for the 62 to 64 year olds.

Prosperity and Family Values Through
the Generations

In this era of unprecedented prosperity many people who grew up poor, or of modest means, now find themselves very wealthy. Some achieved a fortune by athletic prowess. For others, a computer screen lead to untold wealth.

Whether you earned your fortune by hard work, or the luck of a lottery, you may be passing on this wealth to children who may use the windfall to retire from the work force and live off the inheritance. It's probably not what you had in mind. You really want your children to have values. Enjoy life? Certainly. But, there should be an appreciation for what they have and how they use it.

Recently, the Wall Street Journal spoke with some rich parents and asked for their thoughts. Tom Glavine, a pitcher for the Atlanta Braves commented, "I wasn't born with a silver spoon in my mouth. I don't want my kids to feel like they don't have to do anything in life."

Rather than grant his children lump sums of cash, Mr. Glavine has set up a trust that will match each child's annual income up to $100,000. And, there's more. Extra funds are available to help a child start a business. And, recalling that his mother was there every day when he got off the school bus, he offers a monthly payment of as much as $10,000 if his daughter chooses to be a stay-at-home mother.

Billionaires Warren Buffett and Bill Gates subscribe to the philosophy of leaving little more than a lot of incentives. This way, they'll have the drive to make something of themselves.

Incentives are only limited to the imagination of the giver. For some, it may be to help members of the family. In a family with a history of alcoholism, a child showing tendencies toward alcoholism may be offered a premium for staying sober. The same for drugs. Straight pays!

The opposite also holds true. Funds are withheld if the person gives in to drugs or decides to lead the life of a beach bum or spoiled rich brat.

Some of the conditions are based on a real-life incident. The Journal article cites the bequest of a person whose brother was killed in an automobile. Each child received a $10,000 payment each year they drove accident free.

This dolling out of money should also avoid a spendthrift situation where the child loses his or her inheritance by reckless spending. Perhaps the thought is that, before they spend it all, they will come to their senses and learn the value of good money management. One parent decided that his only child would receive half the family estate in a first distribution. After five years, the son's assets would be audited. If the equity were the same or greater than the first distribution, he gets the rest. If not, he forfeits the balance. Rather coldly, the parent summarizes, "The whole purpose is to give my son an incentive to manage his assets well."

Still another parent holds a strong tenant for family values. Therefore, in this will the conditions call for beneficiaries to stay in their marriages. The children, all boys, receive greater distributions if "the descendent is married to the person who is the mother of his children and they are living together in the same house." Can't you envision one or more of his sons living in a home where he and spouse have separate bedrooms and lifestyles, just to keep up an image, and to keep those checks coming in the mail?

That's why there are dissenters to this concept. Some say that even after the parents are dead, the child will feel like he or she is being put to a test. You're pulling strings from the grave. Pretty ghoulish. Others say that the concept may be laudatory, but the motive and intent result in your children doing the right things for the wrong reasons.

Certainly, the average couple isn't well versed in how to make their intentions known, or to be certain the law will uphold what they want to do. Entering the arena is a new form of attorney, one specializing in exactly this type of document. Families that became wealthy want their children to experience the amenities of the good life, but they want them to have values. Some create a limited partnership that must be administered by each family member, forcing them to learn financial values. Others, insist that portions of the trust income be used for charitable purposes so the offspring understand what it means to help those in need.

Because the common denominator here is money, it is difficult not to think in terms of financial value. In the case of Mr. Glavine matching his children's income, for example, what if one of his children wanted to enter religious life? Would that child then receive a pittance, or nothing at all? Or, what if they took a low paying job that was actually more significant to mankind than a sibling who placed a high income above all? Situations such as these show that other consideration should be considered, outside the doors of the bank. Consideration should be provided for a child that chooses an austere life to help others, for that child may put the assets to far greater use than other siblings combined.

This was the thought of one wealthy individual who set aside additional money for a child that choose to become a teacher, including a $15,000 annual supplement to the person's pay.

However, it always comes back to a parent's wish to keep the family fortune somewhat intact. To use it for good and, hopefully, to increase it for the next generation while passing along values gained when the family was lower or middle class. To this end, one trust document contains the caveat: "No descendant shall be allowed to live off this trust."

Giving Money to Your Grandchildren

by Ben Alper

Grandboomers are like their own grandparents. They often express their love for their grandchildren by giving presents, especially on holidays and other occasions. Giving gifts such as toys or candy can be very gratifying since the joy and pleasure the child experiences is so immediate. As children grow older, however, it often becomes more difficult to select an appropriate gift for a grandchild. After all, if understanding the musical and fashion tastes of your children was challenging, it’s probably not going to be much easier with your grandchildren.

Grandparents also want to give their grandchildren a gift that is more practical and longer lasting. Giving money, if done correctly, can be one of the most helpful and important things they can do for their grandchildren, particularly when it comes to helping with their education.

If done wisely and regularly, contributing even a small amount of money, starting when your grandchildren are young, can have a great and long-lasting impact on their lives. The key is to understand the options available to you and, when needed, seeking advice from a reliable financial planner.

If you are just beginning to think about how you can contribute financially to your grandchildren’s future, you might want to ask yourself the following questions:

How much money do you want to give?
Do you want your grandchildren to have access to the money immediately to spend as they see fit? Or would you rather specify that the money cannot be accessed until the child reaches a certain age? Should the money be used solely for educational purposes?
If the money is being invested, should the investment tool be one that is safe and yields small to moderate growth, or should it be more aggressive with the potential of both greater growth and higher risk?
How will your gift affect your taxes as well as your grandchildren’s?

Here is some basic information about giving money to help you get started.

How Much Can I Give?

An individual donor can give up to $10,000 a year tax-free to any individual family member or friend. A husband and wife can give up to $20,000 per individual. Any amount over that limit is subject to a gift tax paid by the donor. You can, however, give more than $10,000 just as long as it doesn’t exceed $10,000 per individual. For example, an individual donor can give $30,000 a year tax-free if $10,000 is given to three individuals.

Custodial Accounts

What if your grandchild wants to spend your $5000 gift on Pokemon cards? That’s why there are custodial accounts. Although your newborn granddaughter may be a shoo-in to eventually win Nobel prizes in a variety of categories, she may not yet be ready to select a good mutual fund.

A custodial account allows a parent, relative, or friend to give money to a minor but also maintain control over the account. A person, usually a parent or close family friend, is then designated as the custodian of the account until the child reaches his or her legal age of maturity. It is the custodian’s responsibility to manage the account and choose how the money will be invested. It is the custodian’s responsibility to administer the account until the beneficiary reaches a specified age (between 18 and 21 in most states).

Another advantage of a custodial account is that if the money is in the child’s name, it will probably be less of a tax burden since it will be taxed at the child’s lower rate. Also, unlike setting up a trust fund, which is a complicated task usually requiring a lawyer’s assistance, setting up a custodial account is very simple and inexpensive.

Different Ways to Give

The following are some of the more popular options available to grandparents for giving money to their grandchildren:

Savings Bonds

Giving savings bonds has long been one of the most popular ways of giving money as presents, particularly since they can be purchased in small denominations. Series EE savings bonds come in denominations of $50, $75, $100, $200, $500, $1000, $5000, and $10,000. The purchase price for each is half the face value. Interest is paid out when the bonds are cashed. Since the federal government guarantees a return of the original cost as well as a set amount of interest, savings bonds are always a very reliable investment. Keep in mind, though, that in times of high inflation they can be a very bad investment (as anyone who bought savings bonds in the seventies can attest). There is no guarantee that they will keep up with the rate of inflation. Thus, it is even possible you could lose money.

In recent years the government has made savings bonds a better investment for education by allowing the income from Series EE savings bonds to be tax exempt if the income on bonds purchased after January 31, 1989 is used solely to pay college tuition.

Mutual Funds

Mutual funds have been the rage with baby boomers. So why not buy some for your grandchildren? Particularly, if they are intended to help pay for a big ticket item such as college tuition. They allow you the flexibility of investing in aggressive growth funds when the child is young (up until junior high school), and then switching over to more conservative funds as the child gets closer to graduating from high school. You can set up a custodial account and designate yourself, your grandchildren’s parents, or a friend of the family as the custodian of the account.

Zero Coupon Bonds

U.S. Treasury zero coupon bonds are popular among parents and grandparents. Zero coupon bonds are discounted Treasury bonds that, unlike regular bonds, do not pay semi-annual interest. You collect the interest when the bond matures. The advantage to this is that you can purchase a bond that matures the same year your grandchild graduates from high school. Or, for example, you could purchase four bonds, one each maturing during a student’s four successive years in college. Though the yield on zero coupon bonds may be nowhere as great as an aggressive mutual fund, they are great way to protect your investment as your grandchild gets closer to graduating from high school.

Pre-paid Tuition

Many states now offer pre-paid tuition programs. While each program has its own rules, they all work basically the same way: They allow you to start saving for tuition to a state college or university at today’s tuition costs. It’s then up to the state to invest your money and make sure it will be enough to cover the costs when your grandchild eventually enrolls.

What happens if the student decides that he or she would like to attend a state college in another state or an expensive private institution? Some states will cover the additional cost of non-resident tuition at another state school, but don’t expect them to pick up the tab for four years at Harvard.

Also, the states will invest your money very conservatively. Do you think you can do better? If so, you could end up with more money and a greater deal of flexibility when it comes to your grandchild choosing a college. If, however, you are like a lot of people, you may value peace of mind over the potential risk that always comes with more aggressive investing.

Education IRA

The Education IRA was recently created by congress. Its name (Education Individual Retirement Account) is confusing since its purpose has nothing to do with retirement. It does, however, work like an IRA. A parent, grandparent, or friend can set up an account and contribute up to $500 a year for any child under the age of 18. The money in the account grows tax-free until it is withdrawn for college expenses. Only the amount that exceeds qualified college expenses can then be taxed. You can set up an Education IRA in addition to the IRA to which you normally contribute $2000 annually.

There are a few strings attached, however. You cannot contribute to an Education IRA if your adjusted gross income reaches $150,000 for married taxpayers or $95,000 for single taxpayers. Also, you cannot contribute to an Education IRA if you are already contributing to a pre-paid tuition program.

529 Plan

A 529 Plan is a newly created state-sponsored college saving plan. (529 is the section of the Internal Revenue Code by which it was created.) Currently, only a few states have 529 Plans, but that will change shortly.

A 529 Plan is allows parents or grandparents to set up an account in the name of a child who becomes the beneficiary of the account. The earnings grow federal income tax-deferred until the money is withdrawn to pay for qualified college expenses such as tuition, books, room, and board. At this time, the beneficiary is taxed at his or her rate, which will usually be much lower than that of the parent’s or grandparent’s. Since the money is not in the child’s name it has less impact on their eligibility for financial aid.

Unlike pre-paid tuition plans, the money can go towards paying expenses at any accredited post-secondary institution in the United States.

Although the participant does not have any say in how the money is invested, each state invests differently. North Carolina, for example, tends to be more conservative than New Hampshire and Massachusetts.

In the case of Massachusetts and New Hampshire (both funds managed by Fidelity Investments), the money is invested in one of eight portfolios, depending on the age of the beneficiary. The younger the beneficiary, the more aggressive the investments. As the age increases, the invested portfolios become more conservative.

If the beneficiary receives a scholarship, the funds can be withdrawn without penalty. If the beneficiary doesn’t use all the money in the account or even chooses not to attend college, the money can be transferred to another beneficiary without penalty.

Any U.S. resident can establish a 529 plan. An individual can contribute up to $50,000 ($100,000 per couple) just as long as the individual makes no additional contributions during the next five years. Family and friends can open up accounts for a beneficiary, just as long as they don’t exceed a total of $100,311 per beneficiary.

Does Your State Have a U. Fund?

The college loans you took out to finance higher education for your children have long been paid off. Now, you have happy grandchildren, and you're in a position to invest in their college tuition. What's the best way to help?

Two New England states...Massachusetts and New Hampshire...along with others, have developed the U. Fund, which is known in investment circles as a 529 Plan. Education costs are rising faster than inflation and college aid is not as available as it was when you were paying the tuition bills.

To help meet future college expenses, U. Fund states allow grandparents (and parents) to establish IRA-like investment accounts in the name of the child. State and Federal taxes on assets in these accounts are deferred until the child reaches college age and funds are withdrawn for tuition and other related expenses like room, board, books, etc. At that time, the money will be taxed at the student's tax rate, presumably significantly lower than that of the contributor.

This money can be used at any college. If you live in Massachusetts, you may recall the Massachusetts U. Plan which followed a similar plan, but limited use of the funds to a Masschusetts school. That plan, in fact, is still available in Massachusetts...along with the new U. Fund.

Conservative Investment

There are some limitations on U. Fund accounts. Each state determines how the funds will be invested...opting for conservative investments like bonds or stock/bond mix mutual funds. You do not have discretion over the investment of the contribution. In some cases, the state determines the placement of the entire amount. In others, you have a choice of a limited number of options.

Limiting risk limits potential loss. However, it is one of the minus points of the program. Investors may prefer a more aggressive program and/or to manage their own account. Only time will tell which of these choices is better from a tax standpoint.

(We'll have more on U. Fund accounts soon on Grandboomers.com including tax benefits for grandparents and transferring funds from one child to another. Check back frequently for this important new posting.)

U. Fund -- Grandparents Helping Grandchildren Go To College

In our first article on U. Fund (529 Plan), we noted that a number of states now offer conservative investment programs that permit grandparents (and parents) the opportunity to put aside tax deferred money for a grandchild's higher education. Email us if you missed that item and we will send you a copy.

Here is more information regarding the U. Fund opportunity.

Placement of funds into a U. Fund provides grandparents with significant estate planning benefits. Currently, the limit of what a parent or grandparent can give a child as a cash gift in a year is $10,000. After that, taxes kick in and certain estate tax benefits are lost. However, U. Fund permits the grandparent to give the child up to $50,000 in a single year ($100,000 per couple). If you select this option, you can add no more money to the account for five years. The advantage is that the funds start to work immediately and there are also estate tax benefits.

Is Your Grandchild Not Going To College?

What happens if the child ultimately decides not to go to college? It is an easy step to transfer the account from the initial child to another child. There is no penalty for this transaction. You can even move the funds to your children or their spouses (that's right, the grandchildren's parents), without penalty. However, the funds must be used to finance higher education including, as noted earlier...tuition, room, board, books, etc.

Early withdrawal of funds, or use of the funds for anything other than college costs results in a tax bill based on your tax rate, plus a 10 percent penalty.

The U. Fund concept is best applied when it is used by grandparents (or parents) for very young children. It insures there will be some money available when the child is ready for college and creates a longer period of investment. Investing in a U. Fund account for a child who will enter college within a few years produces negligible savings.

While not perfect, U. Fund demonstrates states have taken an interest in helping you finance your grandchild's higher education. Grandboomers.com recommends you contact your state government offices to see if the program exists in your state. If so, you can get immediate details. If not, it might be something to recommend to your local legislator.