California Bar Journal
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funds often involve market risk, including fluctuating returns and possible loss of principal.)

Many people have money in the bank, yielding very low (and taxable) rates. In some states, there are some money market funds that offer better potential yields, and in some cases the interest is totally tax free. Further, there may be no commission. This is an investment worth considering.

CDs and bank deposits offer a fixed interest rate and are FDIC-insured. Money market mutual funds are neither insured nor guaranteed by the U.S. government and there can be no assurance that they will be able to maintain a stable net asset value of $1.

Right now, can you write down what percent of your 401(k) plan, IRA and mutual funds are in stock? Is it U.S. stock or foreign? Big blue chip companies (IBM, GE, Microsoft) or small new companies? Are the bonds U.S. Treasury, corporate, junk bonds, tax-free or foreign? Should you be in insured tax-free bonds instead? What percent did your funds grow last year? How did they do compared with their benchmark index for 1998 or the last five years?

When is the last time your stockbroker/financial planner/investment advisor called you? When is the last time your portfolio was readjusted? Who is the beneficiary of your IRA, 401(k) or 403(b) plan? Of your life insurance plan? Do you have a will? A trust? Where is it? If you are married, do you and your spouse hold title to joint assets as joint tenants, community property, in trust or no idea? There could be big, expensive consequences to doing this simple step wrong.

Get a will if you don't have one. If you have a net worth of more than $500,000 or so, you should consider a trust. Even if you don't, you should consider having a durable power of attorney for both health care and asset management.

Who gets your stuff when you die? Do you want some of your cash, retirement plan, insurance or your house to go to a charity or some other tax-exempt organization when you die? If you set it up now, you might still be able to get a tax deduction for 1999.

Are you the owner of your life insurance policy? Not a good idea. Its value is included in your estate when you die. This might not matter if you don't have a large net worth, but if you do, consider putting your policy into an Irrevocable Life Insurance Trust with the help of a local estate planning lawyer.

Long-term care insurance is very easy to own. It takes just two things: money and health. The last three people who wanted me to get them LTC insurance were rejected based on prior health problems. The cost of a year in a nursing home is about $50,000 per year, an amount most people can ill-afford over the long term. You insure your car and your house. Why spend down to poverty for federal coverage when you can pay a bit each year for an insurance policy which will pay for long-term care in an institution or possibly for home health care as well?

Nationally, Medicare pays only about 5 percent of LTC expenses. The rest comes from you, the patient, Medicaid or private insurance.

STEP TWO. What are you invested in? Is your retirement plan (IRA, 401(k), tax-deferred annuity, profit-sharing plan, etc.) properly invested? My personal bias is that you should be in stocks. Several different mutual funds, U.S.- and Europe-based, large, small and medium-sized companies, and both value- and growth-oriented. (International investments involve special risks including economic and political uncertainty and currency fluctuation. Small-cap stocks tend to experience greater volatility than large-cap stocks. Unlike equities, bonds offer a fixed interest rate and return of principal if held to maturity.)

Historically, stocks have far outperformed bonds, although past performance does not guarantee future results. There will be years when the market crashes, as it did in 1972-73. Just hold on.

What is a bond? A bond is an IOU. You lend the money, get interest payments on it, and eventually, if you buy an individual bond, it matures. Perhaps you were raised with Depression trauma, or inherited it from your parents, and feel that bonds are the "safe" place for you money. But it is possible to lose money if you buy a bond. When interest rates go up, the value of your bonds will go down. If you have to sell them, you'll take a loss.

During the late 1970s, people lost lots of money in bonds and those days may well come again. So far, 1999 has been a losing year for many bonds and bond funds.

Stocks have more volatility and growth potential, so if you want to avoid the big fluctuations, both up and down, stay with bonds. As for certificates of deposit, remember that in 1980 you could get a CD yielding about 12 percent and now they yield about five percent. Highly taxed individuals like attorneys should consider tax-free municipal bonds issued in their state of residence. The interest on these bonds is absolutely free of federal or state tax (alternative minimum tax may apply). You can buy California municipal bonds, now yielding competitive rates, depending on cost, yield, maturity and quality. There are some bonds available that are AAA rated and insured to pay you, even in case of catastrophe. Compare this with the tiny, and taxable, interest earned on a bank CD or bank checking account or Treasury bills you are rolling over.

If you have been burned by stockbrokers in the past and you're looking for a relatively safe tax-free and insured cash flow every year for the next 10 or 20 year, it's easy for you to achieve.

STEP THREE. Tax-free income, tax-deferred and tax credits. If you want tax-free income, look to municipal bonds issued by your state, as discussed in the previous two paragraphs. There are mutual funds of state-specific municipal bonds which are both federal and state tax-free. It's the interest that is tax-free. If there are any capital gains, those are still taxable. And, yes, the price of funds varies every day, just like with individual bonds.

If you want tax-deferred growth of your capital, you should consider a tax-deferred variable annuity. You put your money - anywhere from $1,000 to millions - into a TDA and invest it into a mix of investment sub-accounts (similar to mutual funds) composed of stocks and bonds, as you wish. It's somewhat like mutual funds linked with an insurance company: Tax-deferred growth for as long as you keep it in the TDA; additional fees and/or tax penalties if you withdraw money before 59 1/2. There are tax issues if you die with money in it, and ordinary income taxes need to be paid by the beneficiaries when they get their share. It's like an IRA or 401(k), but you can put in as much as you like. The investment sub-accounts involve market risk, including fluctuating returns and possible loss of principal.

There are annuities out there that will add 3 to 5 percent to your variable annuity investment, directly into your account, as soon as you open a variable annuity with them. These deals are one-time additions to your investment and they generally involve a large number of conditions - make sure to read the prospectus carefully. The annuities manage millions of dollars, have been around for decades and have hired companies like Goldman Sachs, Janus, Solomon Brothers and J.P. Morgan to help manage your money. There is no commission and there is tax-deferred growth until you withdraw the money, many years down the road. However, they do have high management fees and you have to pay for the death benefit.

Rolling over T-bills or CDs? You pay tax on those every year and are not getting the possible benefits of being in the stock market. Consider an annuity. As the end of the year approaches, there will be countless articles published about the evils of dividend and capital gain distributions from mutual funds. In an annuity, these have no effect on you because they remain inside the annuity envelope. You decide when you want the income and can select payments for 10 or 20 years, or for as long as you (and your spouse) live.

Another interesting option is variable life insurance, which will pay money out when you die, and the money you invest into the policy also gets to be invested into your choice of mutual fund-like investment sub-accounts composed of stocks and bonds. The proceeds pass to the beneficiaries income tax-free, so it has some tax benefits over the TDA. Again, the investment sub-accounts involve market risk, including fluctuating returns and possible loss of principal. Variable life also typically involves higher fees than mutual funds. Further, loans taken against them may decrease the death benefit.

Tax credits are often in the form of housing credits (which could be Section 8, very low income housing, or Section 42, moderate income housing). These should be considered by individuals who earn more than $100,000 a year. It's a long-term investment, not easy to sell, but, unlike a tax deduction which may give you a write-off of about 40 cents on each dollar spent, the tax credit will hopefully and eventually give you a dollar off your bottom line on your 1040 for every dollar invested over the life of the investment.

Now is the time to review your investments and spend some time talking to a financial planner who is not the one you now use. Consider consulting someone at a small firm rather than a large stockbrokerage whose brokers sell products with commissions or fees.

A fee-based planner should be an "investment advisor," with a form ADV on file with state and/or federal agencies describing hourly fees, educational background, work history, criminal history (if any) and other details. A typical CPA is not trained as a financial planner. Nor is the certified financial planner (CFP) designation a guarantee of quality. It is not a license regulated by any state or federal agencies. There are many excellent investment advisors and financial planners who are not CFPs.

Be sure you have a will and perhaps a trust. Is your retirement plan in the right things? How is the mix of stocks, bonds, cash and overseas investments? How did it do in 1998 and 1999? Do you have a lot in cash, awaiting the next "correction"?

Consider long-term care insurance now if you are healthy and have the money for a policy. If you think you will be the one in two or three people who do not need some form of LTC during their life, there is available life insurance that incorporates a long-term care insurance benefit in the policy.

As a financial planner and stockbroker, I'm in the only business where, when I'm having a sale, potential clients run away. Market timing doesn't work. If you think the price of a car, a house and the stock market will be higher in five or 15 years, today is the day you should be investing. Today is a good day to take action.

Robert Berend is a California attorney, investment advisor, stockbroker, lecturer and author. He can be reached at 510/527-5332, or He offers securities through FSC Securities Corporation (member SIPC).