Smart Money: 'Spendthrift trust' can benefit daughter, grandchildren

Bruce Williams is a national radio talk show host and syndicated columnist

Dear Bruce: Our estate is in trust. We own two rental houses and our main residence, all free and clear.

Upon our death, our will states that our three houses are to be sold and the proceeds to be invested in something long term for our daughter's benefit.

She will receive the investment income until her death, and then our living grandchildren will share and share alike. We are thinking in terms of a long-term bond. The estate should be worth in the neighborhood of $600,000. What would you suggest? T.T., Las Vegas

Dear T.T.: You mentioned that your estate is in trust and then tell what the will dictates. Ordinarily, the trust would be set up with your clear intentions stated in that trust, such as you have outlined. A will could be set up the same way, but I don't know that there is a need for both.

This is not to say that you should not have a will, because you should. If, in fact, all of your assets are inside the trust, then the trustee will make the determination upon your demise.

There are many long-term bonds that you can purchase to accomplish your goals. It would seem to me that a competent broker would be the way to go to make the appropriate choices.

I take it that you are concerned that your daughter might be a spendthrift and that's why the long-term investment. You also might explore establishing what's called a "spendthrift trust" where the trustee will make various determinations as to how the money is to be invested, as opposed to making one decision for 25 years or more in advance.

Generally, that type of an arrangement should yield a higher return for your daughter's benefit.

Dear Bruce: I'm a first-time stock market investor looking to make a small investment. I'm interested in seeing what you think of WorldCom, as the price at the close of business is almost nothing. I was thinking about spending $500 and then seeing what happens. What would you recommend? Should I use a broker or the Internet? A.C. e-mail

Dear A.C.: Hold on to your money. The smart money never invests in bankrupt companies.

There is a possibility that they could come out of trouble and the stock could go up, but you have a lot more favorable odds shooting craps in Las Vegas or Atlantic City.

If you're going to get into investing, then start investing in solid organizations. Most mutual funds require an initial $1,000 investment, after which you can invest as little as $100 at a time, a far wiser way to go. The fact that this stock can be purchased for pennies and at one time listed for a great many dollars doesn't indicate value. The professional investors almost never do what you are proposing.

Dear Bruce: A few years ago, my husband read a book about making money and decided that we should mortgage our paid-for home (worth about $160,000) for as much as we could, invest the money and repay the loan with the earnings from the investment.

I know that owning your own home is something you have said is not a good use of dollars.

At the time, my husband was not well and had had many life-threatening illnesses. I am a cautious person and nixed the plan.

In light of my husband's death a year or so later and the recent volatility of the stock market, was my reluctance the correct stance to take? G.J. e-mail

Dear G. J.: Twenty/twenty hindsight is a commodity in very long supply, and it would appear that your judgment was good.

I have never said that owning your own home free-and-clear is not a good use of dollars. I have recommended that young people take advantage of low-interest rates such as are available today and then invest the money, taking into account both the tax deductibility of interest paid on most mortgages. This, over a period of time, is a good plan.

Clearly, those people who went into the marketplace in the latter part of the last century and the first couple of years of this one took a beating. For an older person, this may be a fatal disease, given the fact that they don't have to time to recover. But someone in their 30s or early 40s has 15 or 20 years to recover.

I believe that investing the equity in your home in the marketplace makes a great deal of sense, allowing of course for a cushion of mortgage-payment money in the event there is a hiccup in the marketplace. You might observe the recent events in the marketplace were not a hiccup, but rather a severe case of indigestion. Nonetheless, over the long haul, the market will prevail.