Long term bonds or Preferreds???

[modhatter]

I am in a quandry. I have cancer and prognoses is not good. I am in process of setting up a Trust for my son and need to create an income stream for him. He is not disabled enough to collect any sort of gov. disabillity, but disabled enough to not be able to hold a job due to severe attention deficit. He can't follow instructions well and always winds up being let go cause he messes up no matter how hard he tries, plus there are other issues.
I do plan on purchasing a portion of dividend stocks, but it is hard to do so now with current high valuations on most. So I am concentrating on the income portion. I need to generate at least $36,000 a year for him. (out side of stocks) I am not interested in bond funds right now, because I need monthly income. I have looked at the Lehman Bros 25 yr bond paying 7%. That is a long time (25 yrs) but I think they will survive the sub prime business ok, and long term in this case is good as my son is only 28yrs. old. He will be alone, as his father died and has no brothers or sisters.

Like your thougts on both preferrds and long term bonds. Preferds pay nicely, but my main concern with them is they can stop thir dividend payment (up to 5 yrs) if need be, and he would be depending on this income than I would or I should say my son would be in a pickle. Treasury's and tips just don't pay enough, especially with inflation and now is not a good time for bond funds.
Please anyone with some "income oriented experience" give me some guidance and thoughts on the above.

I should add, I am not contemplating just one bond or preferred, but maybe probably fifteen to twenty different ones over the next year or so for diversification and spreading risk.

[chinaco]

Sorry to hear about your health problem. I hope things are tolerable. Hang in there.

About your question:

Careful... Can the bonds be called?


It sounds like your son may not be capable of making/managing investments. You could put your assets in a trust to keep him from doing something that does not make sense.

Personally, I would consider using Mutual Funds. It will handle the diversification... which I think will be needed.

Consider taking some portion of the money and put it in a Target retirement fund (on auto-pilot for growth) for old age.... Say target 2040 or target 2045? 100k that earns an avg of 8% would be about 1.3MM in 35 years. That would help supplement SS.

As far as income till retirement, You could consider sort of equity. How about something like the VG Wellesley (40/60) or Wellington (60/40).

I think you could stipulate the amount he could withdrawn in a year.

[haha]

Modhatter, I am sorry to hear of your health setback. Good luck to you- sometimes people do much better than their prognosis would suggest.

Ha

[brewer12345]

Mod, sorry to hear of your troubles. I think you have the right idea with a trust. You should talk to a lawyer and either find someone you are comfortable with to be the trustee or hire a trustee. Banks tend to be fee hogs for trust duties, so I would look into Vanguard and TIAA-CREF, both of which I believe have trust departments.

As for what the trust invests in, I think that you are barking up the wrong tree. If you buy 15 or 20 long dated bonds, you have just re-created a bond fund with less diversification and lots of duration/inflation risk. In stead, I would seriously think about simply investing in a traditional balanced portfolio that is maybe 60% equities. If you look at the very long term performance of the old line balanced funds, they have churned out 8% or so over multi-decade periods. If you don't want to do an all-in-one solution, you could roll your own pretty easily from, say, Vanguard's offerings.

Your son will be looking at an extremely long withdrawal period. Whatever you might choose that would be appropriate right now (Lehman bonds, preferreds, whatever), most assuredly will not be a good idea in 5, 10, 20 or 30 years. I think a careful trust design with the aid of an experienced estate lawyer and a good/sophisticated investment advisor would be a lot more sensible.

Saluki, does your firm do this sort of thing?

[2B]

This is a situation where the availability of trusted trustees will determine the right path forward. If you have capable younger family members that can serve as trustees, you can get a family driven trust with 2 or 3 making the decisions with provisions to replace themselves as they age.

If there aren't any relatives to trust, you must either look to a trust company or a large financial firm that will survive past the friendly person you might start dealing with now. That will cost at least 1% of assets and lower SWR.

Good luck.

[Brat]

Sorry to hear about your concerns for your son.

I agree with others that a balanced fund (Wellington might be a good choice) would be the way to go. Forbes just published it's mutual fund report so you could start there.

The choice of trustees and the terms of the trust are critical. Contact an EXPERIANCED estate lawyer for guidance. You could direct that the trustee purchase an annuity through Vanguard with a cost of living feature at some time in the future and then let the trust expire.

The remember that trust will be paying income taxes on it's gains and there are typically administration expenses. Even with a low cost mutual fund costs may not be incidental.

One option would be to have the trust purchase a condo for him to live in and purchase an annuity that would be enough to pay the taxes and maintenance fees as above. Put the title in the trust name so he couldn't get cute with a personal line of credit against the place. Just a thought... BTW, the residence wouldn't preclude him from most assistance programs should he need them in the future.

[Brat]

Sorry to hear about your concerns abut your son.

I agree with others that a balanced fund (Wellington might be a good choice) would be the way to go. Forbes just published it's mutual fund report so you could start there.

The choice of trustees and the terms of the trust are critical. Contact an EXPERIANCED estate lawyer for guidance. You could direct that the trustee purchase an annuity through Vanguard with a cost of living feature at some time in the future and then let the trust expire.

The remember that trust will be paying income taxes on it's gains and there are typically administration expenses. Even with a low cost mutual fund costs may not be incidental.

One option would be to have the trust purchase a condo for him to live in and purchase an annuity that would be enough to pay the taxes and maintenance fees as above. Put the title in the trust name so he couldn't get cute with a personal line of credit against the place. Just a thought... BTW, the residence wouldn't preclude him from most assistance programs .

[Brat]

Sorry to hear about your concerns abut your son.

I agree with others that a balanced fund (Wellington might be a good choice) would be the way to go. Forbes just published it's mutual fund report so you could start there.

The choice of trustees and the terms of the trust are critical. Contact an EXPERIANCED estate lawyer for guidance. You could direct that the trustee purchase an annuity through Vanguard with a cost of living feature at some time in the future and then let the trust expire.

The remember that trust will be paying income taxes on it's gains and there are typically administration expenses. Even with a low cost mutual fund costs may not be incidental.

One option would be to have the trust purchase a condo for him to live in and purchase an annuity that would be enough to pay the taxes and maintenance fees as above. Put the title in the trust name so he couldn't get cute with a personal line of credit against the place. Just a thought... BTW, the residence wouldn't preclude him from most assistance programs in the .

[saluki9]

Modhatter

The adivce you have received so far is leading you in the correct direction.

Your situation is very common, I run into it all the time with our clients. You should certainly seek out the services of a qualified estate planning attorney. This is not an attorney who does estate planning, but one who primarily does it. You do not want somebody practicing on you.

Most likely he/she will suggest a will and living trust. Written into the living trust will be the creation of a testamentary trust upon your passing. This can be used both for maximizing your estate tax exemption and controlling the distribution of monies to your son. I will let our resident attorneys correct me on the legal details. One important thing I think you should consider is creating with they attorney (through your trust) a series of milestones to give your son either more money or more control. Examples include a certain age, educational milestone, holding a job for 6 months, etc. I would think it would be your goal to see your son become independant and take control over some of the challenges he has had.

You will also need a trustee to control the trust distributions. In many cases this can be a family friend, or your attorney. Just make sure that you provide very specific information about who will make the investment decisions and where you would like the assets custodied.

As for the portfolio, I think you are focusing too much on one asset class. Choosing an asset allocation for you is tricky. According to your own situation you should really be in a conservative allocation with a lot of liquidity. Your son on the other hand most likely will live for a long time and need income from the portfolio. Buying only preferreds and spedning the income is just a guarantee that inflation will eat him alive.

Brewer is correct in that you should focus on a balanced portfolio (typical 60/40) if you expect it to last long enough to support your son.

[roadtoharvard]

I've no advice for the investment side but I wish you luck battling with the cancer. My dad was given 6 months to live and he died 7 years later.

[modhatter]

Thank you all for your thoughtful replys and good wishes. My total portfolio when all real estate is finally sold should be in the neighborhoodd of $1,800,000. I was looking to put about $700,000 in some form of fixed income to generate$36,000 not including income taxes for my son to live on such as bonds, preferred, etc, and the remaining ($1,100,000)in stocks of which I prefer a large portion of dividend stocks as well. None of this is tax sheltered unfortunately. I did speak with one bank, which is a smaller bank, with more flexabillity than the larger ones. They charge 1% for handling the invelments and administering monies, pay bills and see that taxes are done at the end of the year. I don't know about any extra fees though. But if the portfolio produced total income with bonds and dividend stocks of about $70,000 a year, I was looking at it this way $36,000 for my son, $17,000 for taxes, $18,0000 bank fees = comes to $71,000 total, with just the stock appreciation part to hopefully grow over the years. The problem is that $71,000 does not equal a total withdrawel of 3%. It equals 4%, which I don't think in current market conditions will withstand such a long time frame.

I fear the coming decades may not be so kind to the stock market, and don't think such a portfolio could withstand a total 4% withdrawel over such an extended period. I was originally thinking before my diagnoses of cancer that a 3% withdrawel would me more prudent, but with 1% alone taken out in bank fees, plus fund fees, amd income taxes, that would leave my son with about 1%, so I am very concerned.

I did speak with one estate planning attorney (who specializes in setting up trusts, but he first quoted me a cost of about $45,000 and when I gasped it suddenly dropped to about $24,000. Then I spoke with a second attorney and he said to do a Living Trust with will that is not complicated would run around $1,200 pluss filing fees for each deed ($300 ea) that needs to be transferred into the trust (until sold)) But that just covers 4 hours work, as he charges $300 an hour, and it depends on how much time it takes him, so I know it's not going to be any $1,200, He was the one that recommended the bank to me to talk to.

I hate the idea of paying the 1%, but as you mentioned my son nor any of my family members are equiped to handle the investments for him. I would have to hire someone for that. My younger sister is about 52 yrs. old, so she will not be around long enough. If the bank handles the investment end, plus my sons payments, bills and taxes for 1%, then I guess that's not unreasonable, but I don't know about extra charges. They are sending me out information.

My biggest concern with bond type funds now were that I don't think it a good time to be buying them, as in the long term interest rates will have to climb and what I'm trying to do is avoid having to have them liquidate stocks or bonds when they are down, hense my desire for actual fixed income with a mixture of dividend stocks. I am really aganizing over this and so worried about him. I thought I would have a much longer time with him, hence my investment would not have had to last so long.