Financial Q&A: Some alternatives for CD investors

Submit your question to Steve Dinnen at: money@csmonitor.com

from the August 25, 2008 edition

Q: I have a $50,000 CD earning 5.02 percent interest that will mature in September. I would like to keep the interest and reinvest the $50,000. I'm not interested in anything very risky and would consider another CD, but will probably earn less interest. Do you have any recommendations? I am 73 years old with no bills and own my own home.

F.H., via e-mail

A: With interest rates not moving much on CDs and inflation in food and fuel prices, Carlos Lowenberg Jr., a financial planner in Austin, Texas, tells us that income is indeed harder to come by. Further, he says, retirees typically look to bank CDs for safety, many times not realizing that there are other options with safety and guarantees.

For instance, Mr. Lowenberg says, insurance companies issue fixed annuities that typically pay rates similar to longer-term CDs. What's more, interest can be paid out or left to accumulate tax-deferred. It's important to choose a company with the highest ratings and to understand that there is far more complexity to an annuity than a CD.

Another option is a single premium immediate annuity (SPIA). SPIAs essentially are guaranteed income contracts from insurers, typically for the life of the annuity holder. A 73-year-old male could buy $2,500 in annual income with a $25,000 SPIA. With these financial products, longevity is a plus.

You may also want to consider taking a little risk with high-grade corporate bonds, he says. They can provide a higher income, but they fluctuate in value.

Q: Reviewing the real estate sales in the local newspaper, I often see the most expensive properties are bought and sold by trusts. Are these mostly tax dodges so that the rich folks avoid paying taxes on real estate transactions? If not, why don't we all want to establish a trust and funnel all our assets and income into it?

R.W., North Little Rock, Ark.

A: Most real estate transactions involving a trust are revocable living trusts, says Joe Taylor, a fee-only financial planner in Myrtle Beach, S.C. These trusts typically are established to ease the transfer of property upon the death of the owners. A revocable living trust does not avoid or delay income taxes on real estate transactions, but it does have other benefits that you may find attractive.

At death, assets that transfer according to a will are subject to public notice, probate taxes, and the delays of the probate process. Assets that transfer by a trust avoid probate, but not estate taxes.

One of the benefits of using a revocable living trust is to protect the trustee's privacy, adds Mr. Taylor. Assets that transfer by will are a matter of public record, while assets that transfer by trust are not. Another advantage of using a revocable living trust is to keep property in the trust out of probate court. This saves on probate expenses, which can be substantial, depending on the state in which you live, and allows the property to transfer to your heirs without the delay (usually about nine months) of the probate process.