Some trusts beat the tax-time blues
There's nothing like tax-filing time to make people look for ways to save taxes. After one look at bills for 1982 income taxes, people become determined to find ways to cut their '83 tax bills.
This may explain the growing popularity of tax-exempt unit trusts, fixed portfolios of long-term municipal and government-agency bonds. Sales of these trusts have continued to set records, reaching $13.5 billion last year, and continuing at a $15 billion annual pace so far this year.
The fastest growing part of this business is the single-state trust. For people living in more than a dozen states - including California, New York, Massachusetts, Minnesota, Michigan, Pennsylvania, and New Jersey - the interest from these trusts is triple tax-exempt, that is, free of federal, state, and city taxes. Your broker can give you a complete list of these states.
This segment of the unit-trust market boomed from $735 million in 1981 to $3. 3 billion last year. The states offering triple tax-exempt unit trusts include the most heavily populated (and often the most heavily taxed) ones in the nation , but even if you do not live in one of them, you can still benefit by locking in yields and federal tax exemption.
Lately, says John C. Merritt, president of Van Kampen Merritt, a Philadelphia brokerage firm, interest on these unit trusts is running at about 9 1/4 percent, down slightly from a few weeks ago, but still respectable, considering it is all tax-free. For a person in a 35 percent bracket, this is equal to almost 15 percent in a taxable investment.
A federal tax bracket of at least 30 percent is the most efficient income level to benefit from the trusts, Mr. Merritt says.
Another attraction of these investments is their ability to lock in interest rates at a time when most economists expect rates to continue dropping through this year, at least. So for now, at least, the trusts make more sense than they would at a time of rising rates, when investors can lose more in the principal value of the trust than they save in taxes.
Van Kampen Merritt is one of about 15 brokerage firms that sponsor, or package, these unit trusts for investors, though you can buy them from almost any broker, Mr. Merritt says. Other firms packaging trusts include Merrill Lynch & Co., John Nuveen & Co., Bear Stearns, and E. F. Hutton.
There are risks, Mr. Merritt points out. In addition to the possibility that interest rates could go up again, leaving an investor with a locked-in portfolio of low-yielding bonds, there is increasing risk in the bonds themselves. Part of the reason yields on municipal bonds have stayed higher than many other rates is that some investors see more risk in them than they once did. Indeed, Mr. Merritt points out, the ratings of many city and state agencies that issue bonds have been lowered in recent years to reflect this higher risk, so the issuers of bonds have to offer better returns if they want to sell them.
Still, he notes, investors in a trust can liquidate any time they think they are not getting a competitive yield, or if they feel the risk of the bonds is more than they can bear. But the broker may pay less than the face value if interest rates have risen.
For most of these trusts, the minimum investment is $5,000, and it is possible to get into one for as little as $1,000, though Mr. Merritt advises against it. For one thing, the interest on a $1,000 investment would barely be enough to cover the sales charge that ranges from 3.5 to 4 percent. For another thing, he says, ''If you can only invest $1,000, I question whether you have enough income to make it worthwhile.'' However, the fact that many of the other firms sell packaged unit trusts for $1,000 - and a few as low as $750 - indicates there is a market for lower minimums.
While the service charge may seem high to someone who is used to dealing with a no-load mutual fund, you do get more than a selling job for it. For one thing, a broker can find the best-yielding bond packages among all those being put together by various other brokers. Also, the broker that holds the bonds will clip their coupons for you and periodically send you a check. The sales charge is less for purchases over $100,000.
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