Answers to the Major Concerns That Affect Your Finances

Jan. 1, 1997
Tax-Free Municipal Bond Funds . . . are not totally tax-free. Dividends from municipal bond funds may be subject to state or local income taxes. A part of each dividend may represent taxable income or capital gains that the fund realized. If you sell shares in the fund at a profit, your capital gain is taxable.

Hugh F. Doherty, DDS, CFP

Tax-Free Municipal Bond Funds . . . are not totally tax-free. Dividends from municipal bond funds may be subject to state or local income taxes. A part of each dividend may represent taxable income or capital gains that the fund realized. If you sell shares in the fund at a profit, your capital gain is taxable.

Mortgage Prepayment Traps

Avoid biweekly mortgage plans that charge fees-sometimes $300 or more-as a one-time charge plus an annual renewal fee. A mortgage-holder makes half of his/her mortgage payment every two weeks to a mortgage-payment firm, rather than to the lender. Then, the firm pays the lender at the end of the month. It would be better for you to pay down your mortgage principal more quickly by doing it yourself at no additional cost. Simply send a prepayment of principal with your regular monthly mortgage check, being sure to indicate that the second check should be applied to the principal. Watch your mortgage statement to be sure that the prepayments are credited correctly. Make sure that your mortgage agreement does not have a prepayment penalty.

Downside to Joint Ownership

Higher estate taxes are the downside to joint ownership. Anyone can leave $600,000 tax-free to beneficiaries other than a spouse. Over this amount, estate taxes start at 37 percent. One solution is a bypass trust: Upon the death of a spouse, $600,000 goes into a bypass trust that is earmarked for a spouse, children and/or other heirs. The trust money is available to the surviving spouse while he/she lives. Then, it passes to the heir`s estate tax-free. Each spouse passes on $600,000 tax-free for a total of $1,200,000. There is a problem: By law, property that is jointly owned passes to the joint owner and cannot fund a bypass trust, so it is better planning when major assets are owned by individual spouses. Consult your tax adviser for additional information.

Real Estate Investment Trusts-A Good Investment

Are Real Estate Investment Trusts (REITs) a good investment? They are a good hedge against tough times. Real estate values tend to remain steady when the financial markets falter, so it is good to have up to 10 percent of your portfolio in this sector. In addition, real estate is not nearly as expensive today as corporate stocks. Therefore, there is much less risk and greater value. I do not recommend buying REITs directly, though. They are relatively undiversified, and finding a good one requires extensive research. You are better off with a no-load fund that buys REITs.

Some REITs for your consideration would be:

- Cohen & Steers Realty Shares-Buys scores of REITs representing different regions of the country and different types of property, from apartment buildings to office towers. Performance: 16.22 percent. Minimum initial investment: $2,000. (800) 437-9912.

- Fidelity Real Estate has been managed well for the past 10 years by Barry Greenfield. Performance: 13.42 percent. Minimum initial investment: $2,500. (800) 544-8888.

Asset-Allocation Funds Are Worthwhile

Asset allocation funds are appropriate for conservative investors and for those who cannot afford to own a large number of funds to get the diversification they need. Because these fund managers can move assets in and out of stocks, bonds and cash, according to their views of the economy and the markets, investors receive maximum diversification in a single fund.

Some of the Asset-Allocation Funds for your consideration would be:

- Value Line Asset Allocation. Performance: 20.4 percent (since inception, August 24, 1993, through September 30, 1996). Minimum initial investment: $1,000. (800) 223-0818.

- Vanguard Asset Allocation. Performance: 13.45 percent. Minimum initial investment: $3,000. (800) 523-7731.

Researching Life Insurance Saves Time and Money

Insurance companies are well-known for their misleading sales practices. Prudential Insurance Co. of America recently agreed to pay at least $410 million to settle a class action suit brought by policyholders, who argued that the company tricked them into buying costly, additional life insurance coverage they did not need. Paine Webber is being sued for misleading an investor by selling him universal life insurance as an IRA alternative.

What is a consumer to do? One answer: use the Internet. Quote services provide prices on many term insurance policies. Other sites offer educational information on various insurance products and credit ratings on individual insurance companies. A good quote site would be: QuickQuote at or call (800) 867-2404.

If you have any questions about the above information, or our Florida workshops, do not hesitate to call at (908) 449-3225.

Hugh F. Doherty, DDS, CFP, is a national lecturer, consultant to the health-care profession, workshop leader, author, management and financial adviser and Certified Financial Planner. For further information, contact Dr. Doherty at (908) 449-3225.

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