A few sample questions...

Dear Bedda:

I am 22 years old and a senior in my last semester of college. My parents can afford to send me to an expensive private college but I chose to move home my sophomore year to be close to my boyfriend. My college is paid for from a UTMA savings account my parents set up for me when I was a baby. If I had stayed at the private college, the college fund would not have been enough and my parents would have had to put in more money to pay for my college. My boyfriend and I would like to get an apartment together. We plan to get married after he graduates in two more years. We both work part time but our combined salaries are not enough to cover our expenses. My boyfriend thinks my parents should pick up my share of the rent until I graduate. My best friend Amy's parents just bought her a new BMW, they pay for her to keep an apartment in San Francisco, and they pay full tuition at Berkeley. I feel that by living at home and going to a state school I have saved my parents a lot of money and they should pick up my living expenses at least until I graduate. They are extremely well off, but they say no. What do you think?

Sincerely,
Jennifer

Dear Jennifer:

I think your parents are trying to teach you the same responsible money management skills they learned which gave them the means to provide you with a nice lifestyle. Part of growing up and becoming an adult is learning how to support yourself financially. Since you are working even though you don't need to, you have already learned how to get a job and earn money when you desire something. Unlike your friend Amy, it sounds like your parents have been preparing you to be a financially responsible adult for a long time. As a result, your transition into full adulthood will be much less traumatic then your friend Amy's. Still, if you're working, going to school, and setting up housekeeping with a man, you are going to have a lot on your plate. It would be helpful if you had a safety net to tide you over until you get a full time job.

You didn't specify how much is left in the UTMA college fund. Since you are already in your last semester, I presume there is no more tuition or other outstanding college expenses due. An UTMA is an account set up in a minor child's name by an adult who acts as custodian of any invested funds. Many people set up UTMA's when their children are young to save for their children's college education. What they don't realize is that when the child reaches legal age, (18 in most states, 21 in some), the custodian is legally required to turn the funds over to the child even if the child wants to use the money for something besides college. Managing your own investments is the logical next step to becoming financially independent from your parents. I suggest you ask them to turn the assets remaining in the UTMA over to you. That will give you a nest egg and a buffer to pay your share of household expenses when you move in with your boy friend. If your heart is set on moving in with him now, by all means do it. Alternatively, you might consider deferring the move until the end of the semester. Your parents should not pay your living expenses when you move in with your boyfriend. You are contemplating marriage and presumably expect to have children some day. Living with a mate is a rite of passage into adulthood. It is a journey that the two of you should take together without parental interference or financial help.

One last thing-Presumably, your parents have been carrying you as a dependent on your parents' medical insurance policy. When you graduate, you will no longer be eligible as a dependent. Most employers require new hires to complete a probationary period before they are eligible for medical benefits. You will need to shop around for an individual policy or convert your parents' medical insurance under COBRA to get coverage. If you are currently covered under a dental plan as a dependent, you should consider having any dental work done now while you are still eligible under your parents' plan.

Sincerely,
Bedda

Dear Bedda:

I am 55-year-old widow. My only source of income is from a trust set up when my husband died. I used to get $150,000 per year but the bank trustee has reduced my income every year since 1999 so that now I am only getting $100,000 per year. I cannot possibly live on that. Even though I am co-trustee, the bank absolutely refuses to give me any more money. The bank says that they have to grow it so that my children can have the principal when I die. My children make very good incomes and have no need of the money from the trust. I don't understand why I can't have my own money. My broker says the bank has lost almost $1 million since 1999. It used to be worth $3 million and today it is only worth $2.2 million. I would like to remove the bank as trustee and turn the management over to my broker. Can you tell me how to set this up?

Sincerely,
Marilyn

Dear Marilyn:

It is very difficult to be forced to reduce your annual income by one third. When you are accustomed to a certain lifestyle, and you are forced through no fault of your own without any warning to downsize, it is painful. It is likely that trust assets are invested in a combination of stocks and bonds and stock dividends and bond interest is distributed to you as income. Because of the economic downturn, many companies reduced or cut stock dividends and then interest rates were cut as well. As the bonds in your trust matured and were reinvested at today's lower rates, the trust generated less income. The bank correctly refused to distribute principal to compensate you for your loss. That's because if you deplete principal now, your income will not go back up when the market goes up again.

The bank is also probably correct to refuse to distribute principal because as trustee, the bank may be held liable to compensate your children for any principal distributed to you plus accrued interest after you die. Even though you are co-trustee, the bank is a professional trustee with very deep pockets if things go wrong. Consequently, the F.D.I.C. requires bank trustees to retain superceding control over trusts since banks have greater liability if things go wrong. Many beneficiaries feel that trust assets belong to them and the bank should treat them as customers. In fact, when assets are placed in trust, the trustee becomes the legal owner with full liability for negligence or fraud but can receive no benefits. So as in this case, the trustee with the greatest legal liability controls trust assets.

Without looking at the investment history I cannot tell whether the bank invested trust assets improperly as your broker contends. The 33% loss of principal seems rather high even if one accounts for the fierce bear market. To find out for sure, you would need to hire an investment attribution expert to analyze the portfolio. You should expect to pay about $20,000 for that analysis based on the time period covered and the market value of the trust. Even if your broker is right, I advise against giving your broker control over your trust because the broker is not qualified as a professional trustee and if the broker makes any mistakes, he is normally not liable to pay for losses caused by his mistakes. The bank on the other hand has a fiduciary duty to act with the highest standard of care and may be held liable to compensate the trust for negligence or other wrongdoing.

You do have some options. The first step is to set up a joint meeting with the trust officer and the investment officer for an account review. Present them with an itemized list of your expenses and explain why you need more income. Request that they reassess trust asset allocation to increase investment income. Perhaps they could pay you a 1% ($20,000) co-trustee fee out of income and principal. Review the tax returns. Are there additional deductions the bank has forgotten? Is there undistributed trust income that could be distributed? Would the bank consider making regular principal distributions or even a one-time $50,000 principal distribution in exchange for signed releases from your children holding the bank harmless? Do not bring your accountant, broker, or lawyer to the meeting. Do bring your children who are named as beneficiaries. If you feel the need for a professional spokesperson, locate a former trust officer to negotiate in your behalf. www.napfa.org is a good place to start if you are looking for a professional trust advisor. Do not complain about the bank's fees. Bank trustees charge much less than brokers and do a lot more work. Do not complain about how cold, unfriendly, and impersonal the bank is. You are probably right but banks are institutions and institutions are supposed to be impersonal. Complaining about it only distracts from your main objective, which is to get more money out of the trust. It also makes you look silly and shallow. So don't.

Expect the bank to listen, take you to lunch, and then promise to get back to you. Set up a date for a follow-up meeting. After the meeting, confirm your discussion and requests in a formal letter written to your trust officer. In most cases, the bank will figure out a way to give you a partial income increase. If you are dissatisfied with the bank's response, you can hire an attorney and file a petition with the probate court. Avoid going to court if possible. It is very expensive and the bank rightfully may use your trust assets to pay their lawyers to defend against your lawsuit. If you do file a lawsuit, be sure and retain a lawyer with trust litigation experience.

Sincerely,
Bedda

Dear Bedda:

My husband and I are both 42 years old. We have one daughter age 12. We own a house with a market value of $300,000 and equity of $150,000. My husband owns a universal variable life policy on my life in the amount of $250,000 and I own a term life policy on his life in the amount of $150,000. We also have $22,000 in an UTMA for my daughter's college education. I own a small 401(k) plan with a market value of $4,000. My income is $68,000 per year and my husband, who is a sole proprietor, brings in about $16,000 per year. My husband recently inherited $150,000. Our most important priority is to fund our daughter's college education. We would like to purchase more life insurance on my life so that my husband would be able to pay the mortgage if anything happened to me. We would also like to know how to invest whatever is left for our retirement.

Sincerely,
Linda

Dear Linda:

Your most important priority is funding your daughter's college education. The average annual cost of a private college education in today's dollars is $19,850. You will need a nest egg of $60,000 to fund her education from age 18-22. You are currently saving for college in an UTMA, on which your daughter pays income taxes on every year. Your first step is to close out the UTMA. Next, open a section 529 plan account for your state and deposit the $22,000 college fund to the 529 plan. Since your daughter's college education is an important priority, deposit and additional $15,000 from your husband's inheritance to the 529 plan which brings your total to $37,000. By the time your daughter starts college, this fund should be more than sufficient to pay for her college education.

Life insurance on your life is essential since you are the primary breadwinner. You already have $250,000 of coverage. The balance on your mortgage is $150,000. So if you were to transition in the near future, the life insurance would be sufficient to pay off the mortgage and leave your husband an additional $100,000 to invest. If the mortgage were paid off, your husband's income would pay for the rest of ordinary household expenses since the mortgage is your largest monthly expense. As a result of his inheritance, you no longer have a need for insurance on his life. I would let his policy lapse because it is unnecessary in comparison to your other needs.

You have done an excellent job of protecting income in the event of the death of either one of you. That was appropriate when your daughter was young. Now that her education is funded, your greatest need is to fund your retirement. At this point, you need to assume you are both going to live to a ripe old age together and need to figure out a way to save for retirement to supplement social security income. As a sole proprietor, your husband is permitted to contribute $14,000 per year to A SIMPLE IRA plus an additional 25% of net income. In addition, you can contribute $2,000 per year to a Roth IRA. Your strategy should be to deposit the maximum amount to your retirement accounts every year. The IRA's should be invested in a diversified portfolio of no-load mutual funds. The rest of your husband's inheritance should be invested in a tax managed portfolio of no-load mutual funds.

A disability income policy, although recommended, is probably not feasible in your current cash flow.

Sincerely,
Bedda