Question: My insurance agent suggested that I consider setting up an insurance trust for the proceeds of my policy so that my wife won't have to worry about managing the money if I die. Is this a good idea?
Answer: It depends on the ability of your wife to handle financial affairs on her own, without your assistance. If, for whatever reason, she has serious doubts about that ability, then the establishment of a trust for the insurance proceeds can provide professional management of the money in the event she survives you.
But if you're now handling all the family finances by yourself, a much better move would be to expose her to that experience while you're alive, so that she has the capability to manage on her own if necessary.
There is certainly no reason to believe that the average woman is genetically incapable of handling financial matters as well as the average man. Unfortunately, in many marriages she simply is not given the opportunity.
This is a serious mistake. Regardless of who handles the routine financial chores -- like paying bills, balancing the checkbook, deciding on investments -- each partner should be fully aware of what's going on and should be able to take over at any time.
Providing adequate income for a surviving mate is an important part of an insurance program. Equally important is ensuring the ability of the survivor to manage that income and the capital that supplies it.
(I must admit that there are times when a person persists in avoiding any involvement with financial matters, leaving them all up to the partner. If the partner should die first, the survivor may find he or she has to pay a high price, indeed, for that abstention.)
In any event, you should discuss the question with your wife. If she is actually incapable of managing money or decides that she really doesn't want to, then an insurance trust is a possible answer.
But she should understand that such a trust will cost her -- not only in management fees but also in terms of some loss of her freedom of choice.
Q: I'm really confused by the different rules covering interest rates on six-month savings certificates. Can you explain them?
A: The reason you're confused by the rules is that the rules are confusing.
I could try to explain how the interest rates are determined -- but I really don't believe I could make it very clear.
The important element in the establishment of interest rates on six-month savings certificates is the rate on Treasury bills -- and this rate changes regularly and frequently. The certificate rate authorized for banks, savings and loan associations and credit unions is linked to the current T-bill rate.
The trouble is that the rules for linkage change as the T-bill rate goes up or down. And depending on the T-bill rate, credit unions and S&Ls may or may not be permitted to pay more than banks.
The best advice I can offer: When you're ready to buy, check out a couple of each type of institution, then pick the one offering the best deal. Money is like any other commodity -- shop around before buying.
Q: What's the difference between Treasury bills, notes and bonds? Are all equally safe?
A: Each of these three securities is an "evidence of indebtedness" of the U.S. Treasury and is backed by the "full faith and credit" of the United States. All are equally safe.
The principal difference among the three is the term -- that is, the length of time until maturity. A Treasury bill is generally issued for a term of three, six or 12 months.
A Treasury note is an intermediate-term security with a maturity of from one to 10 years. A Treasury bond runs for the longest term, anywhere from 10 years on.
There is also a difference in the way interest is paid. Interest on both notes and bonds is paid semi-annually, based on the face amount. Treasury bills, however, are bought at a discount from face.
The income on the bill is the difference between the price paid and the face amount repaid at maturity (or the price received from a buyer if the bill is sold before maturity).
For tax purposes, this difference is interest income, not a capital gain, reportable when the bill matures or is sold. As you probably know, income from all three of these securities is subject to federal but not state (or D.C.) income tax.