Q: I intend to start a small education fund for my 3-year-old grandchild. My thought was to purchase a 15-year zero-coupon Treasury bond for $500. Is there such a bond? Approximately what would the value of such a bond be after 15 years? Do you recommend this step or do you have a better recommendation?
A: I'm a little confused by your question. At first reading, I thought you meant a bond with $500 face value; but then your question about the future value led me to think that perhaps you meant to invest $500 now.
In either case, the answer is yes -- you can buy zero-coupon Treasury bonds with a 15-year maturity date. Such a bond with a face value of $500 is not too easy to find, but is available.
These "stripped" Treasury bonds -- called stripped because the interest is separated from the principal, and the two components are then sold separately -- have acquired a lot of different names: Merrill Lynch sells TIGRs, E. F. Hutton has TBRs and Salomon Brothers sells CATs. There are others too, sold by various brokerage houses.
Current yield on these zero-coupons is around 11.5 percent, so a bond with a maturity value of $500 would cost in the neighborhood of $200. And a $500 purchase now should generate around $1,200 at maturity.
This is a pretty good way to go if you want absolute safety and do not expect a resurgence of inflation during the next 15 years. My personal recommendation, considering the length of time yet before the funds are needed, would be a good growth mutual fund, with all dividends and capital gains reinvested.
Incidentally, the Treasury Department recently announced a program called "STRIPS" which is intended to facilitate separate trading and ownership of interest and principal components of Treasury bonds.
Treasury is starting with 10-year notes and 30-year bonds, but extension to other issues is likely if the system proves feasible. Treasury itself will not issue zero-coupon securities; the new system will permit major financial institutions to request separate book-entry handling of the two parts of the bonds issues.
Q: On the back of some Form 1099s, used for reporting interest from some banks, it says that if the form shows two or more recipients or if the amount shown includes earnings belonging to another person, the recipient should file a "nominee" form with the IRS showing the proper distribution of the income. If my daughter's name appears with mine on an account (only to simplify things in case of my death), but I receive and report the income, is there something I must file to show this? Three calls to the IRS and more to the bank and I still don't have an answer. Can you clarify this reporting requirement?
A: In the circumstances you describe, there is no requirement to file any forms with the IRS. (I assume, since you're receiving and reporting the interest, that your Social Security number appears on the 1099.)
The instruction on the back of the 1099 is to cover the situation where somebody other than the recipient whose Social Security number is used is actually receiving the interest.
The IRS expects to find interest income reported on the tax return of the person whose tax number is on the 1099. If the income doesn't appear there, or if only a part of the total shows up, a query goes to the taxpayer wanting to know why it was not reported.
If in your case the income was being shared by your and your daughter, and you were each reporting half the total on your individual tax returns, the IRS would have no way of knowing that the half missing from your return is in fact being reported on your daughter's return.
So if that were the situation, you would be required to file another Form 1099 with the IRS with your name as the nominee (that is, the person receiving income on behalf of another) and your daughter's name and Social Security number as the recipient of a dollar amount representing half the total shown on the original 1099.