Q. My husband and I are the guardians of my 20 year old disabled nephew. His mother, my sister, died last year. She had a life insurance policy for $50,000 with the beneficiary being her son. She had spoken about making me the trustee but never did. I am my nephew's representative payee for Social Security. He is currently receiving $680 from her Social Security.

What effect will claiming this money have on Social Security? Our current house is not large enough to accommodate him and we would like to use part of the money toward a down payment on a house. The money will also be used to pay back funeral expenses to those who have contributed. I have heard varying stories about what I can and can't do and they often conflict. Also, would claiming it have any impact on Public Aid benefits?

---C.L., Bartlett, IL

  

A. Social Security benefits are not "means tested" which means the assets or investment income of a recipient are not considered. He may be receiving disability benefits already, as many disabled children do. If that is the case you don't have to worry about his income or establishing eligibility. If, on the other hand, he is receiving survivor benefits, you may need to get him qualified for disability benefits.

If your sister had established a "special needs" trust for this $50,000 its receipt would have no impact on EITHER Social Security benefits or any public benefits such as Supplemental Security Income (SSI). That's why establishing these trusts is so important for people who want to help someone who is disabled. While a special needs trust cannot be used to provide food, clothing, or shelter it can be used to supplement the public funds that ARE used to provide food, clothing, and shelter by paying for other expenses such as telephone, cable, personal care, household items, etc.

One thing you can do with the $50,000 is to try to buy your nephew a condo or house, either directly or as a "life estate". This would NOT affect his ability to receive public funds, if he now receives them.

I would not suggest repaying yourself or others for funeral expenses from his mothers life insurance policy. It's his money.

You have a major learning curve to climb. My suggestions: first, get a copy of "Golden Opportunities" by Amy and Armond Budish and read it. Then make an appointment to visit a Social Security office. Finally, call the local chapter of the AMI ( Association for the Mentally Ill), find out about their meetings and get the name of a lawyer who is familiar with working the rules and regulations. If you take a positive attitude and put one foot in front of another, you'll get this all worked out.

  

Reader Response:

G.F., a reader in Mankato, MN responded to a recent column about tax bills with an interesting suggestion for limiting your tax bill in retirement:

"After detailing a very comfortable income and retirement position ( your reader letter) noted $75,000 in liquid assets: mutual funds, savings accounts, and common stocks. Then they complained of their high tax bracket.

"I was once in that position, too. Then I realized that my old clunker common stocks, growing at about 8 to 12 percent a year with 2-3 percent dividends were really not so bad. Modest dividends. No tax on the capital gains until I sold them… maybe never.

"So the following philosophy gradually evolved:

1) Buy for the long term. Buy a company.

2) Sell only if the company begins to go sour. Keep portfolio turnover low.

3) Put the stocks in a margin account with a discount broker.

4) Use the margin account to provide cash reserves at a very low interest rate.

5) Borrow on margin a modest amount, allowing the interest expense to offset the dividends. This makes the account a home-made IRA with none of the restrictions of tax deferred retirement accounts. Just remember to be conservative with your investments."

This method is a reasonable alternative to tax deferred variable annuity accounts: it eliminates current taxable income and, in effect, converts it into long term capital gains. Unlike the variable annuity accounts, the capital gains will be taxed at capital gains rates, not ordinary income rates.

  

Q. I opened a mutual fund custodial account for my daughter who was born 14 months ago. I have it set up where $100 a month goes into her account. My question is whether or not this is the best way to save for her college education or is there another way? I would like some type of control over the money when she turns 18 so that if she doesn't go to college the money can be used for something other than a trip to Hawaii for a few of her friends.

---J.P., Bartlett, IL

  

A. Gee! The poor kid is just 14 months old and already you're worried she'll be irresponsible. You've basically got two alternatives.

First, you can save the money in your own name. Taxes on common stock mutual funds aren't much of a problem right now so it won't be a major loss of tax efficiency.

Second, you can keep the account in her name a secret. Children don't have to know everything and they aren't very interested in money for years.