L1: CDsI have an ongoing 72 T and my question is can i place CDs into this? I have around five hundred thousand in the72 Tand would like to know if two CDs at five percent for five years could be used for this account. So you get a better understanding each CD will be at two hundred and fifty thousand each. Again is this possible to do or not .2008-08-01 11:44, By: Ben, IP: [22.214.171.124]
L2: CDsYour terminology is confusing. You cannot PLACE any new monies into an existing SEPP 72-T. But, you can invest monies already in a SEPP 72-T into almost any investment, including CDs. I think you meant to ask if you could invest the SEPP 72-T in CDs.
Regardless of the investment, you have to make sure that it will provide the CASH FLOW necessary to make the CASH distributions each year. For example, if your annual required amount is $ 30,000 then you would not have the cash flow from your $ 500,000 at 5% to provide the required cash.
I believe that the new FIDC limit on “insured” CDs is $ 250,000 so you would be ok, especially since you would not be rolling over your interest with new CDs each year. But they would have to be from 2 different financial institutions.2008-08-01 12:42, By: dlzallestaxes, IP: [126.96.36.199]
L2: CDsYou would probably want to ladder the CDs such that enough cash were available each year to avoid taking an early withdrawal penalty from a CD in order to fund your 72t distribution. In the process you could keep any particular CD totals with a provider far enough below the 250,000 insured limit so that the interest earned by the CD also fell within the limit. Otherwise the interest would not be insured.
Two CDs at 250,000 each would not achieve either of the above goals. With many banks in perilous financial condition now, I would not recommend going uninsured on the interest. Some banks are members of a certificate consortium that allows them to insure each other so that the limits can be exceeded. You might check if that protection is available.2008-08-01 18:45, By: Alan S., IP: [188.8.131.52]
L2: CDsLet me second Alan”s comments by relating a personal story. My 82 year old step-Dad only invests his 7 figure savings in CDs. I have spoken with him MANY times about diversifying his all-cash portfolio with some large cap dividend paying stocks or funds and some bonds but my comments fall upon deaf ears. He considers the safety of CDs to be his only consideration and that the stock market is far too risky a place to invest money.
His thoughts on this were recently shaken by the failure of the IndyMac bank. He has a $100k CD with them and is concerned about it. He has contacted both the IndyMac bank and the FDIC regarding the return of his money. Right now, both of these groups are telling him to talk to the other group, which isnot very helpful, and his case has not yet been settled. It may take a few weeks or even months before all is resolved. It is looking like he will get his investment capital back but probably not the accrued interest. IndyMac apparently did not carry any additional depositor insurance beyond thatprovided bythe FDIC.
Ed2008-08-02 15:46, By: Ed_B, IP: [184.108.40.206]
L2: CDsED — I hope you, or his financial advisor, or his broker, has made sure that your 82 year old father is buying CDs with “Death Puts”. This way, if the fair market value of the CDs is below face/maturity value when he dies, his estate can require the financial institutions to redeem the CDs at face/maturity value.
I had done this for a client”s father, and his estate is receiving $ 125,000 in EXCESS of fair market value when he died, on the $ 1 million of CDs and other fixed interest investments ( corporate bonds) when he died in February. It isnot an instantaneous process, because each institution has prescribed redemption dates. But we have already redeemed $ 750,000 of the $ 1 million invested. We expect to redeem all of it before the end of this year.P.S. The broker at Merrill Lynch had know idea what I was talking about when I told him to get only securities and CDs with “death puts”. But he followed thru once he checked with more experienced brokers and managers, and has done a good job on contacting the institutions about the redemptions.2008-08-02 21:06, By: dlzallestaxes, IP: [220.127.116.11]
Thanks for bringing this up. I had not heard of this for CDs but had heard of a “survivor option” for bonds that sounds similar. Somehow, I can”t see my step-Dad getting too excited about a product called a “death put”. As a marketing tool, it seems pretty repugnant… much worse than sushi being called “cold dead fish”. I can see where this option would be VERY useful for bond holders with bond prices changing inversely with interest rates. Can you explain a bit about how this relates to a fixed price asset like a CD? Thanks.
Ed2008-08-03 19:27, By: Ed_B, IP: [18.104.22.168]
L2: CDsCDs can be purchased directly from financial institutions, or thru brokerage houses for ones traded on the open market. You are “guaranteed” to get the full face amount ONLY if you hold them until maturity. When someone dies, the CD can continue to be owned by or transferred to the estate or beneficiaries, but thenheld until maturity. However, if the estate or beneficiaries want the CASH sooner, they can ask the financial institution to redeem them, or buy them back, but that will be done usually by forfeiting interest, and/or at the then current market price. If interest rates have gone up since the CD was originally issued, then the redemption price will be somewhat less. If the CDs were bought on the open market thru a brokerage firm, then they would be sold likewise at a reduced preice if the interest rates have gone up.
By buying CDs, and other fixed interest investments, such as corporate bonds and notes, municipal bonds, etc., with Death Puts, you are guaranteed that upon someone”s death, they will be redeemed by the financial institution (whether bought originally directly or thru a broker) at full face/maturity value. If the CDs are relatively short term, then this might not be necessary. In my client”s case, they were longer term, and therefore had higher interest rates to start with. Many of the bonds and notes were out 20-30 years, which might sound crazy for someone 90 yearsof age, but we knew that we had no downside risk.
If interest rates had gone down, the market values would have gone up, and we could have just sold them at the higher prices without invoking the “Death Put”.2008-08-04 11:29, By: dlzallestaxes, IP: [22.214.171.124]
OK, I see how this works now. Thanks much for the clarification.
I asked my step-Dad about this and he said that there would be no penalty for early cashing of any of his CDs if the CDs were redeemed after his death. Apparently, he already has some kind of “survivor option” in place on his CDs. As far as I know, they are all 1-year CDs. All of these have been purchased from various banks.
These CDs are owned within a living trust with my Mom as the successor trustee and me as the alternate trustee. There would not be any pressing need to liquidate these CDs quickly in the event of his passing, so if we were required to hold them for some months, it would not be a hardship for us. I can see where it might be for someone with a substantial estate tax to pay and little free cash on hand to pay it, though.Ed2008-08-04 16:45, By: Ed_B, IP: [126.96.36.199]
L2: CDsADDITIONAL CLARIFICATION:
In my case there was actually a “bypass” trust that had been set when the spouse died before my client, so that her assets would not be included in his estate when he died. I was very surprised to find out that the fixed interest investments, CDs, corporate bonds and notes, etc. all of which had “death puts”, and these were also being redeemed accordingly because of her husband”s death because he was the INCOME BENEFICIARY of her trust!!!!2008-08-04 21:06, By: dlzallestaxes, IP: [188.8.131.52]