Money Management Q&As

July 21, 2006



What duration tells you about bonds

Q. I've been looking into bond funds, and I'm confused by some of the terminology used. How does duration differ from maturity?

A. Maturity is simply the length of time until a bond becomes due and payable. Duration measures its sensitivity to interest rates. The higher a bond fund's duration, the more volatile the fund is. A fund's "modified duration" can help you judge the degree of volatility. Essentially it tells you how much a fund is likely to gain or lose if interest rates change by a percentage point. For example, if a fund's modified duration is four years and interest rates rise one percentage point, you should expect the fund to lose about 4 percent.

Q. My wife and I will eventually relocate to Florida to live near her brother. At that point we'd like to leave our California home, which is already worth more than $1 million, to our daughter and son-in-law. My wife thinks we can reduce the tax on the transfer by making it through a trust, but she doesn't remember the details. Can you explain?

A. She's probably talking about a qualified personal residence trust (QPRT). Here's how it would work: You'd establish the trust now and put the house into it, but you'd continue to live there for the period of time you specify in the trust document. Since your daughter wouldn't get the home right away, the value of your gift to her would be discounted for tax purposes and you'd use up less of your lifetime gift-tax exclusion. The discount is based on a complicated formula that factors in the term of the trust, your ages, and interest rates, among other things. The downsides: To make this work, you must give up control of the house and leave when the trust's term ends, unless your daughter and her husband are willing to lease the house back to you. Also, if you and your wife die before the term ends, the house will revert back to your estate and pass to your heirs at its full market value.

One rip-off you can limit

Q. The owner of the new home I'm buying just purchased the place nine months ago, so it bugs me that I have to pay for a new title search and insurance policy on the property. Do I have any wiggle room on this?

A. The lender won't let you off the hook, but you may be able to slash your costs by using the same title company the current owner hired and requesting the "reissue rate." Since the insurer did most of the title-search work nine months ago and faces little additional risk, it should comply. This could cut your cost by as much as 50 percent.

Doing the Roth IRA limbo

Q. I want to convert a traditional IRA to a Roth this year, but my adjusted gross income will be about $105,000, which is $5,000 over the income limit for eligibility. To reduce my AGI, I'll take about $5,000 in losses on stock sales. Then I should qualify for the Roth conversion, right?

A. Not quite. The stock losses must first offset any capital gains you have for the year, and you can use only $3,000 of any excess capital losses to reduce your AGI. You must carry any additional capital loss forward to future years. So assuming your stock losses will exceed your gains by $3,000, you'll be that amount closer to your Roth conversion goal. To shrink your AGI further, consider contributing $2,000 to a tax-deferred retirement plan (other than a traditional IRA) if you're not already putting in the maximum.