NYCLifeinaFishbowl
By
Antony Chow
Today's
comic:
Commentary:
On Valentine's Day, the New York Lottery held a press conference announcing the
first two New York City millionaire winners of 2006: Jay Sung ($41
million Lotto winner), and Bryan Panell (Win for Life Spectacular).
The New York Post covered the story
yesterday, and noted how uncomfortable Jay Sung standing in front of
the media.
As a fellow Queens resident, I congratulate Jay on his good fortune.
And I also have good advice, free of charge, on how to invest
the money:
1. Set aside a good chunk of the winnings (for ease of calculation
purposes, let's assume the amount after taxes is around $15 million).
I would suggest either buying a U.S. Treasury note directly
from the government (via TreasuryDirect), or a Certificate
of Deposit (search bankrate.com for the best rates).
My preference would be the government note, because it is not
subject to state or local taxes, and therefore the after tax yield may
be higher than a CD. The interest is paid every six months,
and you can buy online. The latest auction result show a 3
years note yielding 4.595%, which isn't bad. For CD, I would
stick with online banks, and INGDirect
seems highly regarded. They're offering a 2 years CD at 4.70%
yield. It makes more sense to buy short term because interest
rates may still rise. I would invest 1/3 of the net amount,
$5 million, in the note or CD. And I would renew the
instrument if the rate is competitive.
2. Today is a time of uncertainty, and you never know what may happen
the next week, the next day, the next hour. Estate planning
is important if not crucial, because of the amount of money involved.
Cornell Law School has a very nice
online overview of this subject.
Generally speaking, the first $1.5 million in the estate will
be exempt from tax. The rate schedule is located here. For
calculation purposes, the tax is roughly 1/2 the estate.
One way wealthy people try to lower the estate tax burden is through
the use of trusts. A trust is nonliving, legal creation (like
a corporation, for example) created by the trust settlor for specific
purposes, and endowed with assets from the settlor to achieve the
stated purposes. It's relevant to estates because assets
granted to the trust are no longer considered part of the estate.
So out of the $15 million, if $5 million is put into a trust,
then the estate is considered to have $10 million, thereby lowering the
tax bite at death. Assuming $5 million was put into a CD,
there's $10 million remaining. I would put $2 million in a
trust for Jay's mother, and $2 million in another trust for his in-laws.
Wikipedia has a very nice overview on trusts.
3. What should the trust be used for? For starters, it should
be used to buy life insurance policies. $1 million whole life
on each family member. Whole life policies provide great
piece of mind for loved ones in case of sudden death of the wage
earner. It also accumlates value as premiums are paid over
the years. Unfortunately, whole life policies are expensive,
and most families can't afford them. The trusts should set
aside money to pay out the policy premiums.
4. Another use of the trusts assets is to create/produce income to meet
the living expenses of the beneficiaries. Basically, the
trusts should provide for Jay's family financially, without the need to
work to make a living. The major banks all have
branches/offices that specialize in trusts and administering them.
It would be very easy to have a bank set up the trust and
administer it according to the settlor's wishes.
5. Out of the remaining $6 million, I would put $1 million in a mutual
fund. Let the experts on Wall Street invest your money for
you. If I'm not risk averse, I would invest that $1 million
in a venture capital fund.
6. Out of the remaining $5 million, four should go towards real estate.
And here the choices depend on where to live. I
would create a private real estate holding company, a corporation
designed to hold title to real property, and to limit liability to the
shareholder's investment. If I'm inclined to stay local, in
the Big Apple, I would buy houses in the outer boroughs.
Manhattan is simply too expensive, and I would look to rent
out the houses and generate rental income. Condos and co-ops
have many onerous bylaws and other restrictions that may prevent
renting out the units, and local property taxes are relatively much
higher for them compared to houses. Also, there's no point in
buying the house as an individual, because the real property tax
deduction and the mortgage interest deduction (limited to just your
primary residence) will be eliminated by the Alternative Minimum Tax anyway.
7. The remaining $1 million should be tossed into an interest checking
account, for Jay to live it up!
