Setting up Trusts for Grandchildren
A: No amount of money can lessen the emotional pain you and your grandsons have experienced. But you can find comfort in using the money to honor your daughter's legacy. I interpret "bang for my buck" as your desire to make choices that build financial security. Given that all of you are at different life stages, that means three separate strategies.
Let's start with you: Do you have an eight-month emergency savings fund? If not, that should be your top priority. Next, do you have credit card debt? If so, pay it off (and vow not to run up a balance you can't pay off each month). If debt's not an issue, let's talk about retirement. If you live in a home that you plan to retire in, then paying down your mortgage is a surefire security builder. Or you can invest the money in a retirement account.
Next, think back to conversations you and your daughter had about her dreams for the boys. How can you invest the money to realize those dreams? You didn't mention the 18-year-old's college costs, so I am guessing that is not an issue. But if the younger son needs an education fund, put a portion of his share into a 529 college savings plan. The money you invest today will grow tax-deferred, and if withdrawals are used to pay for qualified college expenses, there will be no tax liability. Given his age, you should invest the 529 money in stocks but have a plan to shift the funds to cash or money market alternatives as he nears his freshman year. You should have no more than 20 percent of the portfolio in stocks by then—more would be too risky. You can find a 529 plan with low fees at savingforcollege.com .
I would also talk to an estate lawyer about setting up trusts for the kids. And I suggest delaying their access to the money until they turn 30—because when you are young, it's difficult to make financial decisions that build security. By that time, they should be able to appreciate how they can use the money wisely: to make a down payment on a home, to jump-start their retirement savings, or to build a financial legacy for their own kids. If you decide to go this route, invest the money in stocks. When you have time on your side—at least ten years—stocks are your best shot at earning inflation-beating gains. Set up separate accounts for each grandson at a discount brokerage firm and invest $8,000 to $10,000 per month. This technique, called dollar-cost averaging, helps you avoid the risk of buying too much at a market peak—and that can be better than investing in one lump sum. Initially put the money in a money market deposit account, and then authorize a monthly transfer into stock funds or exchange-traded funds.
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Suze Orman's most recent book is her 2009 Action Plan: Keeping Your Money Safe & Sound (Spiegel & Grau).