Thoughts On Preserving An Inheritance

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NJFlyer
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Thoughts On Preserving An Inheritance

Post by NJFlyer »

I have recently inherited $2.5 million and I am looking for thoughts on how best to preserve it to pass it on to my children, while being able to enjoy some of it myself.

This is money that had accumulated over several generations in my family and not earned by me, so I feel obligated to pass it along myself one day, along with some of my own estate in addition. I do feel it's okay for me to benefit from income from this money though. In my planned situation I would be able to pass along this exact same amount, adjusted for inflation. I was thinking of just a small set of relatively safe funds, such as a total stock index, an international stock index and a bond fund of some sort. From there I would keep a 3% return in the funds each year to account for inflation and then take the rest as income for myself. While I fully understand the volatility of investments as well as inflation, I'm hoping this would at least keep me in the right neighborhood over time. From your experience, do you all feel this is a viable plan? How would you build an appropriate portfolio to do this?

Now, in an ideal situation, I would be able to pass along the exact amount that I received (inflation adjusted) to each of my two children. This would include my inheritance, plus my own assets (house and my own savings - say the equivalent of $1 million in today's value for this exercise), plus growing the base inheritance by the equivalent of another $1.5 million, or 60%, to end up with a total inheritance equal to $5 million today. My (let's hope) own time horizon for passing along the inheritance is about 40 years, so there is some time to make this happen. This is certainly more ambitious, and would leave less for me along the way, but the same questions as above - From your experience, do you all feel this is a viable plan? How would you build an appropriate portfolio to do this?

Any and all thoughts would be greatly appreciated.
123
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Re: Thoughts On Preserving An Inheritance

Post by 123 »

I think the idea of leaving a substantial inheritance is not necessarily benefiting your children. Better to use more of the money now to benefit yourself and your family (including the children). Inherited money is generally not valued as highly as money that results from one's own efforts. In that respect education for the children would be my highest priority. Maybe a remaining lifetime of generosity creates a better legacy then a "surprise" later.

A kid with parents who work multiple jobs to support and better the family situation would probably prefer more time with the parent then the resulting luxury. Your time is the most precious gift you can give and no one else can give it for you.
The closest helping hand is at the end of your own arm.
RadAudit
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Re: Thoughts On Preserving An Inheritance

Post by RadAudit »

I applaud your attempt to preserve and pass on the family inheritance.

Now, that said. I dabble in looking at my family tree. From a cursory glance, I've concluded it is extremely difficult to pass on a family inheritance through several generations. One, things happen. But, the biggest problem is passing on the skills and desire to do well and to help out the subsequent generations. Somewhere along the line, someone will veer off into the ether and blow through whatever inheritance is left him. Well, at least in my family.

Your plan - a three or four fund portfolio - is a good place to start. In order to meet your goal on an inflation adjusted basis, you may have to revisit your SWR based on today's projections of future market / asset returns. Rick Ferri provides his estimates of those returns every year in early January. It's a topic for a lively discussion on the forum around that time of the year.

Best of luck in your endeavors.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
jfave33
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Re: Thoughts On Preserving An Inheritance

Post by jfave33 »

I would pop $0.5m into VTSAX Vanguard total stock market index for each of them. In 40 years when you pass away they receive it all tax free (step up basis on death). Assuming they receive 4% growth on average after inflation over the 40 years they will receive $2.4m each.

Use the rest how you want to including helping with college, for yourself etc. More than anything is to use it to allow you to give them your time. I would just add it to your current portfolio and maybe adjust the AA as you can take less risk.
Last edited by jfave33 on Fri Apr 01, 2016 5:21 pm, edited 2 times in total.
mac808
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Re: Thoughts On Preserving An Inheritance

Post by mac808 »

Set up a perpetual dynastic trust that gives you 3.5% (+ .5% admin fees for a 4% SWR) per year in income. Upon your demise, your kids inherit the right to that income. Upon your kids' demise, your grandkids inherit, and so on and so forth until the end of capitalism. I know a family that set it up this way. I don't think it's possible for the money to ever run out unless they start having a lot of kids per generation.
Gill
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Re: Thoughts On Preserving An Inheritance

Post by Gill »

mac808 wrote:Set up a perpetual dynastic trust that gives you 3.5% (+ .5% admin fees for a 4% SWR) per year in income. Upon your demise, your kids inherit the right to that income. Upon your kids' demise, your grandkids inherit, and so on and so forth until the end of capitalism. I know a family that set it up this way. I don't think it's possible for the money to ever run out unless they start having a lot of kids per generation.
Administration expenses including attorney and trustee fees will certainly exceed .5%, most likely exceeding 1%.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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Bogle_Feet
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Re: Thoughts On Preserving An Inheritance

Post by Bogle_Feet »

NJFlyer wrote:I have recently inherited $2.5 million...
How would you build an appropriate portfolio to do this?
Any and all thoughts would be greatly appreciated.
https://www.blackrock.com/wte/core-buil ... refType=fi
https://gps.ricedelman.com/
http://www.vanguard.com/nesteggcalculator

Set up a trust so that the kids get the money in installments over time. This way they won't blow it all at once or lose a lot of it due to divorce or something. Teach them about looking out for the sharks. When you have money the sharks have a way of finding you.
letsgobobby
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Re: Thoughts On Preserving An Inheritance

Post by letsgobobby »

welcome,

I think your basic idea is a good and noble one. I would look at the problem slightly differently. If you accept a variable 2% inflation-adjusted withdrawal from the assets each year going forward, and invest in low cost indexes such as TSM, TISM, and TBM, you will have a ~90% chance of having more money (inflation adjusted) 30 years from now.

But the devil is in the details. What about taxes, management fees, trust fees? What about that volatility? Will there be lump sums needed (say, for college) at inconvenient moments that cause the portfolio to experience a death spiral (ie, when markets are crashing)? How will you handle those requests, at those moments?

In addition to the Boglehead wiki entry on windfalls, consider reading a few books about inheritances and estates:

Family Wealth, James Hughes
Wealth, Stuart Lucas
Beyond the Grave, Condon and Condon

good luck
randomguy
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Re: Thoughts On Preserving An Inheritance

Post by randomguy »

Gill wrote:
mac808 wrote:Set up a perpetual dynastic trust that gives you 3.5% (+ .5% admin fees for a 4% SWR) per year in income. Upon your demise, your kids inherit the right to that income. Upon your kids' demise, your grandkids inherit, and so on and so forth until the end of capitalism. I know a family that set it up this way. I don't think it's possible for the money to ever run out unless they start having a lot of kids per generation.
Administration expenses including attorney and trustee fees will certainly exceed .5%, most likely exceeding 1%.
Gill

Skip the SWR part and just plan on distributing like 5% of the portfolio's current value/year.

The plan of keeping the first 3% for the fund and distribute the rest is flawed in that you need to decide what to do in down years. For example if the market is down 25% one year and up 30% the next, how much money are you taking out. If you want a somewhat steady income stream, taking out 3-4% (of value) every year and leaving the rest is a real simple scheme.

AA wise you are going to see all sorts of answers from insanely convertative to the 100% stock crowd. With 40+ year time frames you can justify 80% stock AA. You could probably meet your goals of just doubling the money in real terms over 40 years by going with something like 50/50 and a 3% SWR.

And you also need to think about when to give the money to your kids. Money at 20 or 30 is a lot more useful than money at 50 for most people. Of course young people have also been know to do dumb things with money.
dbr
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Re: Thoughts On Preserving An Inheritance

Post by dbr »

NJFlyer wrote:I have recently inherited $2.5 million and I am looking for thoughts on how best to preserve it to pass it on to my children, while being able to enjoy some of it myself.

This is money that had accumulated over several generations in my family and not earned by me, so I feel obligated to pass it along myself one day, along with some of my own estate in addition. I do feel it's okay for me to benefit from income from this money though. In my planned situation I would be able to pass along this exact same amount, adjusted for inflation. I was thinking of just a small set of relatively safe funds, such as a total stock index, an international stock index and a bond fund of some sort.
Stocks are not safe funds. They are certainly not capable of guaranteeing passing along "the exact same amount." Most likely you could pass along more than the real value of the estate, but there is also a risk of losing some of the money. The only inflation adjusted investment that comes out "exactly" would be TIPS, assuming you get a positive real interest rate and cover any premium you pay for the bonds. There would also be an issue of paying taxes on the principal adjustments. You really have to decide where you stand on taking some risk.
Topic Author
NJFlyer
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Re: Thoughts On Preserving An Inheritance

Post by NJFlyer »

Thank you all for your replies and thoughts. There are a lot of great ideas here to consider and work through. One consideration for me is that in the future my descendants might say "this person did really well and passed on some, and that person did really well and passed on some, and, that last person, well he's the one who blew it all." If someone is going to blow it all eventually, I don't want it to be me. You are all correct in that today is far more important than tomorrow. The money that I will be able to take for myself will really go a long way toward the entire family's benefit - travel, time and activities together here, fully-funded education, etc. Prudent and conservative personal finance education for my kids will hopefully come as well - leading by example.
jackholloway
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Re: Thoughts On Preserving An Inheritance

Post by jackholloway »

A noble goal! I received an inheritance, and am hopeful that my child will get a larger one,

Do involve your children in financial activity early, so they can see your mistakes and your victories and can build their own mental model. I do not reveal the total size of the pie, but I have been very clear about how her 3k in the market has done. I also let her know that her grandparents covered a year of a state school free and clear, and how to determine that.

There are many articles that discuss how the third generation loses the money made by the first. I note that having your luck revert to the mean is a perfectly adaquate explanation, and that the best defense is to make sure your children are better trained with better experience than you were.
randomguy
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Re: Thoughts On Preserving An Inheritance

Post by randomguy »

NJFlyer wrote:Thank you all for your replies and thoughts. There are a lot of great ideas here to consider and work through. One consideration for me is that in the future my descendants might say "this person did really well and passed on some, and that person did really well and passed on some, and, that last person, well he's the one who blew it all." If someone is going to blow it all eventually, I don't want it to be me. You are all correct in that today is far more important than tomorrow. The money that I will be able to take for myself will really go a long way toward the entire family's benefit - travel, time and activities together here, fully-funded education, etc. Prudent and conservative personal finance education for my kids will hopefully come as well - leading by example.
As far as blowing it, about all you can control is the spending. If you shove it 100% in tips, sure your risk of losing money is about 0. But you will also only be able to spend 1% and you have zero chance of doubling the money. I would count that as blowing it given the opportunity cost. If you shove it 100% in stocks and we get a japan case and you are taking out 4%, you also could be considered to have blown it. To some extent blowing it is out of your control. If the markets return 7% real over the next 40 years, you can end up with a huge fortune. If they return 1%, you are going to struggle. The best you can do is come up with a reasonable plan (i.e. anywhere from 40/60 to 80/20 in a diversified portfolio depending about if you fear bear markets or missing bulls more) and keep the spending under control. For the spending you have to balance the now versus the later.
dbr
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Re: Thoughts On Preserving An Inheritance

Post by dbr »

randomguy wrote:
As far as blowing it, about all you can control is the spending. If you shove it 100% in tips, sure your risk of losing money is about 0. But you will also only be able to spend 1% and you have zero chance of doubling the money. I would count that as blowing it given the opportunity cost. If you shove it 100% in stocks and we get a japan case and you are taking out 4%, you also could be considered to have blown it. To some extent blowing it is out of your control. If the markets return 7% real over the next 40 years, you can end up with a huge fortune. If they return 1%, you are going to struggle. The best you can do is come up with a reasonable plan (i.e. anywhere from 40/60 to 80/20 in a diversified portfolio depending about if you fear bear markets or missing bulls more) and keep the spending under control. For the spending you have to balance the now versus the later.
You are right that "blowing it" needs to be defined. My post about TIPS was intended to be provocative and to question the goal of "exactly preserving" the asset. It really does require a careful look at what markets can do and judgement about what constitutes at what probability an unacceptable outcome. Doing this while also spending some of the money creates a very nuanced conversation. I am sorry to suggest that there is no simple answer. Also what I or someone else would likely choose to do is not necessarily what the OP actually wants, even if what he wants is not completely clear yet. There might be some guidance in what people do when designing "perpetual" portfolios precisely for the handing down of family wealth, but I don't know much about that.
randomguy
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Re: Thoughts On Preserving An Inheritance

Post by randomguy »

I generally hate them, but this is a case where you could consider a bucket approach. Take half the money (or 1/3 or whatever you think is right) and invest it for your needs (say 50/50 with a 4% SWR). Take the rest and invest it for the heirs (say 80/20, 0% SWR until the kids turn 18 and then maybe dribble out small amounts of money for things like college, houses, and general lifestyle inflation). Hopefully your estate (both inheritence and other money you have saved) grows over time so when you bite the buck you can contribute more money to the 2nd bucket but if it doesn't happen, oh well. And if the second bucket doesn't grow, it isn't because you spent it.

You could either formalize the buckets (set up trusts) or have them informal (i.e. seperate accounts but still controlled by you).
dbr
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Re: Thoughts On Preserving An Inheritance

Post by dbr »

NJFlyer, I am wondering why you need to change how the assets are invested at all. Presumably the people who have been managing this money up till now have been thoughtful about how to do it and have had motivations similar to yours. What are the investments you have today?
afan
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Re: Thoughts On Preserving An Inheritance

Post by afan »

The best maneuver may be to emulate endowments. They smooth their distributions. A typical formula would be to calculate the rolling three year average portfolio total and take out X% of that. Many also smooth this by placing a floor of Y% of rolling average three previous years and a ceiling of Z%. You can further adjust this by starting with inflation over that time. Deduct the trailing inflation rate from the amount you propose to take out.

You almost certainly need to create a trust to make this happen long term. You need the asset protection and to control the impact of inheritance taxes. Setting up the trust will be costly, Gill might give you an idea of how much.

The administrative cost might be kept low for a while if you can avoid a corporate trustee.

If you use Vanguard as trustee, a trust of that size would cost about 0.565%, close to your target. Of course, legal and accounting expenses would be on top of that. But if the assets grow, the percent charged by the trustee goes down, so you can get close to your half percent. For example, at $5 million the Vanguard fee would come to 0.38% of assets. That would leave some room for other expenses. So- half a percent is doable if you shop carefully.

Invest in a mix of Total Stock Market, Total International Stock Market, and some sort of bond fund. Whether taxable or tax free depends on the income of the beneficiaries.

I think it is wonderful to save money you do not need to support yourself and passing it on to your heirs is the best use.

It is possible that spending some of it now might be more beneficial than saving for a distant future. But for people who are comfortably middle to upper middle class in income, as you appear to be, the necessities of life are well covered by current income. You are probably already providing excellent educations, safe housing, quality healthcare, etc. If not, then use some of the money to do this. Beyond that, there is no reason to think that people who spend more money are doing better for their kids.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
afan
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Re: Thoughts On Preserving An Inheritance

Post by afan »

To the extent that you really consider this to have a holding period generations long then you can consider a high allocation to risky assets. you can also consider putting some of it in illiquid investments to get that premium.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
john94549
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Re: Thoughts On Preserving An Inheritance

Post by john94549 »

Divide by two and we're right up there.

As a successor trustee, might I make a humble suggestion. Sell. The best way to preserve an inheritance is to sell.
Dandy
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Re: Thoughts On Preserving An Inheritance

Post by Dandy »

Congrats on receiving such a nice inheritance. My only question would be what is the benefit of passing on a very large inheritance without anyone spending it. Using the dividends? Having security in case of unexpected needs? I get that it is a wonderful family tradition and you would like to continue it. The approach probably means that the money will be used either by some future heir in great need or blown by some heir that will spend all or most of it unwisely.

If you are currently well of I think it is great to look to help your children or heirs whatever method you choose.

I did not inherit great financial wealth but am lucky to be well off. I want to gift money to my children while I'm alive and their need is greatest rather than have them struggle a bit now and wait for some pot of gold inheritance hopefully in a couple of decades. I want whatever inheritance they receive - for them to do the same for their children. I don't want them to be under the ancestral pressure to preserve and/or increase the pot of gold. I want them to spend it wisely and helping their children when they need it. If we are fortunate to help now and leave a nice pot of gold - that would be great. :sharebeer
john94549
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Re: Thoughts On Preserving An Inheritance

Post by john94549 »

Tee hee. I preserved the family Trust by selling, one position after the other. Sell is somewhat unambiguous. Trust me, I now have the funds in the bank. Now, THAT's how to preserve an inheritance.
!
john94549
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Re: Thoughts On Preserving An Inheritance

Post by john94549 »

Aside from the fact I don't have a clue what "preserve" means, does anyone have a clue?
Chadnudj
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Re: Thoughts On Preserving An Inheritance

Post by Chadnudj »

NJFlyer wrote:I have recently inherited $2.5 million and I am looking for thoughts on how best to preserve it to pass it on to my children, while being able to enjoy some of it myself.

This is money that had accumulated over several generations in my family and not earned by me, so I feel obligated to pass it along myself one day, along with some of my own estate in addition. I do feel it's okay for me to benefit from income from this money though. In my planned situation I would be able to pass along this exact same amount, adjusted for inflation. I was thinking of just a small set of relatively safe funds, such as a total stock index, an international stock index and a bond fund of some sort. From there I would keep a 3% return in the funds each year to account for inflation and then take the rest as income for myself. While I fully understand the volatility of investments as well as inflation, I'm hoping this would at least keep me in the right neighborhood over time. From your experience, do you all feel this is a viable plan? How would you build an appropriate portfolio to do this?

Now, in an ideal situation, I would be able to pass along the exact amount that I received (inflation adjusted) to each of my two children. This would include my inheritance, plus my own assets (house and my own savings - say the equivalent of $1 million in today's value for this exercise), plus growing the base inheritance by the equivalent of another $1.5 million, or 60%, to end up with a total inheritance equal to $5 million today. My (let's hope) own time horizon for passing along the inheritance is about 40 years, so there is some time to make this happen. This is certainly more ambitious, and would leave less for me along the way, but the same questions as above - From your experience, do you all feel this is a viable plan? How would you build an appropriate portfolio to do this?

Any and all thoughts would be greatly appreciated.
My idea/plan:

1. Invest in Vanguard Life Strategy Growth (80% stock, 20% bond).
2. Turn off automatic reinvestment of dividends.
3. Each year, it will pay out 2% approximately in dividends. 2% of $2.5 million is $50,000.
4. Spend 75% of the dividends for yourself, reinvest 25% (so in year 1, spend $37,500, and reinvest $12,500).
5. Rinse and repeat. Each year the amount you can spend SHOULD increase, both due to increases in the value of the principal, and because of your reinvested dividends/purchases. Meanwhile, you'll be growing the inheritance to pass along. Now, it won't be a perfect straight line, but generally it should last a long time, leaving you plenty for your heirs and yourself.
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