Help with Funding Plan

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bigringsprinter
Posts: 5
Joined: Fri May 12, 2017 12:22 pm

Help with Funding Plan

Postby bigringsprinter » Fri May 12, 2017 12:34 pm

I am trying to assist a friend with the funding plan for her mother's stay in assisted living. Any advice for changes to what I am suggesting would be appreciated.

The mother is in her mid-90's and is ok physically but is in the early stages of dementia.

She is in a facility that costs approx. $7,500 per month.

She had approx. $650k with a 1% AUM advisor, with all of these monies in American Funds mutual funds with an 80/20 stock/bond AA. I advised to move all those funds to Schwab or Vanguard and to sell anything that there weren't cap gains on. They have done that.

This has left them with $400k in cash and $250k in AMCFX (this fund has about $70k in gains, so they are holding at the moment, because is it in a trust that is subject to cap gains tax after ~$12k of income).

With that $400k, I am thinking of doing a CD or bond ladder, with a 1.5% avg. return, and expect to last approx. 4.5 years (arrived at via annuity calc and seemingly doable via quotes on Schwab). My thinking is that using a bond fund would be too much risk to the principal in the current interest rate environment.

If needed, after 4.5 years, they can start to tap the AMCFX fund (albeit they do plan to sell that off as much a possible until cap gain taxes hit).

A couple of things I am vacillating on: 1) should I advise taking the tax hit and move the proceeds into the bond ladder?

2) if we do take the tax hit, should anything be allocated to stocks? Adding $200k to the bond ladder would get us to about 7 years of expenses.

Please advise. Thanks.

bigringsprinter
Posts: 5
Joined: Fri May 12, 2017 12:22 pm

Re: Help with Funding Plan

Postby bigringsprinter » Sat May 13, 2017 11:36 am

Sorry to bump. Any help? Or should I have asked/formatted differently?

bigringsprinter
Posts: 5
Joined: Fri May 12, 2017 12:22 pm

Re: Help with Funding Plan

Postby bigringsprinter » Fri May 19, 2017 10:35 am

Thought I'd try one more bump. If nobody is going to reply, can anyone chime in on why this is not receiving any interest for helping?

aristotelian
Posts: 2133
Joined: Wed Jan 11, 2017 8:05 pm

Re: Help with Funding Plan

Postby aristotelian » Fri May 19, 2017 10:52 am

Tough question, but I certainly think 80/20 is not appropriate for her age and high income needs. I would take the tax hit at least for a substantial portion. Keep in mind she is probably lower tax bracket and you could cash out at least some with 0% CG hit. You would be taking some risk, but you could consider cashing out over a few years to reduce or possibly eliminate the tax hit depending on her tax bracket. Do you happen to know her bracket/taxable income?

It is possible you could arrange something with the likely inheritor to pay out of pocket in exchange for leaving the funds invested. That would be complicated, but ultimately the money will be coming out of the same portfolio. Of course if there are multiple inheritors that could get ugly.

bigringsprinter
Posts: 5
Joined: Fri May 12, 2017 12:22 pm

Re: Help with Funding Plan

Postby bigringsprinter » Mon May 22, 2017 5:30 pm

Thanks for the reply.

I also thought the lower tax bracket she is in would allow for more shielding of cap gains, but the cap gains are in a Trust account (which has its own tax ID), and Trust accounts start getting hit for cap gains after the first ~$12k of income/gains. She may have close to that much income from the FI portion of the account, so virtually all of the cap gains will be taxed until the FI principal shrinks.

Her personal tax bracket will not influence this.

It is a one inheritor situation, and they've discussed funding from the inheritor's assets in the future, so that may be something that works.

Thanks again.

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CAsage
Posts: 481
Joined: Sun Mar 27, 2016 6:25 pm

Re: Help with Funding Plan

Postby CAsage » Mon May 22, 2017 5:41 pm

Ignorant question: Cannot the trust disperse the income/capital gains to the person, and have them then include it in their taxes?

Suggestion: A short term bond fund would be a suitable alternative to a CD ladder, and allow you to withdraw monthly. Saves you from having to find yet another account for the non-CD cash.

Suggestion: Gradually sell off the stock fund; it if crashes you will be a lot sorrier than paying the taxes (as in, don't let the tax tail wag the dog... or something kitschy like that).

bigringsprinter
Posts: 5
Joined: Fri May 12, 2017 12:22 pm

Re: Help with Funding Plan

Postby bigringsprinter » Thu May 25, 2017 5:47 pm

CAsage wrote:Ignorant question: Cannot the trust disperse the income/capital gains to the person, and have them then include it in their taxes?

As I understand it, the trust can disperse money to my friend's mother, which would be taxed as normal income of hers, but I believe when an asset in the trust is sold the capital gains are considered taxable gains for the trust, and the trust must pay those taxes regardless of how proceeds are distributed.

Thanks for the other ideas as well.


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