need help with strategy to sort out parent's finances

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WBfan
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need help with strategy to sort out parent's finances

Post by WBfan » Sun Sep 08, 2019 12:05 am

I have recently been asked by my mom to look over my parents financial situation and found some concerning investments and overall strategy in their finances and would greatly appreciate some Boglehead valuable advice!
My folks have been extremely thrifty and hard working and have been good savers but do not know much about investing and have placed their trust in and advisor who may not be acting prudently in their best interest.

Dad in mid 80s medium to fair health
Mom in mid 70s good health

Both have Pension and SS without survivor benefit on either- totals 100K annually (for both- if one died the survivor would have roughly half this)
(NO long term care insurance)

Cash 80 K
Mom Traditional IRA- 305 K
Dad Traditional IRA- 151 K
Dad Roth IRA- 13 K
Joint Taxable account: 406 K

All accounts are invested with the same proportions of stock/international stock/bonds- about 68% stock with 15% international and 32% bonds. There appears to be no strategizing for tax-preferential investing between Tax deferred vs Taxable accounts. They have about 18 funds in each account- many with overlapping holdings. All funds have front load of 5.75% and ER 1 to 1.5. Their finance investor/manager is churning a bit and my folks have no idea what the wrap fee is.
It looks like each fund is having withdrawals to pay for mortgages with ? no attention to RMD on IRA (most of withdrawals are being taken from the Taxable account but some withdrawals are from the IRAs and these exceed my calculation of RMD by several percentage points). They have put their financial person in charge of this. They like this person and have been with this person for a long time.

They own 3 properties (not income producing) with 3 mortgages: 136K, 159K, 140K for total of about 435K in mortgage debt (interest rates between 3.75-4.75). Advisor told them they could do better with investments and would be worth paying interest on mortgages and keeping the money in the investment account.

They don't carry credit card debt

My gut feeling is they need to sell one of their properties, take the capital gains tax hit and pay off the other mortgages (if they can - or to the extent they can).
Otherwise, if they can't or won't sell a property, use the taxable account and pay off mortgages- though that leaves them less liquidity and they still have overhead costs of carrying 3 properties.
I would really like to get them away from their current advisor and into a simple portfolio of no load, low ER, index fund investments that they can run themselves or if necessary, with a little help from the "kids".
I think the IRAs can roll over (without any tax consequences) to another company and then switch out the investments?
If/when we hit a big recession in their current state they will be in a precarious position (especially if one dies and leaves the other with half the stable income coming in).
I know ultimately it is their decision and not mine but do feel I need to give advice since they "invited me in"
Thanks ahead of time to any advice!

BarbBrooklyn
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Re: need help with strategy to sort out parent's finances

Post by BarbBrooklyn » Sun Sep 08, 2019 4:35 am

Other more expert folks are going to chime in here, but why do they have 3 properties? Do they travel from place to place often?

Having 400+k in mortgage debt at their age seems kind of insane; you might point out to mom that since the "advisor" is getting 5% upfront, of COURSE he wants their money in his funds and not paying off debt.

You'd do well to post their actual investments here to get a better analysis of how to extricate them from this morass.
BarbBrooklyn | "The enemy of a good plan is the dream of a perfect plan."

GmanJeff
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Re: need help with strategy to sort out parent's finances

Post by GmanJeff » Sun Sep 08, 2019 5:05 am

Before making changes, you probably need to have a good understanding of your parents' goals for their investments, their tax situation, and their risk tolerance.

It would be helpful to know the reason for owning the properties they don't live in, as it's difficult to offer counsel about what to do with them without an understanding of the rationale for their acquisition in the first place, such as for potential appreciation.

Would your parents be willing to move their investments from their current advisor to an alternative which may not provide the same degree of in-person interactivity that they are accustomed to?

People in their 70s and 80s, who have shown no inclination to manage their own investments so far, may not be too interested in or able to begin to do so now, even if they have a sense that they may not currently be positioned as well as they might be.

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CAsage
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Re: need help with strategy to sort out parent's finances

Post by CAsage » Sun Sep 08, 2019 6:47 am

Agree with above posters. The very first question is what changes they are actually willing to make. Then, you can see about selling one property (or wait until the first one passes, at which point changes may be appropriate and they can sell without capital gains due to step up basis). The best solution to save them lots of real money every year would be to redo the investments. You need to find out the capital gains on the taxable accounts before you sell anything; sell any losers, sell gainers to offset losers, and then see what's left. Your concerns are all valid; those loads and fees are dreadful.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

aristotelian
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Re: need help with strategy to sort out parent's finances

Post by aristotelian » Sun Sep 08, 2019 8:09 am

Leveraging the mortgage debt isn't necessarily bad if your dad enjoys real estate. If he put all his eggs in one property, an issue with the property could be very disruptive to their cash flow.

In this day and age, 5% load fees are criminal. My tip priority would be to encourage them to get away from the FA. Perhaps start with the IRAs which you can liquidate quickly with no tax hit. Then if the IRAs outperform the brokerage account they will see the light.

Pudge
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Re: need help with strategy to sort out parent's finances

Post by Pudge » Sun Sep 08, 2019 1:59 pm

WBfan wrote:
Sun Sep 08, 2019 12:05 am
I have recently been asked by my mom to look over my parents financial situation and found some concerning investments and overall strategy in their finances and would greatly appreciate some Boglehead valuable advice!
My folks have been extremely thrifty and hard working and have been good savers but do not know much about investing and have placed their trust in and advisor who may not be acting prudently in their best interest.

Dad in mid 80s medium to fair health
Mom in mid 70s good health

Both have Pension and SS without survivor benefit on either- totals 100K annually (for both- if one died the survivor would have roughly half this)
(NO long term care insurance)

Cash 80 K
Mom Traditional IRA- 305 K
Dad Traditional IRA- 151 K
Dad Roth IRA- 13 K
Joint Taxable account: 406 K

All accounts are invested with the same proportions of stock/international stock/bonds- about 68% stock with 15% international and 32% bonds. There appears to be no strategizing for tax-preferential investing between Tax deferred vs Taxable accounts. They have about 18 funds in each account- many with overlapping holdings. All funds have front load of 5.75% and ER 1 to 1.5. Their finance investor/manager is churning a bit and my folks have no idea what the wrap fee is.
It looks like each fund is having withdrawals to pay for mortgages with ? no attention to RMD on IRA (most of withdrawals are being taken from the Taxable account but some withdrawals are from the IRAs and these exceed my calculation of RMD by several percentage points). They have put their financial person in charge of this. They like this person and have been with this person for a long time.

They own 3 properties (not income producing) with 3 mortgages: 136K, 159K, 140K for total of about 435K in mortgage debt (interest rates between 3.75-4.75). Advisor told them they could do better with investments and would be worth paying interest on mortgages and keeping the money in the investment account.

They don't carry credit card debt

My gut feeling is they need to sell one of their properties, take the capital gains tax hit and pay off the other mortgages (if they can - or to the extent they can).
Otherwise, if they can't or won't sell a property, use the taxable account and pay off mortgages- though that leaves them less liquidity and they still have overhead costs of carrying 3 properties.
I would really like to get them away from their current advisor and into a simple portfolio of no load, low ER, index fund investments that they can run themselves or if necessary, with a little help from the "kids".
I think the IRAs can roll over (without any tax consequences) to another company and then switch out the investments?
If/when we hit a big recession in their current state they will be in a precarious position (especially if one dies and leaves the other with half the stable income coming in).
I know ultimately it is their decision and not mine but do feel I need to give advice since they "invited me in"
Thanks ahead of time to any advice!
I agree with the other posters thus far. I would also want to know the financial stability of the pension, their overall health insurance coverage situation, the reason for keeping the properties if they are not rented, and the market values of the properties. (Some pensions are underfunded.)

Their asset allocation appears out of kilter with their age. If it were me, I would be more inclined to attempt to sell property first and avoid draining liquidity, but I would want to know more about the properties first. I would also agree that the Financial Advisor has some explaining to do on several fronts.

Luckywon
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Re: need help with strategy to sort out parent's finances

Post by Luckywon » Sun Sep 08, 2019 2:07 pm

For my own curiosity I'm asking, but perhaps may serve as a warning to others, Is this financial advisor with Edward Jones?

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Watty
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Re: need help with strategy to sort out parent's finances

Post by Watty » Sun Sep 08, 2019 2:32 pm

WBfan wrote:
Sun Sep 08, 2019 12:05 am
Advisor told them they could do better with investments and would be worth paying interest on mortgages and keeping the money in the investment account.
The sales person (not really an advisor) has a lot of incentive to have them not pay off the mortgages since that would reduce the size of their account and the salesperson would get lower fees each year. Between the fund loads, high mutual fund fees, and probably an asset under management fee, paying off $300K in mortgages could probably cost the brokerage $10K a year or more.
WBfan wrote:
Sun Sep 08, 2019 12:05 am
Their finance investor/manager is churning a bit and my folks have no idea what the wrap fee is.
Two things to do first if your parents are comfortable with it;

1) Revoke the advisors authority to make any trades in their account without any prior approval.

2) Change all the mutual funds to not automatically reinvest any dividends or capital gains distributions. There is no sense if buying any more of a high cost mutual fund that they will not want to keep for the long term.

WBfan wrote:
Sun Sep 08, 2019 12:05 am
I would really like to get them away from their current advisor and into a simple portfolio of no load, low ER, index fund investments that they can run themselves or if necessary, with a little help from the "kids".
One alternative would be to have them have Vanguard manage their account for a least a few years using there personal advisory services. (PAS)

They only change 0.3% and they will not put them into bad investments. Going to a different advisor might feel more comfortable to them than trying to manage it themself.
WBfan wrote:
Sun Sep 08, 2019 12:05 am
All accounts are invested with the same proportions of stock/international stock/bonds- about 68% stock with 15% international and 32% bonds.
For comparison the Vanguard Target Date Retirement Income Fund is about 30% stocks and 70% bonds.

https://investor.vanguard.com/mutual-fu ... file/VTINX

To make matters worse the mortgages are very much like a negative bond so if you subtract that from their bond asset allocation their portfolio is even more extreme.

I would suspect that their advisor has been making big bets with their money to try to make the portfolio performance look better. They may have gotten lucky and had that bet pay off since the stock market is near an all time high but that is likely more luck than skill by the advisor.

Topic Author
WBfan
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Re: need help with strategy to sort out parent's finances

Post by WBfan » Sun Sep 08, 2019 4:16 pm

Thank you all very much for your responses!
The properties are:
A family farm (has been in the family for about 100 years but not been productive in any way for the last 40 years. It may be able to sell for 500-600K but folks say they won't sell it for less than a million. It has low property tax and insurance. It is in the middle of nowhere and no one in the family currently has any interest in farming though my youngest sibling is reluctant to have it sold

There is a vacation lake property that is likely worth about 1.5 million and has high property taxes and insurance. The overhead is also expensive. Selling this one would be highly unlikely as it is loved everyone- though there are interesting dynamics between the "kids" over what might happen with the property after the parents are gone- my preference would be to bow out and not get into any family drama this- so ultimately would not mind if it were sold.

Parents main residence is a small acreage near my youngest sibling and is in a great location for them- close to good medical care. It is likely worth 450K. They wouldn't sell unless they were going to move in with my youngest sibling- which apparently is a possibility...

They have great medical coverage- bought all Medicare has to offer with all the supplements and highest medication coverage (sorry I'm just learning all the terminology around Medicare and how it works- I'm hopefully at least 10+ years from retiring myself)

Their pensions are quite solid.
I believe my mother may live into her mid to late 90s as most of the people on her side did. My dad may not see the end of his 80s and he is 10 years older than she. So they need enough money for her to live without him for probably another 15-20 years.

My main interest is that they are both financially sound until the end of their days and I have no expectation of inheriting (don't need it and have plenty of my own and feel comfortable- though no one really knows what disasters could lie ahead...

HomeStretch
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Re: need help with strategy to sort out parent's finances

Post by HomeStretch » Sun Sep 08, 2019 4:41 pm

Calculate the advisor/ER fees and ask your parents if they feel they are getting that value each year from their advisor.

My parents left their advisor when I showed they were paying $10k in fees and only receiving $18k in RMDs.
They are very happy at Vanguard.

Pudge
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Re: need help with strategy to sort out parent's finances

Post by Pudge » Sun Sep 08, 2019 9:15 pm

WBfan wrote:
Sun Sep 08, 2019 4:16 pm
Thank you all very much for your responses!
The properties are:
A family farm (has been in the family for about 100 years but not been productive in any way for the last 40 years. It may be able to sell for 500-600K but folks say they won't sell it for less than a million. It has low property tax and insurance. It is in the middle of nowhere and no one in the family currently has any interest in farming though my youngest sibling is reluctant to have it sold

There is a vacation lake property that is likely worth about 1.5 million and has high property taxes and insurance. The overhead is also expensive. Selling this one would be highly unlikely as it is loved everyone- though there are interesting dynamics between the "kids" over what might happen with the property after the parents are gone- my preference would be to bow out and not get into any family drama this- so ultimately would not mind if it were sold.

Parents main residence is a small acreage near my youngest sibling and is in a great location for them- close to good medical care. It is likely worth 450K. They wouldn't sell unless they were going to move in with my youngest sibling- which apparently is a possibility...

They have great medical coverage- bought all Medicare has to offer with all the supplements and highest medication coverage (sorry I'm just learning all the terminology around Medicare and how it works- I'm hopefully at least 10+ years from retiring myself)

Their pensions are quite solid.
I believe my mother may live into her mid to late 90s as most of the people on her side did. My dad may not see the end of his 80s and he is 10 years older than she. So they need enough money for her to live without him for probably another 15-20 years.

My main interest is that they are both financially sound until the end of their days and I have no expectation of inheriting (don't need it and have plenty of my own and feel comfortable- though no one really knows what disasters could lie ahead...
So, it appears that there is a lot of equity in the properties. (Family politics aside, I am not sure it matters what the siblings think about selling the property if they don't own it. If your parents are, in fact, the owners, then it would be their own personal decision as to whether to sell any of the properties.)

If there is question as to market value, they can have the properties formally appraised - or get a real estate broker's market opinion. Appraisals cost more and take more time, but carry more weight than a broker opinion. A competent, local, experienced realtor and appraiser should be able to give candid feedback on the properties.

With the sale of the properties, this would right-size their financial picture and liquidity considerably. Really, overall, when you look at the total picture, they have a lot of their wealth tied up in an illiquid asset, namely real estate, and a lot of money (for their age) tied up in stocks - 68%. That appears to be a lot of risk and lot of illiquidity for their age and circumstances.

One other thing to think about is that they really may not need 3 separate mortgages given the current loan balances owed and the estimated property values. 4.75% seems pretty high to me for a mortgage in a declining rate environment. If they were younger, they might consider putting all the mortgage debt onto a single property at a lower rate of interest. Meaning consolidate the debt at a lower rate of interest onto a single property to improve cash flow. You might even be able to pick and choose which property you would want to put the mortgage debt. Going through the mortgage loan process is probably too much hassle, especially if they end up just wanting to sell the properties.

When you say the pensions are solid, what does that mean exactly? Meaning, have you done any extensive in-depth research on the financial health of the pension?

If you went ultra-conservative, you would sell some or all of the real estate properties, and take all the cash and invest conservatively in CDs or bonds, and sell the stocks. Maybe keep a tiny portion in stocks for future growth.

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Watty
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Re: need help with strategy to sort out parent's finances

Post by Watty » Sun Sep 08, 2019 9:30 pm

Be sure to know the capital gains details before any of the investments in the taxable account, or the land is sold.

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WWJBDo
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Re: need help with strategy to sort out parent's finances

Post by WWJBDo » Sun Sep 08, 2019 9:58 pm

The first thing I would do is give them a copy of this book:
https://smile.amazon.com/Beyond-Grave-R ... 062336223/ because it sure sounds like they don't have a plan for after they are gone and at their ages they need a plan.
Seriously, the book is filled with readable vignettes, explaining a lot of what can go wrong without a well thought out will or trust in place. Getting your folks to think about the topic is also a good entree into talking about changing investments, etc.
"It is difficult to get a man to understand something when his salary depends upon his not understanding it." Upton Sinclair

tibbitts
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Re: need help with strategy to sort out parent's finances

Post by tibbitts » Sun Sep 08, 2019 10:08 pm

Are you sure you are paying loads? Some funds waive loads when held in AUM accounts.

LeeMKE
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Re: need help with strategy to sort out parent's finances

Post by LeeMKE » Mon Sep 09, 2019 3:04 am

+1 everyone

The Real Estate Owned (REO) isn't investment property. These are more like personal property, i.e. toys. With so much family drama attached to the properties, I'd avoid messing around with them until one person passes and the need to address the overhead rises in importance. However, re-arranging the mortgages to reduce the interest rate is worth investigating once you all get on the same page about the liquid investments.
The mightiest Oak is just a nut who stayed the course.

hudson
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Re: need help with strategy to sort out parent's finances

Post by hudson » Mon Sep 09, 2019 7:46 am

WBFan,
It's tough advising parents, or anyone actually...even if they ask. My parents and my wife's parents did not want or accept any financial coaching. They'd listen to me on maintenance items for their house. They believed that their financial situation was absolutely perfect.
The chances of them taking your advice or this forum's advice are slim. No good deed goes unpunished.

What if they asked me what I would do? I would immediately transfer everything to say Vanguard. I would go to Vanguard, Fidelity, or Schwab and set up a transfer. I would move on from that "train wreck" as soon as possible.
I would put all of the properties on the market, priced to sell. If there was any money remaining after paying off the loans, I would put it in very safe fixed income. After all that is complete, they would be in a much better place and they would be ready for the next phase of their re-do.

delamer
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Re: need help with strategy to sort out parent's finances

Post by delamer » Mon Sep 09, 2019 9:46 am

WWJBDo wrote:
Sun Sep 08, 2019 9:58 pm
The first thing I would do is give them a copy of this book:
https://smile.amazon.com/Beyond-Grave-R ... 062336223/ because it sure sounds like they don't have a plan for after they are gone and at their ages they need a plan.
Seriously, the book is filled with readable vignettes, explaining a lot of what can go wrong without a well thought out will or trust in place. Getting your folks to think about the topic is also a good entree into talking about changing investments, etc.
My first thought was whether your parents have all the needed estate documents in place. Especially given that you know there are differences of opinion among the siblings as to disposal of the properties, because that can be addressed in their wills. They also are at an age when they need to grant medical powers-of-attorney and have “living wills.”

I agree with Watty that they should immediately revoke their advisor’s ability to make trades and that any dividend reinvestment should be turned off.

If you can convince them to leave the advisor, there will be no taxes if they rollover their IRAs to another financial institution. They probably can move everything “in kind” without selling and then reallocate the portfolios once they are moved. (Occasionally, a specific investment will need to be cashed out before it is moved, but the new institution will tell you if that is the case.). Note that the new institution can arrange to pull the assets from their current advisor’s firm. They sign the paperwork and don’t need to deal directly with the old advisor.

The same is true for the taxable account, in terms of the process. But capital gains taxes will need to taken into before anything is sold.

If the family farmhouse is unoccupied and not being checked on/maintained regularly, that seems like a problem waiting to happen.

BTW, the 18 different investments isn’t unusual for the type of advisor your parents have. They can’t justify their existence (or costs) with a 3 fund Boglehead portfolio.

BillWalters
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Re: need help with strategy to sort out parent's finances

Post by BillWalters » Mon Sep 09, 2019 10:11 am

Just reading the OP makes my blood boil. 5% fee to buy the fund then 1% annual fee plus (it seems) at least 1% to the advisor?

That’s criminal. This topic needs to get so much more attention. These people belong in jail, not across the table from honest people robbing them. Disgraceful. I truly don’t know how these people sleep at night.

Pudge
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Re: need help with strategy to sort out parent's finances

Post by Pudge » Mon Sep 09, 2019 6:26 pm

LeeMKE wrote:
Mon Sep 09, 2019 3:04 am
+1 everyone

The Real Estate Owned (REO) isn't investment property. These are more like personal property, i.e. toys. With so much family drama attached to the properties, I'd avoid messing around with them until one person passes and the need to address the overhead rises in importance. However, re-arranging the mortgages to reduce the interest rate is worth investigating once you all get on the same page about the liquid investments.
End of life costs - retirement homes, hospice care, surgeries - can all cost a small fortune. If we do head into a severe recession and the real estate and stock markets takes a nosedive, you don't want to be kicking yourself for not selling the properties sooner.

At this stage, I would be more concerned about 1.) liquidity, 2.) rebalancing the portfolio to a more suitable asset allocation and fee structure, 3.) making sure that the pension is in really good standing, and 4.) taking a close look at the real estate values and local real estate market direction to evaluate whether to sell real estate, and 5.) possibly consolidating the mortgage debt at a lower rate of interest.

$800k can go real fast, especially if a couple is facing end of life costs that are astronomical. If they have to take a haircut on the pension at some point, and the stock and real estate markets take a nosedive, then the stock investments may not be sustainable without having the properties sold. Mom in her 70s, and with today's medicine, could live for another 25-30 years.

I guess what I am trying to say is to do some really hard-nosed "worst case scenario" type of planning. Meaning, think about the ideal position they would want to be in during a worst case scenario, then move strategically towards that ideal position.

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WBfan
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Re: need help with strategy to sort out parent's finances

Post by WBfan » Mon Sep 09, 2019 9:11 pm

Thank you all VERY much! I appreciate your advice and also the shared concern! It has been a little crazy-making talking with my parents and youngest sibling who do not seem to understand the gravity of the risk they could be in (as has been pointed out in your posts) if the market takes a nose dive, they are still paying 75K per year out of their portfolio for the mortgage.
I thought I had them convinced that it would be a good idea to sell the farm but the youngest sibling is strongly disagreeing-so we are back to square one.
Possibly could get them to think about trying to refinance the mortgages.

We did talk to the financial person today and he told me he does not have a "wrap" fee. He also said he never charged a 5.75 % load, then back peddled and said not if the portfolio was over 1 million value, then said it's actually 1.5% load, then said he hasn't sold them a new fund in years (which isn't true for the last 5 years as I've checked). So not sure what to say about this. He is a very friendly guy though. I can see why my folks like him.
I checked the AA as of July this year and they are now in 80% stock and 20% bonds (with 20% of the stocks in International). I asked their advisor if that that was wise for a couple 70-80 years old and he said -" well yes I am a "growth" man myself, and I think you parents are on the same page with me". I may have convinced my parents that a 50:50 stock:bonds might be wiser (or even less stock...).

They have a Will and Revocable trust though I don't known when it was last updated. I believe my youngest sibling is their DPA and also likely the executor of the Will. They don't want to share this information.

They have no Long Term Care Insurance and I believe their plan is to move in with the youngest sibling if they need assistance.

I guess I've done all I can do and wrote down my recommendations- echoing what you all have suggested as options. Thanks so much!
Sorry for the venting- it's been frustrating.

psteinx
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Re: need help with strategy to sort out parent's finances

Post by psteinx » Tue Sep 10, 2019 11:23 am

WBfan wrote:
Sun Sep 08, 2019 4:16 pm
The properties are:
A family farm (has been in the family for about 100 years but not been productive in any way for the last 40 years. It may be able to sell for 500-600K but folks say they won't sell it for less than a million. It has low property tax and insurance. It is in the middle of nowhere and no one in the family currently has any interest in farming though my youngest sibling is reluctant to have it sold

There is a vacation lake property that is likely worth about 1.5 million and has high property taxes and insurance. The overhead is also expensive. Selling this one would be highly unlikely as it is loved everyone- though there are interesting dynamics between the "kids" over what might happen with the property after the parents are gone- my preference would be to bow out and not get into any family drama this- so ultimately would not mind if it were sold.

Parents main residence is a small acreage near my youngest sibling and is in a great location for them- close to good medical care. It is likely worth 450K. They wouldn't sell unless they were going to move in with my youngest sibling- which apparently is a possibility...
There are a number of interesting angles to this situation, but I'll focus a bit on the real estate.

I'm a little confused about the family farm. It's worth perhaps half a mil up to maybe a mil (if the folks have realistic viewpoints, but they may just be delusional/emotionally overinvested). But it's in the middle of nowhere, there are no interested farmers in the family, and it's not generating income?

This is weird.

Real, valuable farmland in the middle of nowhere probably has rental value. Corn, beans, whatever. Again, assuming the farmland is valuable (which you say it is). Is it being rented? If so, then it's maybe ok for it to just sit there - the rental income may offset the mortgage and other costs, and may even provide a bit of net income to the parents. If the land is truly lying fallow, then it seems SOMETHING should be done with the land. Either find a way to generate some income from it (rent it), or sell it, or something. It's hard to imagine that family members would be too upset about ~100 acres of land far from any family members, lying fallow, getting sold. Of course, there may be some trade-offs to consider between capital gains taxes and step-up basis upon death, but if you expect your mother to live ~20 more years, then leaving land fallow for that long to save some on capital gains taxes seems questionable.

Next, a $1.5M lake property, with high expenses. I imagine it's nice, and the rest of the family enjoys it. But that's a LOT of capital tied up, plus the expenses, for a vacation property. And yes, there's a solid possibility of family drama, as your parents' usage of it declines, the bills for it continue, and ultimately, if/when it is passed on to heirs who must figure out how to pay all the associated costs. Usage is likely to vary. One heir may live 500 miles away, use the place once a year, if that, and prefer to sell out and realize several hundred $K in value (rather than a share of ongoing expenses). Another heir who lives 30 minutes down the road and uses the property 10 times a year may like the status quo, especially if other heirs are bearing a large portion of the costs of the property. I would be thinking about these possible issues NOW, regardless of whether this is an opportune time to act on them.

Also, a $1.5M property is a VERY expensive vacation property, especially when the owners (your parents), are not spectacularly rich. It sounds like this property, at gross (excluding mortgage) value, is close to half their net worth. For a VACATION property, with high expenses, to boot. Ouch.

psteinx
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Re: need help with strategy to sort out parent's finances

Post by psteinx » Tue Sep 10, 2019 11:36 am

So, to do a quick net worth approximation:

Traditional IRAs: $456K
Roth: $13K
Taxable and cash: $486K
Total of $955K, but some allowance should be made for taxes on withdrawals on the traditional IRA, and capital gains on the taxable, which, since it's mostly equities, probably has some CG. Let's call it $830K, net.

Main house: $450K
Vacation property: $1500K
Family Farm: $550K
Mortgages on these 3: $435K

So, net property values of about $2065K
There's probably more capital gains embedded in these properties (especially the family farm), so the REALIASABLE net (after paying CG) is maybe closer to $1915K.

And that in turn, puts total net assets, after taxes, at about $2745K. If certain assets were held until death, then step up gains might eliminate CG liabilities and thus increase the net value some, but if mother lives ~20 years, given the high carrying costs and lack of income from the properties, it's not very realistic for her to hold all 3 properties for all that time.

The lake property in particular stands out as a disproportionate use of assets (and income!) for a couple with this approximate net worth. Turn the lake property and the family farm into cash, and your parents are very well provided for, at normal spend rates. It wouldn't be the end of the world for the status quo to prevail for ~5 years, perhaps until father passes, and a better rationalization of the properties occurs. Also, depending on how the properties are titled and your state laws, there may be a partial (or complete? dunno...) step up in basis if/when one of them passes. You may want to do some research on this. (I am neither a lawyer nor an accountant.)

Yes, the FA costs associated with the liquid portfolio could probably be reduced, too. But the real "leak" here, IMO, is the (1500K + 550K) sitting in two properties that are not generating income, and, for the higher valued property especially, in fact generating costs.

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Wiggums
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Re: need help with strategy to sort out parent's finances

Post by Wiggums » Tue Sep 10, 2019 11:42 am

HomeStretch wrote:
Sun Sep 08, 2019 4:41 pm
Calculate the advisor/ER fees and ask your parents if they feel they are getting that value each year from their advisor.

My parents left their advisor when I showed they were paying $10k in fees and only receiving $18k in RMDs.
They are very happy at Vanguard.
+1

psteinx
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Re: need help with strategy to sort out parent's finances

Post by psteinx » Tue Sep 10, 2019 11:52 am

Here's a way to think about things.

Let's say that the $875K of non-cash liquid investments is in funds average 1.1% ER, and should be (per Boglehead logic) in funds with a 0.1% ER. Assume that the advisor is not charging a wrap fee, and that no more front/back loads will be paid from here, forward.

Then the drag of keeping these investments with this advisor is about $875K * (1.1%-0.1%) = $8,750/year.

(To be slightly more complex, switching these investments might involve paying some cap gains on the taxable stuff, but on the other hand, my assumptions about the ER, lack of wrap fee, and no new front loads paid may be a little optimistic. So my ballpark annual cost is probably at least, well, in the ballpark.)

Compare to ~$2050K in the vacation property and the family farm that are not income generating.

Even without income, the farm may increase in value at something close to the inflation rate, but it also probably has at least modest costs. So let's assume the (appreciation less costs) comes out to about 1.5%.

For the vacation property, assume again, appreciation close to inflation, but higher costs, for a net (appreciation less costs) of perhaps 0.5%.

Compare to the possible return on investment. Simply paying off mortgages would return about 4%, or a little more. A blend of fixed income (currently around 2%) and equities might also have a realistic expected return of 4%. Maybe even higher, but lets go with 4%. (And this also assumes investment via low cost funds or the like - no 1% ER drag).

So, for the family farm:
$550K * (4%-1.5%) = $13,750/year

For the vacation property:
$1500K * (4%-0.5%) = $52,500/year

And, again, recall the ER/adviser -driven lag of the liquid portfolio of around
$8,750/year

So, all 3 could be improved on. But the drag from the properties likely dwarfs that from the adviser. To the extent you want to cash in chits (time, effort, mental anguish) to improve your parents' financial situation, it may be better to focus first on the properties, while being mindful of potential for family drama.

psteinx
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Re: need help with strategy to sort out parent's finances

Post by psteinx » Tue Sep 10, 2019 12:06 pm

Softening my above posts a little:

The vacation property, in particular, is likely a large value sink for your parents.

BUT, between the pensions and the SS, plus the liquid investments, they may be able to sustain things for years or for their entire lifetimes. In particular, if there truly is a good plan for mother to move in with kid at some point after father dies, then things may be at least somewhat in-hand. But of course, keep in mind that big hospital bills might come, and/or kid may not be able/willing to provide the care that mother needs at some point.

The parents, and various kids/other heirs/descendents/interested parties may have different forms of mental accounting. While the vacation property may be expensive and perhaps of only modest direct benefit to the parents themselves and/or more distant parties, it may be viewed by some as both glue for the family, and what's due to those living close and providing more care & visits. It may be seen by some as an incentive for the kids (and grandkids/great-grandkids?) to remain relatively close to the parents. Etc. Lots of things to keep in mind, and how you view things personally may not be the same as how others view things.

bltn
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Re: need help with strategy to sort out parent's finances

Post by bltn » Wed Sep 11, 2019 5:05 am

As noted above, the vacation home may be an important part of your parents’ lives. Maybe not the farm. Consider selling the farm to pay off the mortgages.
I used Vanguard and Fidelity to transfer assets from multiple brokerages and mutual fund companies a few years ago. I simply called them, and they handled the transfer with no further input from me. Very simple.

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Re: need help with strategy to sort out parent's finances

Post by junior » Wed Sep 11, 2019 11:36 am

If you handle your parents portfolio what will happen if the stock market crashes? Will it cause stress on your relationship or are they able to handle such a crash?

One reason you might try to move them to a better advisor instead of handling it yourself is there'd hopefully be less stress on your relationship if there's a market crash and your parents panic (if they may be prone to do so).

MathWizard
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Re: need help with strategy to sort out parent's finances

Post by MathWizard » Wed Sep 11, 2019 12:06 pm

Family Farm: I understand why they do not want to sell, but a farm is a business, and should carry its own weight.
They may need a property management company to rent it out for them. This should at least not be
a money sink, and perhaps make a 2% profit.

Vacation Property: Parents should say: we can no longer afford to keep this. We are going to sell it, or you kids can buy us out.
Kids need to get a loan from a bank, not "We'll pay you X per month mom and dad." Even selling at a small family discount
would be a good deal, then put those dollars to work (no 5.75% load though). I think having the kids own it is not a great idea,
but why should they have a say in selling something they do not own? You parents are not rich, and the kids should not
treat them as such.

Main residence: keep but pay down mortgage with proceeds of sale of vacation property.

psteinx
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Re: need help with strategy to sort out parent's finances

Post by psteinx » Wed Sep 11, 2019 2:48 pm

MathWizard wrote:
Wed Sep 11, 2019 12:06 pm
You parents are not rich, and the kids should not treat them as such.
Net worth around $2.7M. Yeah, they're rich.

Are a lot of their assets underproductive? Yeah.

But even on BH, ~$2.7M is nothing to sneeze at. And in the real (non-BH) world, it's quite a bit.

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