Advice on Mom's retirement accounts

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Winston101
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Advice on Mom's retirement accounts

Post by Winston101 » Tue May 19, 2020 9:59 am

Thank-you in advance for any insights and advice that you can offer!

I manage my mother's retirement savings. Mom is 97 and in a memory care facility. She has $710K between two retirement accounts: $160K in an IRA and $550 in a taxable trust account. Mom draws $8000/month from savings to pay expenses. Between the two accounts, she has 42% in equities and 58% in money market and bond funds. I keep enough in the money market to pay 1 year of expenses (about $100K). Bonds include a US treasury fund and a state muni fund exempt from Fed and State taxes. All of her equities are in her trust account. This includes $98K in a bio-medical company stock that Dad bought many years ago--long before he died. The rest is in Fidelity total market index fund (FSKAX). The bio-medical stock has outperformed the market and I've wanted Mom to avoid 15% tax on a large capital gains so I've left it untouched. Also, its cost basis will be set to current price when Mom dies.

OK, here's tricky part. My sister's new son-in-law is a financial advisor and my sister has asked him to give us some free advice on Mom's investments.

His first recommendation: Get rid of total market index fund (FSKAX) and replace it with a group of index funds that represent the different asset classes (large-cap-value, large-cap-blend, large-cap-growth, mid-cap-value, etc, etc.). Mom would have a fund for each asset class and the allocation (or weighting) across these funds would be such that it replicates the total market fund. I could then buy/sell based on how each asset class perform rather than buy/sell the entire market. Makes sense to me except I am not an economist or finance expert and would not trust myself to make good buy/sell decisions for the individual asset classes. His response to this is that I could always leave funds untouched except for an annual reallocation to realign them to the total market.

His second recommendation: Get rid of the state muni bond fund and replace with a higher yield, national level municipal bond fund (exempt from Fed taxes but not state taxes). The rational is that the higher yield will more than offset the savings on state taxes. Here' my thoughts on this: if current economic conditions were different and Mom was younger, I'd be attracted to this idea, but right now high yield bond funds scare me given their higher risk and volatility.

He also has a recommendation to avoid Fed capital gains tax on selling some of the bio-medical stock in 2020. This involves reducing her income to under $40K by skipping the IRA RMD this year (permission granted by the Fed CAREs act). This avoids Fed capital gains tax but not state cap gains tax which could be substantial. I'm investigating.

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KlingKlang
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Re: Advice on Mom's retirement accounts

Post by KlingKlang » Tue May 19, 2020 10:16 am

My knee-jerk reaction is that it is silly to replace a total market index fund with multiple stock index funds for a 97 year old. It only multiplies the maintenance work and is unlikely to have a significant impact on the returns over her remaining lifetime. Same with switching bond funds, unlikely to make a significant impact.

Rather than skipping the IRA RMD I would consider draining the small IRA account as soon as possible to avoid the headache of splitting it among multiple beneficiaries.

whereskyle
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Re: Advice on Mom's retirement accounts

Post by whereskyle » Tue May 19, 2020 10:26 am

Winston101 wrote:
Tue May 19, 2020 9:59 am
Thank-you in advance for any insights and advice that you can offer!

I manage my mother's retirement savings. Mom is 97 and in a memory care facility. She has $710K between two retirement accounts: $160K in an IRA and $550 in a taxable trust account. Mom draws $8000/month from savings to pay expenses. Between the two accounts, she has 42% in equities and 58% in money market and bond funds. I keep enough in the money market to pay 1 year of expenses (about $100K). Bonds include a US treasury fund and a state muni fund exempt from Fed and State taxes. All of her equities are in her trust account. This includes $98K in a bio-medical company stock that Dad bought many years ago--long before he died. The rest is in Fidelity total market index fund (FSKAX). The bio-medical stock has outperformed the market and I've wanted Mom to avoid 15% tax on a large capital gains so I've left it untouched. Also, its cost basis will be set to current price when Mom dies.

OK, here's tricky part. My sister's new son-in-law is a financial advisor and my sister has asked him to give us some free advice on Mom's investments.

His first recommendation: Get rid of total market index fund (FSKAX) and replace it with a group of index funds that represent the different asset classes (large-cap-value, large-cap-blend, large-cap-growth, mid-cap-value, etc, etc.). Mom would have a fund for each asset class and the allocation (or weighting) across these funds would be such that it replicates the total market fund. I could then buy/sell based on how each asset class perform rather than buy/sell the entire market. Makes sense to me except I am not an economist or finance expert and would not trust myself to make good buy/sell decisions for the individual asset classes. His response to this is that I could always leave funds untouched except for an annual reallocation to realign them to the total market.

His second recommendation: Get rid of the state muni bond fund and replace with a higher yield, national level municipal bond fund (exempt from Fed taxes but not state taxes). The rational is that the higher yield will more than offset the savings on state taxes. Here' my thoughts on this: if current economic conditions were different and Mom was younger, I'd be attracted to this idea, but right now high yield bond funds scare me given their higher risk and volatility.

He also has a recommendation to avoid Fed capital gains tax on selling some of the bio-medical stock in 2020. This involves reducing her income to under $40K by skipping the IRA RMD this year (permission granted by the Fed CAREs act). This avoids Fed capital gains tax but not state cap gains tax which could be substantial. I'm investigating.
By selling a share of a total-market index fund, you are selling more of whatever has done well lately, no? I don't see how timing sales across sectors reliably yields to a better result. There is always the chance you will sell something at the wrong time, right before it goes up even higher. I don't see how making things more complicated benefits you. I also am skeptical of advisers who recommend making things more complicated. (Thanks, Jack!)
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle

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cheese_breath
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Re: Advice on Mom's retirement accounts

Post by cheese_breath » Tue May 19, 2020 10:30 am

Did he also offer to handle it all for you? If he didn't he will, for a fee.
The surest way to know the future is when it becomes the past.

Beehave
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Re: Advice on Mom's retirement accounts

Post by Beehave » Tue May 19, 2020 10:36 am

The $160K IRA should cover 20 months of care at $8k per month. Do you have documentation that the care she receives is medically needed? If properly documented, you should be able to use the IRA funds with very low tax implications.

I agree with the post above suggesting not complicating things. Between living your own life and caring for mom, I do not see how micro managing sectors is going to add more than it detracts in terms of time, worry, and risk. I would keep it simple and suggest strongly not turning over responsibility to anyone else. The handwriting is on the wall for the future scenario of "this multi-sector thing is a no brainer" - to "oops, I never saw that coming" - to "I'll just take this risk to make up for that negative surprise" - to "where the hell did all the money go?"

Best wishes and keep it simple.

Edited to add - - if care expenses are deductible, then the biomedical stock cap gains tax would be drastically reduced if you want to sell out of that single stock exposure too.

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David Jay
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Re: Advice on Mom's retirement accounts

Post by David Jay » Tue May 19, 2020 10:58 am

First, let me say that the recommendations are not "terrible", at least he didn't suggest that you take the IRA money and put it all in a variable annuity (BH sarcasm).
Winston101 wrote:
Tue May 19, 2020 9:59 am

His first recommendation: Get rid of total market index fund (FSKAX) and replace it with a group of index funds that represent the different asset classes (large-cap-value, large-cap-blend, large-cap-growth, mid-cap-value, etc, etc.). Mom would have a fund for each asset class and the allocation (or weighting) across these funds would be such that it replicates the total market fund. I could then buy/sell based on how each asset class perform rather than buy/sell the entire market. Makes sense to me except I am not an economist or finance expert and would not trust myself to make good buy/sell decisions for the individual asset classes. His response to this is that I could always leave funds untouched except for an annual reallocation to realign them to the total market.

This is "not terrible" and is a typical financial manager's suggestion. There are two issues that would keep me from doing this. The first is complexity for complexity sake. As he said, it will be necessary to rebalance periodically, whereas there is no need to rebalance when holding total market so somebody has to do this. Not a big deal but it will require just a bit more attention.

The second issue is more important, rebalancing will create capital gains (rebalancing is selling the winners, which have the highest gains) and your Mom will pay taxes on those gains. If your mother's portfolio holds Total Stock there will be no capital gains taxes and the heirs will get a step-up basis at time of inheritance so they will have no taxable gains. Taxable gains, especially at your Mom's age, is just throwing money away.


His second recommendation: Get rid of the state muni bond fund and replace with a higher yield, national level municipal bond fund (exempt from Fed taxes but not state taxes). The rational is that the higher yield will more than offset the savings on state taxes. Here' my thoughts on this: if current economic conditions were different and Mom was younger, I'd be attracted to this idea, but right now high yield bond funds scare me given their higher risk and volatility.

I agree with this recommendation. I don't believe that he is talking about "high yield" bond funds, I am guessing he means regular bond funds. Because they are tax free, muni bonds are actually "low yield", the savings in taxes for high income (typically 32% marginal tax rate or higher) individuals makes the trade off beneficial.

He also has a recommendation to avoid Fed capital gains tax on selling some of the bio-medical stock in 2020. This involves reducing her income to under $40K by skipping the IRA RMD this year (permission granted by the Fed CAREs act). This avoids Fed capital gains tax but not state cap gains tax which could be substantial. I'm investigating.

I agree with this suggestion, limiting the amount sold to stay in the "zero" capital gains bracket. Even though it is a good company, the percentage of total portfolio (~14%) in this one stock is a significant risk.
So I agree with two out of three, and if necessary for peace in the family even the third isn't terrible.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

deltaneutral83
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Re: Advice on Mom's retirement accounts

Post by deltaneutral83 » Tue May 19, 2020 11:25 am

Splicing up the total market is sketchy to me. Who has the time and what good is it, possibly more efficient tax lost harvesting? At the age of the account holder, not even close to being worth it unless I'm missing something? I don't necessarily disagree with the bond issue, she's in a low tax bracket, the munis probably need to be present for someone in a high tax bracket which it does not appear to be the case. Keeping taxable income to the top of the 12% bracket lets you take capital gains at 0%, that's good advice. With half a million in the taxable, we can assume that's throwing off 10-15k of dividends? Don't know the entire income picture but selling some of the single stock but staying in the 12% bracket and avoiding those capital gains works I imagine. Even if you mis-measure selling of the single stock say on Dec 31, you will only be charged CG of 15% on the dollars that go into the next tax bracket so you don't have to measure it out 100% accurately especially when you consider the alternative which is the risk of a single stock holding but it doesn't even appear that it represents 10% of the portfolio so it might not even be worth the trouble.

delamer
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Re: Advice on Mom's retirement accounts

Post by delamer » Tue May 19, 2020 11:29 am

Do you know if the cost bases on the assets in the trust will reset when your mother dies?

Depending on the type of trust, they may have reset when your father died but will not do so when your mother does.

RetiredAL
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Re: Advice on Mom's retirement accounts

Post by RetiredAL » Tue May 19, 2020 11:40 am

Winston101 wrote:
Tue May 19, 2020 9:59 am
Thank-you in advance for any insights and advice that you can offer!

I manage my mother's retirement savings. Mom is 97 and in a memory care facility.
I concur with Beehave's comments.

A person that is in already in Memory Care Facility is likely to deficient in enough ADL's ( Activities of Daily Living ) to have the care cost as a deductible medical expense. This could change her the tax situation a lot, especially with respect to possibly drawing down her IRA quickly. You and your siblings are better off inheriting any residual $ left over from her taxable account than her an IRA account.

As to your investment strategy, IMO risk is a hazard. My thoughts are whatever is thought would be gained with the slice and dice approach your sister suggests is likely to be pretty small peanuts.

I'm in a similar place as you. My Dad is 95 and in Assisted Living, but has a strong Military Retirement and Long Term Insurance is paying his ALF cost. Even with that, I've largely re-structured his investment accounts towards lower risk compared to where it was 18 months ago ago.

Looking4Answers
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Re: Advice on Mom's retirement accounts

Post by Looking4Answers » Tue May 19, 2020 11:52 am

I suspect the rationale between breaking up the total market is to allow for tax loss harvesting. However, besides having to keep up with it, there have been many years through the bull market that there weren't that many opportunities to do this even if a person had different funds/etfs for each asset class. It is fine if someone has the interest and incentive to do this, but there does not seem a compelling reason to change what you have been doing.

Sandwich
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Re: Advice on Mom's retirement accounts

Post by Sandwich » Tue May 19, 2020 12:16 pm

RetiredAL wrote:
Tue May 19, 2020 11:40 am
...
A person that is in already in Memory Care Facility is likely to deficient in enough ADL's ( Activities of Daily Living ) to have the care cost as a deductible medical expense. This could change her the tax situation a lot, especially with respect to possibly drawing down her IRA quickly. You and your siblings are better off inheriting any residual $ left over from her taxable account than her an IRA account....
+ 1

I took this method into account when depleting my late uncle's IRA over a three year period. I coordinated IRA withdrawals and taxable account withdrawals so that his itemized medical expenses resulted in him being in the tax bracket was 0%. I asked his health care provider to provide a written statement documenting uncle's deficiency in ADLs.

From memory, I believe the certification must state deficiency in at least 2 ADLs ( i.e., needs assistance with bathing, transferring, etc.) or having "severe cognitive impairment" ... being in a memory care facility may meet the criteria, depending on her individual prognosis.

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grabiner
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Re: Advice on Mom's retirement accounts

Post by grabiner » Tue May 19, 2020 12:25 pm

Looking4Answers wrote:
Tue May 19, 2020 11:52 am
I suspect the rationale between breaking up the total market is to allow for tax loss harvesting. However, besides having to keep up with it, there have been many years through the bull market that there weren't that many opportunities to do this even if a person had different funds/etfs for each asset class. It is fine if someone has the interest and incentive to do this, but there does not seem a compelling reason to change what you have been doing.
The downside is that it increases rebalancing costs, whether you are holding or withdrawing.

Suppose you have $900K in a total-market index, which rises to $1M, and then you need to spend $100K. Your capital gain on the sale will be $10K

Suppose you have $450K in growth and $450K in value, and the entire market rise was in growth, so that you now have $550K in growth and $450K in value. In order to rebalance, you must sell $100K from the growth fund, for a capital gain of $100K*(100K/450K)=$18K.

In the same situation, if you aren't withdrawing, then with the total-market index, you have no capital gain, but with the growth/value split, you have a $9K capital gain to rebalance to 50/50, as you sell $50K from the growth fund to buy the value fund.
Wiki David Grabiner

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CAsage
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Re: Advice on Mom's retirement accounts

Post by CAsage » Tue May 19, 2020 12:43 pm

Thank him for the advice, and ignore it. You are doing fine with a simple, solid plan, don't mess with good karma. I would look into draining that IRA as quickly as possible and prioritize that for spending down for Mom, as if (when...) you and your sister (I'm presuming here...) inherit, you will have to spend it down in 10 years and your tax bracket might be higher. Spend pretax money ASAP, watching carefully to monitor her overall tax situation. Wiping that out in 2 years might make your life even easier. Let Sister get all the good advice she wants with her money!
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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Winston101
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Re: Advice on Mom's retirement accounts

Post by Winston101 » Wed May 20, 2020 8:56 am

Thank you to those who offered suggestions. I truly appreciate it! Here are a couple decisions I've made based on your input as well answers to a few questions.

- Replace the total market index fund with index funds for each asset class? The consensus seems to be, not a great idea for Mom at this time. I agree!
- Replace state muni bond fund with a higher yield, national level municipal bond fund? Feedback on this idea has been mostly positive. I think I agree. I'm putting together a spreadsheet model to validate given a couple options.
- Reduce income in 2020 (skip the RMD) to avoid capital gains tax on sale of bio-medical stock? I agree with reducing income in 2020 but not necessarily on selling the bio-medical stock. Reducing her income will make her eligible for a decent renter's property tax refund offered by our state. The capital gains would reduce or eliminate this eligibility. She'd also have to pay state income tax on the gain. I recognize the risk of having 14% of her savings in a single stock so I may start whittling it down next year.

Other recommendations/questions from forum members:
- Spend down the IRA faster than the annual RMD. I totally agree with this starting in 2021 -- although I don't know how many years we have left to do this. Mom has 7 children so none of us will get that much in an inherited IRA.
- Did the cost basis of the trust get reset when Dad died? The answer is, no. The trust was setup with both Mom and Dad as settlors (ie, co-granters).
- If her care expenses are deductible can they offset taxable income? Mom just moved from assisted living to memory care earlier this year and my sister is investigating how much of her care plan is deductible. Her facility has tiered care plans and at this point, Mom is still at a relatively "light" level of care compared to nursing home type care. I appreciate the suggestion and we will definitely follow-up!

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grabiner
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Re: Advice on Mom's retirement accounts

Post by grabiner » Wed May 20, 2020 9:02 am

Winston101 wrote:
Wed May 20, 2020 8:56 am
- Reduce income in 2020 (skip the RMD) to avoid capital gains tax on sale of bio-medical stock? I agree with reducing income in 2020 but not necessarily on selling the bio-medical stock. Reducing her income will make her eligible for a decent renter's property tax refund offered by our state. The capital gains would reduce or eliminate this eligibility. She'd also have to pay state income tax on the gain.
This may also affect decisions whether to withdraw more from the IRA when the care expenses offset it. The property tax credit is likely based on gross income, not taxable income, so withdrawing more from the IRA to increase adgjusted gross income by $50k (which would include increased taxable SS) and taking a $50K itemized deduction might not affect her income tax but would cost her the tax credit. And not all states allow deductions for medical expenses; you need to check the state tax implication.

If this is an issue, it is better to sell the stock (which is only partly taxable income) to pay the care expenses, rather than to withdraw from the IRA (which is all taxable).
Wiki David Grabiner

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