Managing my mom's account

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LadyGeek
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Managing my mom's account

Post by LadyGeek »

My Mom is in memory care and I'm managing her account as POA (Power of Attorney). I'd like to ensure that her portfolio is appropriate for her situation.

Emergency funds: Yes Not needed
(Edited 9/23/22: A bank savings and checking account hold sufficient funds to pay several months of expenses.)

Debt: None

Tax Filing Status: Single

Tax Rate: 22% Federal, 3.07% State

State of Residence: PA

Age: 90

Desired Asset allocation: 20% stocks / 80% bonds (Added 9/23/22: Capital preservation is more important)
Desired International allocation: 50% of stocks

Please provide an approximate size of your total portfolio: 1.9 M

Current retirement assets

Taxable at Fidelity

58% Fidelity Money Market Fund Premium Class, FZDXX, 0.36%
6% Vanguard Intermediate-Term Treasury Fund Admiral Shares, VFIUX, 0.10%
18% Vanguard Pennsylvania Long-Term Tax-Exempt Fund Admiral Shares, VPALX, 0.09%

Her Traditional IRA at Fidelity

18% Vanguard Target Retirement Income Fund, VTINX, 0.08%
_______________________________________________________________
Total percentage of all the above accounts together equals 100%.

Notes

Recurring expenses: Memory care at roughly 10k / month.

Income: Small pension and Social Security, not enough to cover expenses

Drawdown strategy: I will be drawing down her traditional IRA to pay expenses because memory care is a qualified medical expense. Her AGI (Adjusted Gross Income) will be reduced significantly and it will place her in a much lower tax bracket. Her IRA withdrawals will become essentially tax-free (or very low). (Corrected 9/23/22: AGI is not reduced.)

Also, it is much easier as a beneficiary to manage a taxable account than an inherited IRA.

Questions:

1. What, if anything, should be done with the money market account?

This account represents a recent transfer of bank-issued CDs. The local bank was paying a paltry CD rate of 0.05%, which is the same as the savings account. I could not negotiate for a better rate and is too low to be ignored.

It is very inconvenient to open new accounts under POA. Fidelity and the local bank are the only two options I'll use. So, I cashed-out ("broke") the CDs and moved the money to Fidelity. (Transfer in process, but this will be the final result.)

Discussed elsewhere, I'm considering alternative approaches to the money market. Should a portion be allocated to Treasuries, brokered CDs, or TIPS?

Your time horizon usually defines the types of investments. In this case, the time horizon should also consider that the account is Transfer On Death (TOD) with beneficiaries.

2. What, if anything, should be done with the taxable Vanguard accounts?

A few years ago, I didn't want to touch them because of capital gains. Now, the cost basis is about $1/share higher than the current price. This suggests a tax loss harvesting opportunity, but perhaps I should do nothing.

Update: Post edited 9/23/22 as shown above.
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humblecoder
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Re: Managing my mom's account

Post by humblecoder »

Some thoughts:

Consider whether you want to set aside some money in safe assets to cover your mother's memory care expenses. You mention that it costs $10K/month but she does have a pension and social security, so I assume you would still need to cover some amount less than $10K/month. You would have to decide how many years you'd want to set aside for this.

Since you want to use the Traditional IRA to pay for her care expenses, if that represents 18% of her total portfolio, that would be 3+ years depending upon how much her pension and SS is. Could be a good place to start.

Once you have set aside for her care expenses, the rest of the money can be considered more long term, as this could be for her heirs. That can be invested more aggressively. Perhaps not too aggressively, though, since if she outlives what you set aside above, she might need to tap into this money.

Putting it all together, the Traditional IRA would be the safe assets that you can use for her expenses. Then the taxable can be the legacy fund + long term emergency fund if she outlives her Traditional IRA nest egg. So that could be some sort of three fund portfolio with asset allocation based upon your risk tolerance. Obviously, making those moves in the taxable could result in cap gains, but I am guessing that, since they are all bond/money market funds, the cap gains isn't going to be too onerous.
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Re: Managing my mom's account

Post by dodecahedron »

LadyGeek wrote: Thu Sep 22, 2022 7:35 pm Notes

Recurring expenses: Memory care at roughly 10k / month.

Income: Small pension and Social Security, not enough to cover expenses

Drawdown strategy: I will be drawing down her traditional IRA to pay expenses because memory care is a qualified medical expense. Her AGI (Adjusted Gross Income) will be reduced significantly and it will place her in a much lower tax bracket. Her IRA withdrawals will become essentially tax-free (or very low).

Also, it is much easier as a beneficiary to manage a taxable account than an inherited IRA.
I think your drawdown strategy (of using traditional IRA distributions to pay for medical expenses) is sound but note that deductible medical expenses will NOT reduce her AGI (nor her MAGI for various purposes including IRMAA and taxation of SS benefits).

The deductions will of course reduce her taxable income, which is very helpful, but since the medical deductions are "below-the-line" deductions, your planned strategy of taking large distribution is actually likely to *increase* her AGI rather than decrease it. In particular, the large tIRA distributions virtually ensure that 85% of her SS benefits will be taxable and they may bump up her Medicare IRMAA premiums.

That said, I still think your drawdown plans make sense.
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Re: Managing my mom's account

Post by Exchme »

Sorry for your situation, it is difficult to experience loved ones in this condition.

Given your mom’s age and health, it would seem like you could set aside a few years of expenses for her care and start investing the rest with an eye to heirs’ life spans. For the reserves you keep ready for your mom’s near-term needs, one year in very short term instruments like MM would seem good enough and the rest in a short term bond fund or TIPS.

I would think the tax-exempt fund is a poor deal, those are generally priced to be a fair deal for top tax bracket buyers, but not middle bracket folks like your mom, that seems like a candidate for TLH.
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Re: Managing my mom's account

Post by LadyGeek »

humblecoder wrote: Thu Sep 22, 2022 7:57 pm Some thoughts:

Consider whether you want to set aside some money in safe assets to cover your mother's memory care expenses. You mention that it costs $10K/month but she does have a pension and social security, so I assume you would still need to cover some amount less than $10K/month. You would have to decide how many years you'd want to set aside for this.

Since you want to use the Traditional IRA to pay for her care expenses, if that represents 18% of her total portfolio, that would be 3+ years depending upon how much her pension and SS is. Could be a good place to start.

Once you have set aside for her care expenses, the rest of the money can be considered more long term, as this could be for her heirs. That can be invested more aggressively. Perhaps not too aggressively, though, since if she outlives what you set aside above, she might need to tap into this money.

Putting it all together, the Traditional IRA would be the safe assets that you can use for her expenses. Then the taxable can be the legacy fund + long term emergency fund if she outlives her Traditional IRA nest egg. So that could be some sort of three fund portfolio with asset allocation based upon your risk tolerance. Obviously, making those moves in the taxable could result in cap gains, but I am guessing that, since they are all bond/money market funds, the cap gains isn't going to be too onerous.
Yes, that's basically what I was thinking (3+ years was my estimate). It's almost like a "bucket" approach. The IRA is for expenses and the money market fund holds the cash. It's not truly cash, but is close enough to use it like such.

IRA bucket --> money market bucket holding "cash" <--> bank savings (hub for making payments and receiving income deposits)

money market excess --> other "safe" long-term investments

Once the IRA bucket dries up, I'll work out of the "other" investments or "cash" bucket - depending on liquidity and taxes.
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Re: Managing my mom's account

Post by LadyGeek »

dodecahedron wrote: Thu Sep 22, 2022 8:20 pm I think your drawdown strategy (of using traditional IRA distributions to pay for medical expenses) is sound but note that deductible medical expenses will NOT reduce her AGI (nor her MAGI for various purposes including IRMAA and taxation of SS benefits).

The deductions will of course reduce her taxable income, which is very helpful, but since the medical deductions are "below-the-line" deductions, your planned strategy of taking large distribution is actually likely to *increase* her AGI rather than decrease it. In particular, the large tIRA distributions virtually ensure that 85% of her SS benefits will be taxable and they may bump up her Medicare IRMAA premiums.

That said, I still think your drawdown plans make sense.
In hindsight, you are correct and I misstated what I meant. I modeled her situation in my H&R Block tax software, which is how I saw the significant reduction in taxes. The tax software includes Social Security, so I'm looking at this as well. It does not, however, consider IRMAA.

(If anyone sees something wrong, feel free to correct me. I'm more than willing to accept my mistakes. It's how we learn.)
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Re: Managing my mom's account

Post by dodecahedron »

Exchme wrote: Thu Sep 22, 2022 8:21 pm I would think the tax-exempt fund is a poor deal, those are generally priced to be a fair deal for top tax bracket buyers, but not middle bracket folks like your mom, that seems like a candidate for TLH.
Definitely agree with this. Tax-exempt bonds don't hold much appeal for someone in your mother's current situation with large medical deductions keeping her in a low bracket. If you can tax-loss your way out of the tax-exempt bond fund, it seems like low-hanging fruit to grab and put into another investment.
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Re: Managing my mom's account

Post by LadyGeek »

dodecahedron wrote: Thu Sep 22, 2022 8:35 pm
Exchme wrote: Thu Sep 22, 2022 8:21 pm I would think the tax-exempt fund is a poor deal, those are generally priced to be a fair deal for top tax bracket buyers, but not middle bracket folks like your mom, that seems like a candidate for TLH.
Definitely agree with this. Tax-exempt bonds don't hold much appeal for someone in your mother's current situation with large medical deductions keeping her in a low bracket. If you can tax-loss your way out of the tax-exempt bond fund, it seems like low-hanging fruit to grab and put into another investment.
Thanks. I'm not sure how to handle the tax loss harvesting for those funds. Would it be to sell enough to not exceed the $3,000 maximum annual loss? I assume I would be purchasing more of the money market fund which avoids a wash sale.

Should the intermediate-term bond fund be sold as well?
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Re: Managing my mom's account

Post by Exchme »

LadyGeek wrote: Thu Sep 22, 2022 8:39 pm I'm not sure how to handle the tax loss harvesting for those funds. Would it be to sell enough to not exceed the $3,000 maximum annual loss? I assume I would be purchasing more of the money market fund which avoids a wash sale.

Should the intermediate-term bond fund be sold as well?
First any losses are going to be used to zero out any investment gains, only what's left will be used to offset ordinary income up to the $3,000 limit. But I don't see why you wouldn't sell the whole tax exempt position, it's not an appropriate investment. If your mom makes it past the first of the year, she will have taxes to offset next year too. When she does pass, you haven't done any harm as the cost basis of everything will get reset at that time. I don't know why you would buy more MM with the proceeds though, your mom has too much cash already (of course it turns out that holding gobs of cash was a good thing in 2022, but usually it wouldn't be).

I wouldn't have any problem with holding an intermediate bond fund, that could be appropriate for either your mom or heirs. If you do want to TLH it, then the Vanguard Total Bond Market is not much different in performance.
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Re: Managing my mom's account

Post by phoroner »

LadyGeek,

Sorry for the situation. your mom sounds to be in good financial situation. No disagreement with anything others have said. But a few thoughts:

1. Consider making a bond ladder to cover her expected expenses over the next 3-5 years (or other life expectancy based timeline). This would provide guaranteed cash flow but allow you to safely extend your fixed income duration some. You could then hold several years of buffer funds in a safe fund, such as short-term treasurys (VGSH) or tips (VTIP), and then invest the balance however feels most comfortable.

2. Depending on tax bracket of heirs, you might consider Roth conversions instead of TIRA withdrawals.

Best wishes.
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Re: Managing my mom's account

Post by JayB »

LadyGeek wrote: Thu Sep 22, 2022 7:35 pm Your time horizon usually defines the types of investments. In this case, the time horizon should also consider that the account is Transfer On Death (TOD) with beneficiaries.
Regarding the TOD with beneficiaries, I'd recommend making sure that there are sufficient assets in a taxable account(s) without TOD or beneficiaries to settle your mom's estate down the road, including taxes (e.g., income and PA Inheritance Tax) and last bills for memory or nursing home care after she passes. Once assets are pushed out automatically to beneficiaries by Fidelity or Vanguard, it can be difficult to have the recipients contribute back some of their inheritance in order for the executor/executrix to cover last expenses. And it makes settling the estate and dealing with probate a bit more complex.
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Re: Managing my mom's account

Post by FellsGuy »

At this point it is really impossible for her to run out of assets (emergency fund for what???) and questions like international v domestic stock mix seem odd within her potential lifespan. The macro question is are you asking for her benefit or asking how to optimize the inheritance? If managing for her benefit then treasuries and CD's would be the order of the day and getting creative on the memory care front meaning upping spending. Question are her assets truly being 100% applied to providing her the absolute best quality of life. I have just been through this and 10K a month is an elder warehouse in the northeast, it is assisted living with locked doors. I quickly understood this when I hired an elder care consultant and learned about supplemental programs and truly specialized memory care. A quick example my mother was passive and almost childlike in her desire to please housed with some aggressive / angry people. Virtually memory care units mix these two since they all might "wander off". Within specialized care mom had activities that really seemed to help and her periods of being lucid increased along with her happiness. This was more money but led to a greater quality of life and better safety. We also paid for an art therapist to work with her she had forgotten how to paint after a lifetime of decorative arts but having someone get her started she got right back to work and the joy she had in displaying her art work was priceless. When we started assisted living my mother was panic stricken about the costs even though she was relatively comfortable financially she definitely did not have $2,000,000 in assets when she hit 90. I brought in a bumper sticker meant for a luxury car that said "I'm spending my children's inheritance" and said Mom this is the goal and this became our running joke. She didn't succeed unfortunately but she definitely lived better my only regret is I didn't get her additional customized care earlier. You've got plenty of assets to work with but are they being deployed optimally for her benefit or for investment returns.
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Re: Managing my mom's account

Post by cas »

LadyGeek wrote: Thu Sep 22, 2022 7:35 pm
Tax Rate: 22% Federal, 3.07% State

Desired Asset allocation: 20% stocks / 80% bonds

Please provide an approximate size of your total portfolio: 1.9 M [82% in taxable account]
A few quick thoughts:

1. Marginal tax rates can become very weird and unexpectedly high in a situation like your mother's situation: big taxable account, social security, IRMAA single brackets, looks like probably some stock purchases (leading to qualified dividends) in taxable to get to the 20% stocks allocation?

Throw in a big medical deduction and a choice of tIRA-vs-taxable withdrawals on top of that, and I can't begin to predict what the marginal rates would actually be.

I would withhold judgement on the suitability of the tax-exempt muni approach until her marginal tax rates (as opposed to the nominal tax brackets) come more into focus.

Do you have Excel? The Personal Finance Toolbox listed in the Bogleheads wiki - and used by FiveK to get a lot of the marginal rates graphs in the wiki, e.g. here for an example of how weird and high marginal rates can get with SS/tIRA withdrawals/IRMAA - is really useful for picking up those marginal rate surprises.

There is a tutorial put out by The Finance Buff here. (specifically for an ACA premium subsidy/Roth conversion scenario, but the tutorial is generally useful.)

2. How much patience do you have for new tax details? In the current environment, a bond/CD ladder definitely has its good points, and I would suspect lots of people would be very enthusiastic about helping you set one up. But ... since it would likely be predominantly in the big taxable account - there would be some extra fiddliness and learning curve with taxes. Probably some potential extra complications when looking ahead to eventually settling the estate, too.

Having recently been through something similar as what you are likely going through with your mother, I would say it is perfectly ok to say "No, no new tax learning curve. Keep the estate settlement ultra-simple. My mind and time are consumed with other things." Or at least to take any tax ladder recommendations with a grain of salt unless the person giving them is willing to list out the tax reporting and basis-step-up-at-death-calculation and how-to-divide-easily-among-beneficiaries details.

3. Not to be morbid, but keep in mind that the "cost basis step-up" at death turns out to be a "cost-basis step-down" if the asset has an unrealized capital loss. Probably don't want to keep large amounts of unrealized capital losses hanging around unnecessarily at your mother's age and health status. On the other hand, targeted year-end tax loss harvesting can be useful for optimizing extra IRA withdrawals, so it is a bit of a toss-up on timing of realizing the losses. (But then that is getting into tax fiddliness that you may not have time or mental energy to deal with.)
Last edited by cas on Fri Sep 23, 2022 7:14 am, edited 1 time in total.
CloseEnough
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Re: Managing my mom's account

Post by CloseEnough »

FellsGuy wrote: Fri Sep 23, 2022 4:50 am This was more money but led to a greater quality of life and better safety. We also paid for an art therapist to work with her she had forgotten how to paint after a lifetime of decorative arts but having someone get her started she got right back to work and the joy she had in displaying her art work was priceless. When we started assisted living my mother was panic stricken about the costs even though she was relatively comfortable financially she definitely did not have $2,000,000 in assets when she hit 90. I brought in a bumper sticker meant for a luxury car that said "I'm spending my children's inheritance" and said Mom this is the goal and this became our running joke. She didn't succeed unfortunately but she definitely lived better my only regret is I didn't get her additional customized care earlier. You've got plenty of assets to work with but are they being deployed optimally for her benefit or for investment returns.
OP: As someone who is in a similar situation, and has been for almost 10 years, I am sorry that you are having to handle this with a family member. I have not seen anything that suggests you really know what the "investment horizon" is, because if there are not other terminal health issues that is an unknown. That said, on the financial side even with a longer horizon and increases in expenses, it would not seem that there is a risk of running out of money. The most important thing as you likely know is the asset allocation, and 20/80 seems fine, although more conservative than what I decided on somewhat similar facts.

The more interesting thing that I have struggled with is the comment above on quality of life. I have not found a way to spend more to improve quality of life beyond what is found in a good, but standard, nursing home environment for a person with advanced dementia (in my case, older by about 5 years). Perhaps it depends on the level of dementia because while I appreciate greatly what FellsGuy says and did, one difference for me (and perhaps for you) is the patient in my situation would not have the cognitive level to be "panic stricken" about the costs as it wouldn't even register. In fact, having re-read FellsGuy post, the level of dementia is definitely a huge factor in whether greater spend translates to improved quality of life - in my case there would be no potential of working and joy from displaying art work, for example, as the dementia is so advanced that return to these type of life activities would not be possible. I do agree with the general sentiment that the money is there for the patient and not for the heirs, and so if there is anything that would improve quality of life by spending it should be done. However, as I tried to point out, it may not be at all clear on whether, or how, to do that. Good luck.
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Re: Managing my mom's account

Post by LadyGeek »

First, I have edited the OP to clarify my situation and to make corrections based on comments received so far.

I'd like to take the opportunity to explain that what you see is the result of someone (my Dad) working hard all his life, spending very little, and putting everything he had into the bank. He thought "stocks are for losers" and adamantly refused to invest in the market. There was some justification to that because a relative did indeed lose a lot of money in the stock market.

That's why the portfolio is heavy in cash. Everything went into a savings account or CD. When I was living at home, I asked him why. His answer was "Because the money is right there" (in the bank) and I didn't question him further. My conservative approach to investing is due to his influence.

So, putting everything in the bank does work if you invest early enough and watch compound interest work it's magic over a long period of time. My Dad passed in 2014. My mom is receiving a survivor's pension benefit due to this, along with Social Security.

==================================

Regarding my Mom's care, memory care is not skilled nursing. She is in the best possible situation. All of her needs are taken care of and they have sufficient staff to manage everything. Meals are in a community environment and they have activities to keep everyone busy. Her unit is clean and clothes are laundered (and not missing).

When I visit her, I make sure the staff sees me. When staff sees family presence, (1) it lets them know that their work is appreciated and (2) it keeps them on their toes to pay attention to my mom.

This is in contrast to my experiences with my late husband when he was in a skilled nursing facility. My mom's situation is far better and my mind is at ease knowing that I have nothing to worry about.
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Re: Managing my mom's account

Post by LadyGeek »

phoroner wrote: Thu Sep 22, 2022 10:28 pm LadyGeek,

Sorry for the situation. your mom sounds to be in good financial situation. No disagreement with anything others have said. But a few thoughts:

1. Consider making a bond ladder to cover her expected expenses over the next 3-5 years (or other life expectancy based timeline). This would provide guaranteed cash flow but allow you to safely extend your fixed income duration some. You could then hold several years of buffer funds in a safe fund, such as short-term treasurys (VGSH) or tips (VTIP), and then invest the balance however feels most comfortable.

2. Depending on tax bracket of heirs, you might consider Roth conversions instead of TIRA withdrawals.

Best wishes.
I never thought of a Roth conversion, thanks. My Mom has no Roth IRA, but I should be allowed to create one for the conversion. I'll have to think about that. It's a taxable event but puts the money in a better situation for the heirs and I can choose the funds without concern for cap gains.
CloseEnough wrote: Fri Sep 23, 2022 6:29 am I have not seen anything that suggests you really know what the "investment horizon" is, because if there are not other terminal health issues that is an unknown. That said, on the financial side even with a longer horizon and increases in expenses, it would not seem that there is a risk of running out of money. The most important thing as you likely know is the asset allocation, and 20/80 seems fine, although more conservative than what I decided on somewhat similar facts.
Yes, I don't think she'll run out of money. The asset allocation seems reasonable to me, which is due to a lifelong conservative approach to investing - see my previous post.
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Re: Managing my mom's account

Post by LadyGeek »

JayB wrote: Thu Sep 22, 2022 11:50 pm
LadyGeek wrote: Thu Sep 22, 2022 7:35 pm Your time horizon usually defines the types of investments. In this case, the time horizon should also consider that the account is Transfer On Death (TOD) with beneficiaries.
Regarding the TOD with beneficiaries, I'd recommend making sure that there are sufficient assets in a taxable account(s) without TOD or beneficiaries to settle your mom's estate down the road, including taxes (e.g., income and PA Inheritance Tax) and last bills for memory or nursing home care after she passes. Once assets are pushed out automatically to beneficiaries by Fidelity or Vanguard, it can be difficult to have the recipients contribute back some of their inheritance in order for the executor/executrix to cover last expenses. And it makes settling the estate and dealing with probate a bit more complex.
Good suggestion. However, my mom is in a good situation for her heirs - there is no estate. When my mom went into memory care all of her physical property - her furniture and items from her CCRC independent living apartment - was donated to charity. It was simply given to someone in need without concern for finances. IOW, there are no receipts or records of this donation.

She does not own any real estate and her car was donated to someone in need when she couldn't drive any more.

The only remaining assets are her finances, which are all POD or TOD accounts with assigned beneficiaries. There is nothing to probate.

Her memory care unit does have a few pieces of furniture (bed and dresser, etc.), but that will also be given to someone in need when she passes. There is nothing of significant value in her unit.
cas wrote: Fri Sep 23, 2022 6:20 am A few quick thoughts:
1. Marginal tax rates can become very weird and unexpectedly high in a situation like your mother's situation: big taxable account, social security, IRMAA single brackets, looks like probably some stock purchases (leading to qualified dividends) in taxable to get to the 20% stocks allocation?

2. How much patience do you have for new tax details?
Thanks. I'm not too concerned getting to the 20/80 allocation, as it was a rough guess. Capital preservation is key, but I have to (unfortunately) start looking forward to the heirs. I'll look at your suggestions.

I do have insight into one of the heirs' financial situation, but my patience depends on available time.
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Re: Managing my mom's account

Post by gavinsiu »

I am sorry to hear about your mom. Even though she is taken care of, it can be hard

You situation with your dad is similar to mines, where he basically had everything in cash, mostly due to a bad experience with stock.

I think your plan is sound though I would shift the allocation a bit more to stock like 40/60 stock/bond. Since the expense appears to be consistent year after year, you can build out a bond ladder that converts to cash at around the time the bill is due.
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Re: Managing my mom's account

Post by Target2019 »

LadyGeek,
I had responsibility for in-laws' finances as they moved from home to independent living to assisted living to memory care (just mother). Wife took care of most everything else. Every situation is different, and of course this is what we did.

In the beginning they consolidated money with an advisor. M-I-L was very conservative, and picked the 20/80 asset allocation. Within a few years we changed that to 35/65 AND stopped adding un-used income to the managed portion. We placed that income into the un-managed brokerage (at same institution). It had tax-exempt long-term, but mostly dividend stocks (started by F-I-L). Because of the time period, that decision turned out well for the heirs.

Their income and LT insurance paid for everything up until the final year. In the last year the cost was over $10K monthly for the memory care unit for her. For many years I measured the monthly costs and always kept an eye on "how long" can this be supported by the income and insurance sources. To guide choices I always focused on that. What went to the heirs was not part of the analysis or plan.

As we both understand, the success or failure is due to facts in the situation. "How long" is something that others under-estimated. The memory decline and eventual passing was more than 7 years. This is just our experience, so YMMV.

You should build in a 5% inflation factor for the facility's costs. A yearly increase was like clockwork. For that reason I might seriously consider CD ladder.

Along the way a facility may add extras you don't need, or can cover in a more efficent way. So question everything.

I wish you well.
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Re: Managing my mom's account

Post by HMSVictory »

LadyGeek wrote: Fri Sep 23, 2022 7:15 am
I'd like to take the opportunity to explain that what you see is the result of someone (my Dad) working hard all his life, spending very little, and putting everything he had into the bank. He thought "stocks are for losers" and adamantly refused to invest in the market. There was some justification to that because a relative did indeed lose a lot of money in the stock market.

That's why the portfolio is heavy in cash. Everything went into a savings account or CD. When I was living at home, I asked him why. His answer was "Because the money is right there" (in the bank) and I didn't question him further. My conservative approach to investing is due to his influence.

So, putting everything in the bank does work if you invest early enough and watch compound interest work it's magic over a long period of time. My Dad passed in 2014. My mom is receiving a survivor's pension benefit due to this, along with Social Security.
This was and is a very common mindset for who lived through the Great Depression of the late 1920s.

Although the Vanguard Wellington Fund began in 1929 there was not a lot of participation in mutual fund investing until the 1970/1980s. Many people who owned stock during the Great Depression were not diversified and owned single stocks. They were wiped out when the share prices went to zero with companies going bankrupt. I think your dad did one heck of a job of providing for his family with the tools, thrift and knowledge that he had.

Good for you for helping your Mom in this later stage of her life.

I think the other posters have some very good points about converting the tIRA into a Roth... I think there is some tax planning opportunity there.
Stay the course!
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Re: Managing my mom's account

Post by LadyGeek »

Thanks to everyone. I am reading all the posts and am glad to see my situation is not unique. In summary, I am seeing:
  • Consider the time horizon with a focus on the heirs. Also, plan for mom to live for a long time. In addition to Target2019's mother, I have heard of someone else living in memory care for 7 years.
  • Put an inflation factor on her monthly expenses
  • Consider a Roth IRA conversion
  • The PA muni fund no longer serves it's intended purpose and should be tax loss harvested.
  • Shift the asset allocation for more stock, such as 40/60.
  • Consider a bond ladder which could be used to pay down expenses
  • Consider a bond fund, TIPS
  • Consider a CD ladder
cas wrote: Fri Sep 23, 2022 6:20 am 3. Not to be morbid, but keep in mind that the "cost basis step-up" at death turns out to be a "cost-basis step-down" if the asset has an unrealized capital loss. Probably don't want to keep large amounts of unrealized capital losses hanging around unnecessarily at your mother's age and health status. On the other hand, targeted year-end tax loss harvesting can be useful for optimizing extra IRA withdrawals, so it is a bit of a toss-up on timing of realizing the losses. (But then that is getting into tax fiddliness that you may not have time or mental energy to deal with.)
Thanks! That's an important point. I never thought about a cost-basis if there was a capital loss - which is what I would have for the PA muni bond and intermediate treasury funds in taxable. Looking at the wiki: Step-up in basis (Step-down valuation)
If a decedent's adjusted basis in property is higher than the fair market value, the beneficiary's basis will equal the fair market value of the property at the time the decedent dies.
This is correct, but perhaps that description should be more clear. If the property is worth less at the time of death, then that's what you get.
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Re: Managing my mom's account

Post by RetiredAL »

LadyGeek wrote: Fri Sep 23, 2022 7:34 am
phoroner wrote: Thu Sep 22, 2022 10:28 pm LadyGeek,

Sorry for the situation. your mom sounds to be in good financial situation. No disagreement with anything others have said. But a few thoughts:

1. Consider making a bond ladder to cover her expected expenses over the next 3-5 years (or other life expectancy based timeline). This would provide guaranteed cash flow but allow you to safely extend your fixed income duration some. You could then hold several years of buffer funds in a safe fund, such as short-term treasurys (VGSH) or tips (VTIP), and then invest the balance however feels most comfortable.

2. Depending on tax bracket of heirs, you might consider Roth conversions instead of TIRA withdrawals.

Best wishes.
I never thought of a Roth conversion, thanks. My Mom has no Roth IRA, but I should be allowed to create one for the conversion. I'll have to think about that. It's a taxable event but puts the money in a better situation for the heirs and I can choose the funds without concern for cap gains.
CloseEnough wrote: Fri Sep 23, 2022 6:29 am I have not seen anything that suggests you really know what the "investment horizon" is, because if there are not other terminal health issues that is an unknown. That said, on the financial side even with a longer horizon and increases in expenses, it would not seem that there is a risk of running out of money. The most important thing as you likely know is the asset allocation, and 20/80 seems fine, although more conservative than what I decided on somewhat similar facts.
Yes, I don't think she'll run out of money. The asset allocation seems reasonable to me, which is due to a lifelong conservative approach to investing - see my previous post.
I thought of this topic after my post to you last night and so this leads to my thoughts ---

It's a very personal decision to invest what part her money as investments for the heirs. And their should be some consensus between you and your sibling.

In my Dad's case, his long term insurance paid for almost all of his Assisted Living costs, so I did a regular 60/40 investment plan as a maximize for my sister and I. I would have loved to convert his IRA to a Roth, but his income level was such it just didn't make sense between Fed + CA + IRMAA steps.
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Re: Managing my mom's account

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RetiredAL wrote: Fri Sep 23, 2022 10:06 am It's a very personal decision to invest what part her money as investments for the heirs. And their should be some consensus between you and your sibling.
This is an excellent point. I've already connected with a sibling on this. There is a consensus to take care of mom first. We're not concerned about our own finances. If mom's assets go to zero, that's fine with us.

This is one reason that assigning someone as your POA must be done with care. It requires absolute trust to ensure that your intentions are followed as you expect.

Myself and a sibling are heirs for our mom's assets, so there is some personal bias in these decisions. That can't be helped, but I'd say it's extremely low. I'm making the best choices in a difficult situation. Liquidating the bank CDs was one such choice.
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Re: Managing my mom's account

Post by HomeStretch »

Do you project that your mom's future Federal marginal tax rate will be 22% given her itemized healthcare/LTC deductions?

Is $10k your mom's total monthly expense run rate or is that just the memory care cost?

While the primary goal of your mom's portfolio is to pay for her care, given that you expect the portfolio balance to exceed her care costs for the next 10 years, I agree with re-looking at the portfolio with an eye towards her heirs. That may mean you increase the equities to 30-40% and/or consider Roth conversions. Maybe everything in excess of 8-10 years of expenses would be held in equities.

Consider shifting the portfolio equity into the Taxable account using Total Stock Market US and International Funds such as FSKAX and FTIHX.
Consider shifting bonds/other fixed income investments into the tax deferred account.

Have you considered opening a cash management account (CMA) to act as a back-up for the local bank? You could hold 3-6 months cash in FZDXX in the CMA. You would have access to Bill Pay where you can set up your mom's bills (memory care, insurance premiums, etc.) on auto-pay and it can also accept direct deposits of her income from pension and SS. The account offers a debit card (which can be locked when not in use) if that is convenient for small purchases (if you bring your mom food, etc.).

Aside from the liquid bill paying funds at the local bank/CMA, consider buying treasuries with the excess cash in the Taxable account which offer a better yield than FDLXX (which includes non-treasury holdings).
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Re: Managing my mom's account

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HomeStretch wrote: Fri Sep 23, 2022 10:56 am Do you project that your mom's future Federal marginal tax rate will be 22% given her itemized healthcare/LTC deductions?
No, it might be less. 2022 is a partial year for her healthcare expenses. 2023 will be a full year.
HomeStretch wrote: Fri Sep 23, 2022 10:56 am Is $10k your mom's total monthly expense run rate or is that just the memory care cost?
It's a budget amount slightly higher than the memory care cost. Actual monthly memory care is around $9500 / month.
HomeStretch wrote: Fri Sep 23, 2022 10:56 am While the primary goal of your mom's portfolio is to pay for her care, given that you expect the portfolio balance to exceed her care costs for the next 10 years, I agree with re-looking at the portfolio with an eye towards her heirs. That may mean you increase the equities to 30-40% and/or consider Roth conversions. Maybe everything in excess of 8-10 years of expenses would be held in equities.

Consider shifting the portfolio equity into the Taxable account using Total Stock Market US and International Funds such as FSKAX and FTIHX.
Consider shifting bonds/other fixed income investments into the tax deferred account.
All good suggestions.

I don't think it makes sense to shift bonds / fixed income into the tax deferred account. That can only be done as an IRA contribution and the $6k annual limit is insignificant compared to the taxable assets.
HomeStretch wrote: Fri Sep 23, 2022 10:56 am Have you considered opening a cash management account (CMA) to act as a back-up for the local bank?
No, because I would have to switch all of her automated payment accounts to Fidelity. It's a lot of work for no perceived benefit. I can take care of any problems locally at her full-service bank. There's no need for a debit card. I'll pay for minor expenses and write myself a check from her checking account (if I want).

BTW, the pharmacy which services the memory care facility is balance billing for unreimbursed portions of their insurance claims. Yes, They can do that. (I had the same situation with my late husband. Institutional pharmacies work under contract and bill differently than retail pharmacies.) That bill is paid online from her checking account because they don't accept ACH from a savings account.
HomeStretch wrote: Fri Sep 23, 2022 10:56 am Aside from the liquid bill paying funds at the local bank/CMA, consider buying treasuries with the excess cash in the Taxable account which offer a better yield than FDLXX (which includes non-treasury holdings).
Treasuries are one of the things I'm considering, along with TIPS and bond funds.

As noted earlier, I'm still transferring her liquidated CDs into Fidelity. It will take several days due to the daily transfer limit, but I'm not in any hurry. Once all the funds are in FZDXX, my mom is already doing much better than she was with the bank CDs.

I'll need some time to process all of the suggestions in this thread and come up with a good plan. This will include using my H&R Block tax software for planning, taking a look at cas' spreadsheet suggestions, and possibly the Retiree Portfolio Model spreadsheet for Roth conversions.
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Re: Managing my mom's account

Post by water2357 »

If you can, match the taxable income to the deductible expenses each year. I.e. don't sell assets to pay bills that will generate more gain than can be absorbed by deductible expenses, likewise with withdrawals from traditional IRAs. You will have SS, pension, RMDs, etc that you must report as income, if medical expenses are beyond this do whatever you can to control additional income beyond matching those expenses.

Plan for PA inheritance tax, and be sure that there will be money available to pay it as well as final expenses, e.g. funeral, final medical, etc. Unless you know for sure that whoever is listed as a beneficiary payable on death will actually contribute to pay the inheritance tax and federal and state income tax, etc., you can't have named beneficiaries on all assets, or someone is going to get stuck, namely any executor, with a really tough time of collecting that tax money.

Certified elder lawyers are the best sources of information for anyone dealing with LTC and a PA POA. Start researching PA inheritance law and other regulations now. Even the lawyers and accountants can't know everything, it really helps if you start looking into the actual tax filing processes yourself.
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Re: Managing my mom's account

Post by dodecahedron »

LadyGeek wrote: Fri Sep 23, 2022 3:54 pm
HomeStretch wrote: Fri Sep 23, 2022 10:56 am While the primary goal of your mom's portfolio is to pay for her care, given that you expect the portfolio balance to exceed her care costs for the next 10 years, I agree with re-looking at the portfolio with an eye towards her heirs. That may mean you increase the equities to 30-40% and/or consider Roth conversions. Maybe everything in excess of 8-10 years of expenses would be held in equities.

Consider shifting the portfolio equity into the Taxable account using Total Stock Market US and International Funds such as FSKAX and FTIHX.
Consider shifting bonds/other fixed income investments into the tax deferred account.
All good suggestions.

I don't think it makes sense to shift bonds / fixed income into the tax deferred account. That can only be done as an IRA contribution and the $6k annual limit is insignificant compared to the taxable assets.
1) I assume your mother has no earned income, given her memory issues, so an IRA contribution is not even an option in any event.

2) However, there are other ways to shift bonds/fixed income into tax-deferred without making a new contribution to an IRA.

Your OP said that her Fidelity IRA is currently entirely in VTINX, which is 30% equity/70% fixed income. You could swap the VTINX in her IRA for a pure fixed income bond fund or funds of your choice, thereby making your mother's tax-deferred 100% fixed income. And you could preserve the overall asset allocation by swapping some of her fixed income in her taxable account for equity.

#2 above is what I did after I took over management of our household's portfolio after my husband's death and started to think clearly about asset location and tax-efficiency. To be honest, I hadn't paid much attention to portfolio management when he was alive.

I moved the tax-deferred portfolio entirely into fixed income (swapping equity holdings into fixed income there) and, to maintain my desired asset allocation, in the Roth and taxable accounts, I swapped fixed income into equity.
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Re: Managing my mom's account

Post by deserat »

Thank you to LadyGeek for being willing to share this 'use case' and to the posters who are submitting their ideas and suggestions. I am learning a lot through this thread; biggest overall is that how one manages their resources or directs someone or hopes someone manages their resources as the age and possibly end up unable to self-manage has very different goals and possible outcomes than that of accumulating and decumulating. Also, it is possible to optimize the resource management for a better outcome overall even in this situation.
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Re: Managing my mom's account

Post by J295 »

LG. Could you share your thoughts on treasuries which you stated you are considering? Doing so seems prudent to me. In case of ourselves and my widowed mother 5 year ladders are a good fit (and no worries about FDIC coverage limits). The treasuries are one aspect of the AA.
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Re: Managing my mom's account

Post by CloseEnough »

I recently had some advice on similar facts, in this thread:

viewtopic.php?p=6814816#p6814816

Might be helpful to questions raised here.
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Re: Managing my mom's account

Post by LadyGeek »

LadyGeek wrote: Fri Sep 23, 2022 3:54 pm As noted earlier, I'm still transferring her liquidated CDs into Fidelity. It will take several days due to the daily transfer limit, but I'm not in any hurry. Once all the funds are in FZDXX, my mom is already doing much better than she was with the bank CDs.
As someone newly doing this at Fidelity, I got stuck trying to buy FZDXX. The core position SPAXX showed the right amount, but it did not show up as cash available to trade. My taxable securities are available as cash, but not the money I moved over from the bank.

"Never invest in anything you don't understand" is a good tenet to follow. I didn't understand why, so I stopped and asked Fidelity for help. The online chat person didn't have access to what I was seeing (?), so I called the 24/7 support line and I had my answer in a few minutes.

When using Electronic Fund Transfer (EFT), there is a 4 - 7 business day collection period until the money becomes available. Sometime late next week, I'll be able to buy FZDXX. The rep apologized that this information was not visible on the website to me (but she could see it). No worries, as the money is in SPAXX and earning interest.

Knowing what to look for, I found the info in the Fidelity Trading FAQ. Now I know what "collection period" means. :) If I had driven to the local Fidelity office and handed them a check, it would be a direct deposit and not subject to a collection period.

I'm not making any further changes until I finish my FZDXX trades. One moving part at a time...

================
CloseEnough wrote: Sat Sep 24, 2022 6:23 am I recently had some advice on similar facts, in this thread:

viewtopic.php?p=6814816#p6814816

Might be helpful to questions raised here.
Thanks! You and I are investing for an end-of-life situation. As deserat notes, this is a different approach than what members recommend when investing for retirement (decumulation phase).

Based on that thread and advice here, I'll probably sell the PA muni bond and intermediate-term bond funds. If I do that, I'll have capital losses exceeding the $3k IRS limit and will have to carry that loss forward until it's depleted. (Wiki: Tax loss harvesting)

That thread also suggests to not automatically reinvest dividends and capital gains. I'm in a different situation, so I'll probably continue with automatic reinvestments.

For those new to Fidelity, please check your distribution settings. All accounts --> Account features --> Brokerage & Trading --> Dividends and Capital Gains. I forgot to do this with my own taxable account as Fidelity defaults to distribute the dividends. I got an unexpected surprise when cash showed up in my core position. I immediately bought back the distribution and changed the setting to reinvest automatically.
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Re: Managing my mom's account

Post by LadyGeek »

water2357 wrote: Fri Sep 23, 2022 8:29 pm If you can, match the taxable income to the deductible expenses each year. I.e. don't sell assets to pay bills that will generate more gain than can be absorbed by deductible expenses, likewise with withdrawals from traditional IRAs. You will have SS, pension, RMDs, etc that you must report as income, if medical expenses are beyond this do whatever you can to control additional income beyond matching those expenses.

Plan for PA inheritance tax, and be sure that there will be money available to pay it as well as final expenses, e.g. funeral, final medical, etc. Unless you know for sure that whoever is listed as a beneficiary payable on death will actually contribute to pay the inheritance tax and federal and state income tax, etc., you can't have named beneficiaries on all assets, or someone is going to get stuck, namely any executor, with a really tough time of collecting that tax money.

Certified elder lawyers are the best sources of information for anyone dealing with LTC and a PA POA. Start researching PA inheritance law and other regulations now. Even the lawyers and accountants can't know everything, it really helps if you start looking into the actual tax filing processes yourself.
All good points. In my situation, there will be no estate and all money will be transferred to the heirs (myself and a sibling). I'll take care of unpaid expenses.

(For others reading this thread, please recognize the importance of leaving enough money to pay expenses.)

I would also like to mention that my Mom (like my Dad), has a contract with the funeral home and cemetery. The contract was signed many years ago and costs have risen. Funeral homes can, and do, charge above the stated contract price. Prepare for that discussion, as the funeral home is within their rights to collect the additional costs.
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Re: Managing my mom's account

Post by RetiredAL »

LadyGeek wrote: Sat Sep 24, 2022 3:02 pm Now I know what "collection period" means. :) If I had driven to the local Fidelity office and handed them a check, it would be a direct deposit and not subject to a collection period.

I'm not making any further changes until I finish my FZDXX trades. One moving part at a time...
LadyG -- even a check has a waiting time where they can recall/adjust it. Short of doing a wire transfer or equivalent, little else happens instantaneously as far as the backroom bookkeeping operations see it.

What you ran into also applies when sending from a brokerage to a bank and then trying to immediately spend it or transfer elsewhere. The exact rules vary by the institutions and their enter-relationships with each other.

I've long practiced that when I move large amounts of money, I always wait for every at each intermediate step long enough for their clearing process to fully occur. Several years back, I moved 100K+ from USAA to Schwab via Wells Fargo Bank. I let those funds sit a Wells Fargo for 4 complete business days before moving it to Schwab. Wells did not say boo about the transaction.
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Re: Managing my mom's account

Post by LadyGeek »

dodecahedron - I saw your post on moving to bonds to tax-deferred.
J295 wrote: Sat Sep 24, 2022 6:17 am LG. Could you share your thoughts on treasuries which you stated you are considering? Doing so seems prudent to me. In case of ourselves and my widowed mother 5 year ladders are a good fit (and no worries about FDIC coverage limits). The treasuries are one aspect of the AA.
It started with a question in here. I then had a phone call with a Fidelity rep and a Fixed Income Specialist. Kevin M commented on that phone call and recommended I start a thread (this one) to get recommendations on the entire portfolio instead. See this post.

I don't have any specific recommendations at this time. I'm still trying to figure out what to do with my portfolio.
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Re: Managing my mom's account

Post by Northern Flicker »

A few thoughts...

If you want 20% stock (split 50-50 US and ex-US), you could set up:

10% VTI or Fido equivalent
10% IXUS or Fido equivalent
40% short-term TIPS (STIP)
20% intermediate treasuries (VFIUX is fine)
20% cash

Fill up the IRA with STIP so that taxable bond income is more predictable than TIPS distributions that include variable inflation adjustments.

With a portfolio value just over 15x current year expenses in addition to SS and a small pension, you also could consider:

10% cash
90% STIP

It may be worth investigating the Genworth Long-Term Care SPIAs:

https://insurancenewsnet.com/innarticle ... er-clients

That could be an effective use of the IRA if available that way and they are reasonably priced.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Managing my mom's account

Post by LadyGeek »

^^^ Thanks! So you are proposing from:
Taxable at Fidelity

58% Fidelity Money Market Fund Premium Class, FZDXX, 0.36%
6% Vanguard Intermediate-Term Treasury Fund Admiral Shares, VFIUX, 0.10%
18% Vanguard Pennsylvania Long-Term Tax-Exempt Fund Admiral Shares, VPALX, 0.09%

Her Traditional IRA at Fidelity

18% Vanguard Target Retirement Income Fund, VTINX, 0.08%
_______________________________________________________________
Total percentage of all the above accounts together equals 100%.
To:
Taxable at Fidelity

10% Vanguard Total Stock Index fund, 0.03%
10% iShares Core MSCI Total International Stock ETF, IXUS, 0.07%
20% iShares 0-5 Year TIPS Bond ETF, STIP, 0.05%
20% Vanguard Intermediate-Term Treasury Fund Admiral Shares, VFIUX, 0.10%
20% Fidelity Money Market Fund Premium Class, FZDXX, 0.36%

Her Traditional IRA at Fidelity

20% iShares 0-5 Year TIPS Bond ETF, STIP, 0.03%
_______________________________________________________________
Total percentage of all the above accounts together equals 100%.
This would also align with dodecahedron's suggestion to put the bond allocation into tax-deferred. This won't change my IRA drawdown strategy.

I'd rather not do anything with annuities at this point. In any case, I found another press release here. The link pointing to the GenWorth site says "Page not found" which does not bode confidence. I also found a product description Income Assurance. The income looks fairly low, as I'll be needing 100k+ annual vs. the 40k shown in the example.
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Re: Managing my mom's account

Post by LadyGeek »

RetiredAL wrote: Sat Sep 24, 2022 4:09 pm LadyG -- even a check has a waiting time where they can recall/adjust it. Short of doing a wire transfer or equivalent, little else happens instantaneously as far as the backroom bookkeeping operations see it.
Yes, but I was thrown by the lack of website info. The correct cash balance ("details" section) was shown and SPAXX had the funds. That gave me the impression that I was able to trade. There was no indication that these funds were unavailable for trading other than the dollar amount not showing the expected amount. Hence, my confusion.

If there was date in the Balance tab display saying "Your funds will be available for trade on xxx", I would know what's going on. Lesson learned.
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Re: Managing my mom's account

Post by Fremdon Ferndock »

LadyGeek wrote: Fri Sep 23, 2022 7:15 am First, I have edited the OP to clarify my situation and to make corrections based on comments received so far.

I'd like to take the opportunity to explain that what you see is the result of someone (my Dad) working hard all his life, spending very little, and putting everything he had into the bank. He thought "stocks are for losers" and adamantly refused to invest in the market. There was some justification to that because a relative did indeed lose a lot of money in the stock market.

That's why the portfolio is heavy in cash. Everything went into a savings account or CD. When I was living at home, I asked him why. His answer was "Because the money is right there" (in the bank) and I didn't question him further. My conservative approach to investing is due to his influence.

So, putting everything in the bank does work if you invest early enough and watch compound interest work it's magic over a long period of time. My Dad passed in 2014. My mom is receiving a survivor's pension benefit due to this, along with Social Security.

==================================

Regarding my Mom's care, memory care is not skilled nursing. She is in the best possible situation. All of her needs are taken care of and they have sufficient staff to manage everything. Meals are in a community environment and they have activities to keep everyone busy. Her unit is clean and clothes are laundered (and not missing).

When I visit her, I make sure the staff sees me. When staff sees family presence, (1) it lets them know that their work is appreciated and (2) it keeps them on their toes to pay attention to my mom.

This is in contrast to my experiences with my late husband when he was in a skilled nursing facility. My mom's situation is far better and my mind is at ease knowing that I have nothing to worry about.
LadyGeek - Your comments regarding your Mom's place of care were a kind of "aha" moment for me. I've seen several facilities from ALFs to SNFs caring for my mother, and agree with you. There seem to be few SNFs - even the expensive ones - that provide the personal care I would like for my mother. You're lucky if someone will show up to help you when you need it. In contrast, it's easier to find an ALF with better facilities, food, and care. Why? The ALFs are private pay mostly. SNFs cost more, if you are private pay, but the quality of care usually leaves a lot to be desired from what I've seen personally. There's a "custodial care" mentality and culture in SNFs that isn't present in most ALFs. You are right -- there's a lot more worrying about how she's being cared for in the SNF where she is now living out her last days. Terribly said experience for her and us.

Memory Care facilities are mostly (in my experience anyway) a separate section of ALFs. They are private pay, and cost significantly more than assisted living, per se. in the same facility. My mother has been in all the levels and if I've learned anything caring for her, it's that I never want to end up in a SNF - even a high-end one - if I can possibly avoid it. I've always intended to be private pay; and your comment made me realize that I can aim for Memory Care as the highest level of care I'll need. Might turn out differently, but hopefully if I do end up in a SNF, I'll be so far gone at that point that I won't care. Thanks!
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Re: Managing my mom's account

Post by Northern Flicker »

LadyGeek wrote: Sat Sep 24, 2022 7:52 pm ^^^ Thanks! So you are proposing from:
Taxable at Fidelity

58% Fidelity Money Market Fund Premium Class, FZDXX, 0.36%
6% Vanguard Intermediate-Term Treasury Fund Admiral Shares, VFIUX, 0.10%
18% Vanguard Pennsylvania Long-Term Tax-Exempt Fund Admiral Shares, VPALX, 0.09%

Her Traditional IRA at Fidelity

18% Vanguard Target Retirement Income Fund, VTINX, 0.08%
_______________________________________________________________
Total percentage of all the above accounts together equals 100%.
To:
Taxable at Fidelity

10% Vanguard Total Stock Index fund, 0.03%
10% iShares Core MSCI Total International Stock ETF, IXUS, 0.07%
20% iShares 0-5 Year TIPS Bond ETF, STIP, 0.03%
20% Vanguard Intermediate-Term Treasury Fund Admiral Shares, VFIUX, 0.10%
20% Fidelity Money Market Fund Premium Class, FZDXX, 0.36%

Her Traditional IRA at Fidelity

20% iShares 0-5 Year TIPS Bond ETF, STIP, 0.03%
_______________________________________________________________
Total percentage of all the above accounts together equals 100%.
This would also align with dodecahedron's suggestion to put the bond allocation into tax-deferred. This won't change my IRA drawdown strategy.

I'd rather not do anything with annuities at this point. In any case, I found another press release here. The link pointing to the GenWorth site says "Page not found" which does not bode confidence. I also found a product description Income Assurance. The income looks fairly low, as I'll be needing 100k+ annual vs. the 40k shown in the example.
Yes.

I do have a couple of additional comments though. If you set the allocation ratio of US and ex-US stock to cap weight you won't have to rebalance. That would be about 60% VTI 40% IXUS. VXUS is also fine, though IXUS has had a higher percent of dividends qualified.

An ER of 0.36% is high for a money market fund. You could address that by combining a large chunk of the cash fund and intermediate treasury fund into a short treasury fund like FUMBX with an ER of .03%.

I think the overall slightly lower combined duration might be preferable anyway given the high portfolio withdrawal rate. Could also hold both FUMBX and STIP at 35% for simplicity since the cash fund balance will fluctuate with dividends distributed and cash withdrawn. Basically target a year of expenses in cash, 20% in stock, and the rest split equally between FUMBX and STIP.

This would look like the following. (I also adjusted the IRA weight to 18% but it will of course fluctuate with withdrawals and market movements.)

Taxable at Fidelity

12% Vanguard Total Stock Index fund, 0.03%
8% iShares Core MSCI Total International Stock ETF IXUS, 0.07%
17% iShares 0-5 Year TIPS Bond ETF, STIP, 0.03%
35% Fidelity Short-Term Treasury Bond Index Fund FUMBX, 0.03%
10% Fidelity Money Market Fund Premium Class, FZDXX, 0.36%

Her Traditional IRA at Fidelity

18% iShares 0-5 Year TIPS Bond ETF, STIP, 0.03%
_______________________________________________________________
Total percentage of all the above accounts together equals 100%.
Last edited by Northern Flicker on Sun Sep 25, 2022 2:37 am, edited 1 time in total.
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Peter Foley
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Re: Managing my mom's account

Post by Peter Foley »

Sorry to hear about your situation. We went through this for my MIL who died at age 100. She was in memory care for 4 years at a slightly lower cost than you are experiencing. During those years she paid no state or federal income tax. (I did her tax and estate planning with regard to drawdown of assets and consolidation of accounts.)

Your drawdown strategy as stated:
"Drawdown strategy: I will be drawing down her traditional IRA to pay expenses because memory care is a qualified medical expense. Her AGI (Adjusted Gross Income) will be reduced significantly and it will place her in a much lower tax bracket. Her IRA withdrawals will become essentially tax-free (or very low). (Corrected 9/23/22: AGI is not reduced.)"

I would take a look at a one year higher drawdown from the IRA if you can keep her taxable income relatively low (SS benefits not taxed would be a bonus). This would result in one year of higher IRMAA while at the same time lowering IRMAA in future years. You would have to run the numbers to see if this makes sense. Planning for an additional 6 to 8 years is not unrealistic.
water2357
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Re: Managing my mom's account

Post by water2357 »

Maybe this was mentioned above and I missed it, but you should be aware of the following:

Capital Loss Carryovers Expire Upon a Taxpayer's Death

Rev. Rul. 74-175 provides that capital loss carryovers expire upon a taxpayer's death and cannot be used on the estate's income tax return. The decedent cannot transfer a capital loss carryover to the estate because the decedent and estate are separate tax entities. A taxpayer's capital loss carryovers also cannot be transferred to the surviving spouse.

It can take a long time to chip away at loss carryovers, so I wouldn't accumulate any if possible.

Check for more recent changes, but this article may be a starting point
https://www.journalofaccountancy.com/is ... eturn.html

Also it is good to be aware of what can be deducted as expenses on PA Inheritance tax. And note that something like funeral expenses can be deducted on federal income tax (either personal or estate but not both) and can be deducted from the amount subject to PA Inheritance tax.

Always remember that PA Inheritance tax is totally separate from Federal (Personal or Estate) and State Income tax. PA Inheritance tax looks at the amount being inherited after all allowable expenses are deducted and these expenses may or may not be the same as any appearing on e.g. a Federal Income Tax Schedule A, etc.

PA Inheritance tax is technically a liability of the person who inherited the assets. You need to plan to have enough money on hand to pay that tax within a few months of death, particularly if you want to pay the discounted amount. The rate for a child inheriting from a parent is 4.5% whether everything has named beneficiaries or there is a will or no will, probate or no probate.
water2357
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Re: Managing my mom's account

Post by water2357 »

Unless you are prepared to apply for Medicaid for skilled long term care, I would not jeopardize any assets that may be needed to private pay for care and for medical expenses (including insurance premiums).

Memory care residents can live a decade, often more, 2 plus decades after diagnosis. Much of that time may not be in a facility, but possibly a decade may be in a facility. And memory care residents in a facility can live to be more than 100 years old, if they have no other major health problems and do not succumb to another illness, like the flu.

And as others have stated, facilities raise their prices like clockwork, every year. So, you have to plan for multiple years of expenses with inflation factored in. Likewise medical insurance premiums increase, as well as other medical costs. And any private duty aides or nurses fees will also increase each year.

Having seen the steep drops in the stock market in the early 2000s, in 2008 and other years, I would not want to have needed funds invested in stocks, because once they drop, you do not have time to recover the loss, a drop of 50% will mean you need a gain of 200% to recover. And with current increasing interest rates, the value of bond funds may also continue to drop for some time.

You need a guaranteed source of principat that will not be impacted by the market or interest rates available to pay expenses for whatever term you believe will be needed, possibly 10 years more or less dependent on all known health factors. Laddered FDIC insured certificates of deposit with conditional puts on the death of the holder that mature on the same schedule when money is needed is a possible option. There should also be enough money on hand at the beginning of the year in a liquid account (money market type) to cover the current year's expenses.

If you purchase brokered CDs, make sure they have the conditional put on the death of the holder, so that you are not subject to early withdrawal penalties at time of death.

Any assets that you hold that can only be accessed by selling them (and are not part of a laddered maturity approach), stocks, bonds, nonmoney market mutual funds should be either 1) deemed part of the remaining assets that are being invested for the benefit of heirs as opposed to providing for care or 2) sold or reinvested at beneficial times to provide for care. I would not just start selling things, unless it truly makes sense to sell them at that time. And as stated previously, try to match income to deductible expenses for tax purposes.

You may be fortunate enough to never have to think about the rules that you are required to follow to anticipate applying for Medicaid in PA, but you may still want to be aware of them.

From experience in dealing with a number of care circumstances in PA, you can never know enough. And even if you choose not to use an elder lawyer or CPA, it doesn't hurt to interview a few and find one you can work with, if ever needed and you don't have one now. Filing tax returns for someone who can't and dealing with the enormous expenses of care, as well as selling assets to pay for that care, will often benefit from some additional one on one advice. Also, since you have a PA POA, an elder lawyer is usually the best bet to draw up one that will work at most financial institutions in PA and to up date the POA as needed.

And I'm assuming you also have someone named as your mother's "Representative Payee" for Social Security purposes. If that has not happened yet, you will need to do that, most likely soon.

One other note, if your mother has a safe deposit box, do everything you can to have someone on that box as a "deputy" so they can access that box as needed. Many banks in PA are notoriously difficult about accessing safe deposit boxes with a POA only, even if written to comply exactly with PA law. If you have any difficulry working with a bank in PA, first try another branch of that bank, bank personnel knowledge varies widely from branch to branch. Second, visit other banks and ask them exactly what they can or won't do for you with a POA, before you deal with them at all.

Best of luck.
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Re: Managing my mom's account

Post by rossington »

Your Mom's current portfolio with S.S. and pension if you don't make any changes would more than likely cover 9 - 10 years of expenses.
Upthread you listed 8 things that you are considering modifying.
At your Mom's age I don't think this is a good idea since it appears she has more than enough to live in comfort.
Tweaking may seem to make sense to enable you to preserve or increase the size of the portfolio that got her to this point, but what if something you do backfires?
It is her money after all.
Hope everything works out.
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Re: Managing my mom's account

Post by LadyGeek »

water2357 wrote: Sun Sep 25, 2022 1:50 am ...PA Inheritance tax is technically a liability of the person who inherited the assets. You need to plan to have enough money on hand to pay that tax within a few months of death, particularly if you want to pay the discounted amount. The rate for a child inheriting from a parent is 4.5% whether everything has named beneficiaries or there is a will or no will, probate or no probate.
Thank you. Everything I was handling up to this point has been for a surviving spouse - my Mom (Dad passed in 2014) and myself (husband passed in 2020). The PA tax for spousal inheritance is 0, so it wasn't a concern.

Looking at the wiki's Estate and inheritance tax page, estate tax is at the federal level. States can additionally levy their own estate tax, inheritance tax, or both.

I checked the PA site - only inheritance tax is levied. From the PA Department of Revenue: Inheritance Tax and Commonly asked questions.

The heirs will pay 4.5% for both the taxable and IRA accounts. There's a 5% discount if paid within 3 months.

Additionally, taxes are levied on where the decendent was located, not where the beneficiaries live. If a beneficiary moves out of PA, such as NJ, PA inheritance applies - not NJ. NJ also has taxes for non-resident decendents who have NJ property - that's not the case here.

If I'm incorrect on anything, please let me know. (I'm still looking at capital losses and the impact on investment choices.)
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Re: Managing my mom's account

Post by cas »

LadyGeek wrote: Sun Sep 25, 2022 8:25 am (I'm still looking at capital losses and the impact on investment choices.)
Since I mentioned capital losses earlier ... it occurred to me later: harvesting the losses may not have all that much financial impact one way or the other. The $3000 allowed loss would have an effect on AGI (and thence on (potentially) IRMAA and taxable amount of SS and the 7.5% AGI barrier to taking medical deductions), but *if* the medical deduction is enough to wipe out all tax, the capital losses will just wipe out some income that would be taxed at 0% regardless.

Kind of depends on the specifics of your mother's tax situation exactly whether the tax loss harvesting would produce any value or not. So many moving parts.

That Personal Finance Toolbox tool should be useful for revealing that sort of thing.

Also ...
LadyGeek wrote: Thu Sep 22, 2022 7:35 pm Income: Small pension and Social Security, not enough to cover expenses
Since you didn't mention it in your list of income ... after years of negligible interest rates (including those 0.05% CDs), don't forget that rising interest rates mean some much more substantial income arriving from the assets currently sitting in cash/bonds in the big taxable account. (Rough estimate for a full year: 1.5M-ish taxable account x 2% interest = $30K income; x 3% interest = $45K income, etc.) Even the tax-exempt income affects MAGI for IRMAA and SS taxation. I don't think it affects the 7.5% AGI limit for taking medical deductions.)
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Re: Managing my mom's account

Post by Pistachioicecream »

I handle the finances for my 102 yr-old aunt. What water2357 said upthread is a valid concern:

"And I'm assuming you also have someone named as your mother's "Representative Payee" for Social Security purposes. If that has not happened yet, you will need to do that, most likely soon." I am currently going through this now for my aunt.

Has Social Security been notified of your mom's change of address in a manner acceptable to the agency (i.e. by you mother calling SS and notifying them herself, or by her speaking with an SS rep and giving them permission for you to speak for her)? If not, when her end-of-the-year statement arrives at her old address, it will be returned to SS (Post Office cannot forward) and her monthly SS payments will stop. It does not matter if the SS payments go directly to her (or joint with you) bank account.

To start the process you will need to set up an appointment to speak with an SS rep (I was given a phone appointment) to apply to be your mother's "Representative Payee." The SS rep I spoke with started the application over the phone and then snail-mailed me a copy. In my aunt's case, as she was unable to give permission for me to speak for her due to her dementia, I needed to get a letter from my aunt's doctor indicating her dementia diagnosis. The letter, along with a copy of my driver's license then needs to be faxed to my local SS office. All documents need to contain my aunt's name, date of birth and SS number. I am currently in midst of completing these tasks now. Once SS has received the required documents, it is supposed to take 30 days for approval.

You may already know all this but in case others do not, I'm hoping this information will be useful.

Best,
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Peter Foley
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Re: Managing my mom's account

Post by Peter Foley »

I noted that you are taking a look at capital losses. I personally would be inclined to take about 2 years worth at a time.

With that additional factor, I would run the numbers through the Retiree Portfolio Model to get an approximation of tax liability over time. If you used the option of projecting a Roth conversion of some of the IRA funds the taxes spreadsheet tab would provide you with insight regarding such a conversion as well as the impact of a larger than RMD withdrawal.
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Re: Managing my mom's account

Post by LadyGeek »

Pistachioicecream wrote: Sun Sep 25, 2022 10:24 am I handle the finances for my 102 yr-old aunt. What water2357 said upthread is a valid concern:

"And I'm assuming you also have someone named as your mother's "Representative Payee" for Social Security purposes. If that has not happened yet, you will need to do that, most likely soon." I am currently going through this now for my aunt.

Has Social Security been notified of your mom's change of address in a manner acceptable to the agency (i.e. by you mother calling SS and notifying them herself, or by her speaking with an SS rep and giving them permission for you to speak for her)? If not, when her end-of-the-year statement arrives at her old address, it will be returned to SS (Post Office cannot forward) and her monthly SS payments will stop. It does not matter if the SS payments go directly to her (or joint with you) bank account.
Yes, I saw water2357's Social Security suggestion. The mailing address was changed earlier to mine. Now that she's in memory care, I'll see about adding myself as a Representative Payee.

As for her pension, I have contacted her pension provider and mailed them my POA documents for approval. Once that's approved, I'll be able to change her mailing address to mine and (hopefully) have online access to her account. Currently, I'm working blind and don't have access to her tax statements. I can see deposits in her bank account, but that's about it.

FYI - Social Security + pension covers less than half of her monthly expenses.

=========
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Pistachioicecream
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Re: Managing my mom's account

Post by Pistachioicecream »

Since you've already changed her address to yours, it's probably fine. However, in order to avoid problems with SS later on, it's good that you're planning to apply to be a Representative Payee. Even though your mother's SS only covers a fraction of her expenses, it's still money.:D My aunt is in a similar situation w SS & expenses, although she does have a significant pension. The two together still do not cover all her memory care costs ($10,455 per month and increasing in 2023).
ee22bee
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Re: Managing my mom's account

Post by ee22bee »

LadyGeek wrote: Sat Sep 24, 2022 3:02 pm Sometime late next week, I'll be able to buy FZDXX.
LadyGeek, if the cash/FZDXX is above $1M (even if temporary for just one day), you can use FMPXX instead of FZDXX. FMPXX has higher yield, for similar composition as FZDXX, but $1M minimum on the initial buy. It has no ongoing minimum balance, can be drawn down below the initial minimum.

As of Friday:
FZDXX 2.39%
FMPXX 2.50%

Sounds like you'll be buying FZDXX over a number of days (as you mentioned a daily transfer limit of the liquidated CDs). I think you can do an 'Exchange' from FZDXX to FMPXX when your FZDXX reaches $1M (as opposed to Sell then Buy).
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