Financial advice for my recently widowed father in law.

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mtritt2
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Financial advice for my recently widowed father in law.

Post by mtritt2 » Mon Apr 06, 2020 2:09 pm

My mother in law passed away recently while on hospice. As the physician in the family and a minor personal finance nerd I’ve been basically taking care of the majority of the end of life care and arrangements. Unfortunately, this all came fairly rapidly and some of my mother in laws financial wishes were not set in stone in her current will.

Here’s the basic issue. She had a 700K life insurance policy. What she told me she wanted was to use this money to pay off her mortgage (my father in law does not work at all, is already drawing social security, and is not particularly financially savvy) the balance of which is approx 270K. She then wanted the leftover money to be divided equally between my father in law and her two daughters (one of which is my wife). This was in spite of my protests that we didn’t need the money and it should all go to her husband. She also specified that she didn’t think he should get the money “all at once”, she was the breadwinner and basically took care of EVERYTHING for him.

However, her life insurance policy has the beneficiaries split evenly between the my father in law and her two daughters. She passed before we were able to change the percentages to what would have made her desires possible. So the money should have been split (per her wishes approx 400K/150K/150K. However it will be split 233K three ways. This isn’t a huge issue, we are all very close and can move the money around without it being an issue but I’m just not sure of the best way to do that. Seems like if we pay off his mortgage with part of his daughter’s “share” we could run into gift tax issues.

I was considering buying a SPIA for my father in law with the extra non-mortgage portion of the life insurance payout (approx 150K, he’s 60) so he’ll have a little extra monthly money in addition to his social security death benefit and a small pension. He’s not the type to do well with a large chunk of money hence my mother in laws wishes.

My initial thought was to purchase a 150K SPIA for him, use the remaining 80K to pay off some of the mortgage and then my wife and her sister can each pay off 15K of the mortgage each year (to keep under gift tax) until the mortgage is fully paid. This would reasonably do what my mother in law wanted but seems rather complicated.

Any thoughts on other ways to do this? Is the annuity a bad idea?

Sorry for typos, I typed this all up on my phone.

psteinx
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Re: Financial advice for my recently widowed father in law.

Post by psteinx » Mon Apr 06, 2020 2:20 pm

I'm a fan of SPIAs in the right circumstances (that said, I've never bought one nor been involved with a family member's purchase of one).

A key circumstance, IMO, is that the insured's health and longevity prognosis is about normal or above for their underwriting bracket. I *think* that only age and gender are used for those, but obviously you can look into this yourself. If your F-I-L is, say, 72, and in somewhat below average health compared to age & gender cohort, then SPIA may be less attractive. I assume that those who actually BUY SPIAs are, on average, a bit healthier/longer lived than the population as a whole, and that SPIA pricing reflects that. (So, if you're at exactly the 50th percentile of health/expected lifespan, you might perhaps be effectively overpaying for an SPIA.)

A key possible hitch in your plan is whether your wife's sister is OK with gifting her father, over time, the same ~$83K that it sounds like you/your wife plan to. That said, if you're a high income physician, and your S-I-L is of more modest means, perhaps it's not unreasonable for you and your wife to bare a little more of the brunt of supporting your F-I-L.

EDIT - Oh, and of course, keep possible gift tax issues in mind, but it seems like you're already aware of this. There may also be ways to disclaim a portion of the insurance payout/inheritance in favor of F-I-L, but that's WAY beyond my competence...

student
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Re: Financial advice for my recently widowed father in law.

Post by student » Mon Apr 06, 2020 2:24 pm

So basically you need to transfer $83K to him. Between you and your wife, you can give $30k a year. I would say just do it over 3 years if you do not want to do any paperwork.

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Sandtrap
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Re: Financial advice for my recently widowed father in law.

Post by Sandtrap » Mon Apr 06, 2020 2:26 pm

Here is the annuities calculator from "ImmediateAnnuities".com
https://www.immediateannuities.com/annuity-calculators/
This will give you an idea of what returns to expect.
Be sure you select just the straight up SPIA.

j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

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WoodSpinner
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Re: Financial advice for my recently widowed father in law.

Post by WoodSpinner » Mon Apr 06, 2020 2:34 pm

There really is no gift tax to worry about given the numbers you mentioned. Fill out form 709 for each of the daughters and that’s it.

WoodSpinner

delamer
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Re: Financial advice for my recently widowed father in law.

Post by delamer » Mon Apr 06, 2020 2:36 pm

Your wife and her sister could gift your FIL enough to pay off the mortgage by adding $37K to his share of the life insurance. (Easy to do without incurring gift tax filing.)

Whether the annuity makes sense depends on whether he has any liquid assets. If not, then it would be best for your wife/SIL to set aside the remaining $130K that your MIL wanted him to have as a future emergency fund.

In the longer run, you have to evaluate whether it makes sense for him to pay the costs (property taxes, utilities, maintenance) for continuing to live in the house

123
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Re: Financial advice for my recently widowed father in law.

Post by 123 » Mon Apr 06, 2020 3:22 pm

mtritt2 wrote:
Mon Apr 06, 2020 2:09 pm
I was considering buying a SPIA for my father in law ...My initial thought was to purchase a 150K SPIA for him...
While an SPIA could be a suitable solution for him now is probably one of the worst times in SPIA history to buy one. The income benefit provided by an SPIA is highly dependent on interest rates, the lower the interest rate the lower the periodic payment. Maybe some ladder of CDs would work for awhile. Of course an advantage of the SPIA for you is to get you "out of the loop" since the periodic payments to him get issued by the insurance company. If you decide to proceed with an SPIA in these times the best advice might be to divide the purchase up over a purchase period of maybe 3 years and purchase a separate SPIA each year.
The closest helping hand is at the end of your own arm.

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Watty
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Re: Financial advice for my recently widowed father in law.

Post by Watty » Mon Apr 06, 2020 3:58 pm

mtritt2 wrote:
Mon Apr 06, 2020 2:09 pm
This isn’t a huge issue, we are all very close and can move the money around without it being an issue but I’m just not sure of the best way to do that. Seems like if we pay off his mortgage with part of his daughter’s “share” we could run into gift tax issues.
You really need a lawyer to handle it if you are going to try something like that. The policy beneficiary "is what it is" and the fact that you talked about changing it does not mean a lot.

In some situations if you are the executor of the estate you can be personally liable if there is ever a problem with something like that.
mtritt2 wrote:
Mon Apr 06, 2020 2:09 pm
I was considering buying a SPIA for my father in law with the extra non-mortgage portion of the life insurance payout (approx 150K, he’s 60)
A SPIA can be a valid part of a retirement plan so there is nothing inherently wrong with that option but 60 is pretty young to buy a SPIA. With even moderate inflation it may not be worth very much by the time he is 80. Often when an SPIA makes sense it is part of a plan to buy several more in the future to make up for earnings power that is lost to inflation.

Another issue is that a large factor in what a SPIA pays is the current interest rate and you would be basically be locking that in for the rest of his life. With as low as interest rates are I would be real cautious about buying a SPIA now.

Buying a SPIA should be considered along with his decision on when to start Social Security. If he can delay starting Social Security to get a larger benefit check later that is in essence about the same as buying an inflation adjusted annuity that has tax benefits. One possible use of the money might be to help him fund his living expenses for the next ten years so that that he could get a larger Social Security check when he starts Social Security when he is 70. You can look at some of the claiming strategies on this web site.

https://opensocialsecurity.com/

You would need to check with a lawyer but a trust might be a more appropriate way to protect him from himself. If he agrees the house could also be put in the trust. One risk with the house, especially if it is paid off, is that he might decide to get a home equity loan against the house and get himself into trouble. The trust could also be set up so that when the house is eventually sold that the sisters would get back their part of the life insurance money that was used to pay it off.

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Kenkat
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Re: Financial advice for my recently widowed father in law.

Post by Kenkat » Mon Apr 06, 2020 4:40 pm

Your father in law is going to have to agree to everything first - absent any specific instructions in a will or previously established trust document, you can suggest but the money is his at this point. You cannot pay off the mortgage for him and you can’t purchase an annuity on his behalf without his permission.

If you want to direct some of the excess funds paid out to the daughters, gifting up to the annual maximum would work over a few years which would achieve the goal of not giving him too much money all at once.

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mtritt2
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Re: Financial advice for my recently widowed father in law.

Post by mtritt2 » Mon Apr 06, 2020 5:08 pm

Thanks for all of the advice.

I was not aware of the current interest environment being bad regarding SPIA, good to know.

So my in laws finances were kind of a mess. My FIL has been taking social security since 59 I think? He was a blue-collar worker, his payment is very low something like $800/mo, I did their taxes this year. How does the death benefit work, does he have to automatically start taking that? Or can he defer that like you do with regular social security to increase his monthly payment if we can make the numbers work?

cjclueless
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Re: Financial advice for my recently widowed father in law.

Post by cjclueless » Tue Apr 07, 2020 10:36 am

You mentioned he is 60 and has been collecting Social Security since 59. Is this SS disability based on his prior working record? It would be unusual to be eligible prior to age 62 otherwise. He should be eligible for SS survivor benefits based on your MIL's (presumably) higher benefit. He would be first eligible at 60 with benefits reduced based on MIL's full retirement age. If he can hold out until her FRA that might result in a larger benefit. As far as I know there is no advantage in that scenario of holding out until 70.

Good luck -- lots to consider!

CJ

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mtritt2
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Re: Financial advice for my recently widowed father in law.

Post by mtritt2 » Wed Apr 08, 2020 7:21 am

Apparently my FIL is 63 (I think he’s getting been getting SS for the last year or 2) My MIL was 60 when she died. I’m not sure he will be able to hold out for another 5 years to start getting survivor benefits.

not4me
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Re: Financial advice for my recently widowed father in law.

Post by not4me » Wed Apr 08, 2020 3:01 pm

This may be outside of what you are asking about, but might be a consideration even as it delves somewhat into family dynamics. I applaud you for working to ensure MIL's wishes are carried out & so I'll assume paying off the mortgage now is a given.

Maybe a starting point is to say consider your FIL's estate plan. If nothing else, he may need to update it after his wife passed. I wasn't clear as to if perhaps he was your wife's stepfather & potentially planned for his estate to go somewhere other than your wife & her sister. That might bring in another voice telling him not to go the SPIA route etc. If all of his non-mortgage money goes into an spia, is he in danger of not being able to handle keeping the house maintained? It might be a shame for it to lose substantial value if he might want to downsize later & access the equity. Maybe some should stay in a cd/treasury ladder in addition to the spia?

Sorry for the loss & glad your wife can rely on you & her relationship with sister seems solid.

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