Advice needed for parent's finances

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guitarguy
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Advice needed for parent's finances

Post by guitarguy » Mon Nov 13, 2017 12:36 pm

Hi All,

So my mom has asked me to look over her finances and advise her...basically she's asked for my advice in making sure things are setup in her best interest, and also just about as important, to help explain things to her. Basically she has very little idea about her full financial picture aside from what's readily accessible in her brick and mortar checking and savings accounts. My father passed away about 20 years ago, and she's been relying on our family tax accountant to give her advice, which for the most part seems OK thus far but not really complete as it's really just focused on the tax side of things. Also, the second part of the picture is that she's wanting to sell her house and move into a smaller condo...benefits being things like grass and snow taken care of, a nicer area closer to my aunt, etc. So in addition to making sure her finances and investments are setup appropriately, she's asked for help with how to financially go about moving. I think I have a general handle on what would be appropriate advice for her on most of this, but I would greatly appreciate any advice that will help.

Quick Big-Picture Background:

Age: 66 and in good health

Income: Retired, collecting social security (she started collecting SS when my Dad passed away). She also receives quarterly dividends from her IRA and taxable accounts (more on that below).

Debt: None

Note: She doesn't do computers, email, text, have a smartphone, etc. So per her request I will be managing her retirement accounts online going forward as needed. For this I will setup and manage an email account for her as well while making sure to select that she receives statements for everything through regular mail.

Part 1 - Retirement/Finances:

Current Assets:
I don't have any online accounts setup for her as of yet, so this is information I've gathered from the statements she could find and showed me (most from her 2016 tax return folder), and from the little summary write up her account gives her annually to sum up data on all of her accounts.

Taxable
$20k in brick and mortar savings. This is where all of her dividend checks go, and she draws from this account for big bills like property taxes and stuff. She's also earmarked some of this money for home repairs and that in preparation for selling her house.
$106k in DTE stock in Revocable Living Trust at Wells Fargo. I'm guessing this was setup when my Dad died? But not sure and neither is she.
$2k in "JP Morgan Trust". I'm guessing this is at Chase Bank but not sure...she doesn't have any paperwork on this account...this is a line item on the account provided sheet. Any advice on how to investigate this?

Her Regular IRA at Vanguard
$318k all in VFIAX (SP500 Index Admiral)

Questions:

1. From an asset allocation standpoint, it seems to me like she's way overexposed to the market for her age at essentially 100% stocks plus some cash. My guess is none of this has been changed or even really examined since my dad passed (1996), and just to clarify my mom has no idea what asset allocation even means. So, I think a discussion of her risk exposure is warranted, and I will likely suggest that she reallocate this IRA entirely into a Target Retirement Fund like VTXVX or maybe just do a mix of Total Stock and Total Bond or something that makes sense taking into account her taxable stock exposure as well. Basically, I would like her to understand that she doesn't need to take on this much risk and she can adjust this to protect herself. Honestly once I explain the situation I can't imagine that she won't agree with me 100% on this based on her personality and desire to not ever "gamble" on anything, never take on debt, etc. She has what I would say is a very risk averse type personality.

2. What should I suggest to do with the taxable stock fund? Leave it alone and come up with an AA strategy that lets the taxable account just remain unchanged? Her accountant is capturing gains and losses on her tax return. As far as taxable accounts go...any other considerations? We don't have any taxable investments of our own so I've never managed an account of this type.

3. She's very concerned about her dividends coming in quarterly because she saves that money to pay her tax bills and so forth. How will the changes in AA affect her dividends? Honestly I've never really payed much attention to these as we just reinvest them in all of our accounts. Less stocks and more bonds = smaller dividend checks? I know that I can explain to her the money is still there whether it's in her savings or still in the account at Vanguard...but she's a very "see it / feel it" type of person...so I know if things change and the checks coming into her quarterly are different she will wonder why. To her, the money isn't really "there" until she has it in her bank savings. If that makes sense.

4. I will check and make sure her beneficiary information is up to date...it probably hasn't been updated in years...if ever.

5. Am I missing anything else here? I want to make sure I'm doing what's best for her.

Part 2 - Financial Side of Moving:

My first thought at a plan: she should go find a condo for a price and location that make sense, get a mortgage with a down payment, and buy it. Then she can get moved over, my brothers and I can repair what needs fixing, paint, all that...and then she can sell the house. I can say with certainty that she will NOT want any kind of mortgage, so when she sells the house she can essentially pay of the new condo at that time. I'm thinking her getting a mortgage on a temporary basis will help with the stress and difficulty of trying to fix up her house, sell, and buy all at once.

1. My first step in this process will be to look at her credit, which she says is good, but I have no idea. She has no credit cards, no car loan, no mortgage, etc. Credit is funny that way when you don't have much activity. I may end up suggesting she open a credit card just to have it. I could probably set her up with online bill payment and just take care of that myself for her so it stays active monthly.

2. Can anyone recommend the best place to fund her down payment? I think the stash she has in her savings will be enough to cover repairs and upgrades no problem. Conservatively her home value is about $130k. So assuming she can find a condo somewhere in the ballpark of that price range, she'd be looking at coming up with maybe $30k for the down payment plus maybe a little extra to take care of the mortgage payments she'll have during the turnover time on the house. Taking into consideration her financial picture above, where would be the best place to draw funds for her down payment?

3. Any other ideas or things to consider here?

Thanks very much for all the help everyone! :beer

feehater
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Re: Advice needed for parent's finances

Post by feehater » Mon Nov 13, 2017 12:54 pm

Two thoughts before the experts come along:

1. There is a contingent of folks on here who will point out that you logging in to your mom's account is impersonating her and is technically illegal or at least against the terms of service. They would tell you to instead fill out a form for each company authorizing you to have access and power to control the accounts.

2. If she really has had absolutely no credit accounts in the past many years, you are right that she most certainly does not have good credit. We had a couple of threads on here recently that you can search for where people even had trouble qualifying for a mortgage in her case. Have you considered selling the house first which would solve both the getting a mortgage problem and the problem of finding a downpayment without having to sell lots of investments that would have tax consequences?

delamer
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Re: Advice needed for parent's finances

Post by delamer » Mon Nov 13, 2017 1:06 pm

A few thoughts, in no particular order:

Since she is somewhat dependent on the dividends from the stock and her IRA, she may be unhappy with more bond exposure. That assumes that the IRA will throw off less income if you move a large percentage to bonds, as you said. Note that I am not arguing that she should not be more in bonds; I agree that she is overexposed to stocks. But she needs to understand the consequences.

It is not great that such a large portion of her assets are tied up in one stock. I would make a plan to sell off slowly. But see note above about dividends.

You should sit down with her and go over her expenses -- weekly, monthly, semi-annual, and annual. If she is close to the edge as is, then that will affect what she can pay for the condo. Remember she will have a HOA fee and possibly higher property taxes.

Are you sure that she can qualify for a mortgage on the condo with her income? Have you tried an online affordability calculator? She will still have property taxes and insurance on her current home that will count as expenses (in her debt to income) until she sells it. Could she sell the house and stay with someone for a few months until the condo is purchased and ready? All that said, she may be able to use her IRA to help qualify for the mortgage.

guitarguy
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Re: Advice needed for parent's finances

Post by guitarguy » Mon Nov 13, 2017 1:10 pm

feehater wrote:
Mon Nov 13, 2017 12:54 pm
Two thoughts before the experts come along:

1. There is a contingent of folks on here who will point out that you logging in to your mom's account is impersonating her and is technically illegal or at least against the terms of service. They would tell you to instead fill out a form for each company authorizing you to have access and power to control the accounts.
Thank you for pointing this out. Of course it wouldn't be my intention to do anything more than what she asks me to do...I certainly don't want to be doing anything illegal. I will sit with her when we create the accounts and we'll just do it that way. My goal is certainly not to have to actively be logging on and taking regular action while managing her accounts. My thought was a target fund simply so that it would continue to be on auto pilot, but with a more suitable AA.
feehater wrote:
Mon Nov 13, 2017 12:54 pm
2. If she really has had absolutely no credit accounts in the past many years, you are right that she most certainly does not have good credit. We had a couple of threads on here recently that you can search for where people even had trouble qualifying for a mortgage in her case. Have you considered selling the house first which would solve both the getting a mortgage problem and the problem of finding a downpayment without having to sell lots of investments that would have tax consequences?
She had a car loan, but that was paid off probably 5 years ago or more. No credit accounts since that time. When she said "oh I have good credit" I said well we have to look into that because credit is weird that way....etc.

I have considered selling the house first and I think that would be great if we could do it. However, my mom has a TON of "stuff". I don't know how else to say it...but the house is full of stuff and really needs to be cleared out so that rooms can be painted, minor repairs completed, etc. I think it would be extremely difficult to do while she is still living there...but would certainly be open to ideas from anyone that's been through something like this.

Also, getting rid of stuff isn't easy for my mom. It never has been. Since I know she does NOT want to be in debt, I think if she had that (temporary) mortgage on her plate along with the excitement of moving into her awesome new condo, it would get her really motivated to clean house and get rid of whatever she didn't want to take along when she moves.

But you're right...I certainly don't want her to have too many negative tax implications from coming up with the down payment. Hmm.

mouses
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Re: Advice needed for parent's finances

Post by mouses » Mon Nov 13, 2017 1:26 pm

I'm slightly older than your Mom.

I also "discovered" that I had a ton of stuff when I moved after decades in the same place. I encourage her to start nibbling away at getting rid of things. If she goes slowly enough and keeps anything she is not sure about, this should not be painful, although I imagine she will still have a lot of stuff when it comes time to move. Boxing that up and leaving it in one room of the condo will give her time to go through it without feeling rushed. I made 5-6 passes before I saw the finish line.

Is the JP Morgan trust at perhaps JP Morgan :-) Can the tax guy tell you where it is?

I think you should get her a bit comfortable with electronic stuff. My Mom learned in her eighties. Libraries or senior centers sometimes have beginner courses. Of course, maybe this is a bad idea if she is really uncomfortable with it.

However, I think you should get her familiar with where all her investments etc. are once the dust settles. Otherwise she will be lost if you get run over by a truck or somesuch.
Last edited by mouses on Mon Nov 13, 2017 1:28 pm, edited 1 time in total.

guitarguy
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Re: Advice needed for parent's finances

Post by guitarguy » Mon Nov 13, 2017 1:27 pm

delamer wrote:
Mon Nov 13, 2017 1:06 pm
A few thoughts, in no particular order:

Since she is somewhat dependent on the dividends from the stock and her IRA, she may be unhappy with more bond exposure. That assumes that the IRA will throw off less income if you move a large percentage to bonds, as you said. Note that I am not arguing that she should not be more in bonds; I agree that she is overexposed to stocks. But she needs to understand the consequences.

It is not great that such a large portion of her assets are tied up in one stock. I would make a plan to sell off slowly. But see note above about dividends.
Would it make sense to start selling off small chunks of the DTE stock to essentially equal the dividend she was getting quarterly from the IRA? Since she's paying taxes on both (right...?) when she receives the dividends, that shouldn't affect her taxes much in the end I wouldn't think.

Also another consideration is that she'll going to be required to start taking distributions from her IRA in summer 2021, so at some point we'll need to take that into account too.

I really don't have a good understanding of what kind of shape she is in overall with her assets vs age and so forth. I know it's not up to many BH standards, but as an outsider taking my first glimpse at least she has no debt and some fairly substantial assets...so it doesn't seem like she's in too bad of shape.
delamer wrote:
Mon Nov 13, 2017 1:06 pm
You should sit down with her and go over her expenses -- weekly, monthly, semi-annual, and annual. If she is close to the edge as is, then that will affect what she can pay for the condo. Remember she will have a HOA fee and possibly higher property taxes.
We definitely need to have a look at this, and I will go through it with her.
delamer wrote:
Mon Nov 13, 2017 1:06 pm
Are you sure that she can qualify for a mortgage on the condo with her income? Have you tried an online affordability calculator? She will still have property taxes and insurance on her current home that will count as expenses (in her debt to income) until she sells it. Could she sell the house and stay with someone for a few months until the condo is purchased and ready? All that said, she may be able to use her IRA to help qualify for the mortgage.
No, and no. I certainly need to dig into this further as well. Ideally it would be great to sell the house and just go pay cash for a smaller condo, but I'm not sure it'll be just that easy...

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CAsage
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Re: Advice needed for parent's finances

Post by CAsage » Mon Nov 13, 2017 1:28 pm

Lots of good advice already, adding some minor thoughts. You certainly can manage her accounts online, my brother did that for my Mom at Vanguard (get the form signed). Your Mom's last tax return folder should have statements or 1099 forms for those accounts, they will at least give you all the account numbers. Sell the $2k JPMorgan thing, it's just nuisance-sized. For the Trust account... ideally there is a trust document somewhere, that controls how that money is managed, but very likely your Mom has access to all of it. You need to find out the current cost basis (possibly sell in batches). Move all asset accounts to one: Vanguard/Fidelity/Schwab (whichever you like, similar accounts available). Some have walk in offices (not Vanguard).
About the house. Your Mom probably has 40 years worth of clutter/junk. If you can get her excited about moving to a nice new home, and help toss a lot of it. I found it easier to part with things I really did not need when one book described it as - things other people will get more use out of and need. This is a critical step, it's just holding her back. Especially if you don't see a way to fix up the house until it's empty and can't buy another place. Start now, and try and work either 2 hours a day or something steady - get her a supply of goodwill boxes and trash bags.
The budget is a big swinger. Is renting by her sister not an option? Are condos available and are HOA fees affordable? You can look online and determine what the income stream is from a Target retirement fund, or assume she can take out about 3% to live on, plus her SS. Set it up as a monthly deposit.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

guitarguy
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Re: Advice needed for parent's finances

Post by guitarguy » Mon Nov 13, 2017 1:43 pm

CAsage wrote:
Mon Nov 13, 2017 1:28 pm
Lots of good advice already, adding some minor thoughts. You certainly can manage her accounts online, my brother did that for my Mom at Vanguard (get the form signed). Your Mom's last tax return folder should have statements or 1099 forms for those accounts, they will at least give you all the account numbers. Sell the $2k JPMorgan thing, it's just nuisance-sized. For the Trust account... ideally there is a trust document somewhere, that controls how that money is managed, but very likely your Mom has access to all of it. You need to find out the current cost basis (possibly sell in batches). Move all asset accounts to one: Vanguard/Fidelity/Schwab (whichever you like, similar accounts available). Some have walk in offices (not Vanguard).
About the house. Your Mom probably has 40 years worth of clutter/junk. If you can get her excited about moving to a nice new home, and help toss a lot of it. I found it easier to part with things I really did not need when one book described it as - things other people will get more use out of and need. This is a critical step, it's just holding her back. Especially if you don't see a way to fix up the house until it's empty and can't buy another place. Start now, and try and work either 2 hours a day or something steady - get her a supply of goodwill boxes and trash bags.
The budget is a big swinger. Is renting by her sister not an option? Are condos available and are HOA fees affordable? You can look online and determine what the income stream is from a Target retirement fund, or assume she can take out about 3% to live on, plus her SS. Set it up as a monthly deposit.
We've had the conversations on the getting rid of stuff aspect already...she is slowly getting rid of stuff but it's unfortunately not what I would call significant progress.

I love the idea of transferring all of the assets to Vanguard. Can anyone advise in greater detail how to do this? What are the tax implications of moving this around? If she, say, sells $25k of this DTE stock and we transfer to a taxable account at VG and buy into another fund, won't there be a nasty tax implication? Forgive me for being a total layman here...I haven't ever conducted any type of transaction like this!

Renting would be an idea...I don't know if she'll like it as she really loves the no debt/no payments type of thing she has going and likely will want that again. But selling the house will give her a pile of cash to use for mortgage payments so she won't "feel" them on a monthly basis, and $100k in cash would conservatively be plenty to pay her monthly rent payments for several years until she starts taking required distributions from the IRA and will have more cash flow on a monthly basis.

cas
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Re: Advice needed for parent's finances

Post by cas » Mon Nov 13, 2017 1:56 pm

guitarguy wrote:
Mon Nov 13, 2017 12:36 pm

Taxable:

$106k in DTE stock in Revocable Living Trust at Wells Fargo. I'm guessing this was setup when my Dad died? But not sure and neither is she.

<skip>

2. What should I suggest to do with the taxable stock fund?
Could you clarify exactly what the "DTE stock" you mention is?

If I type "DTE" into the Morningstar quote page, it indicates that it could be either

DTE Energy Co (a single stock)
or possibly
Deutsche Telecom (a single stock ... but it looks like it would be called DTEGY for the version trading on the US exchanges)

But then you call it a "taxable stock fund".

Which is it? A single stock? Or a stock fund (and I'm just not finding the mutual fund corresponding to that ticker on Morningstar?)

If it is a single stock, that would worry me a lot, given her situation.

(Not to jump too far ahead, before you confirm whether or not it is a single stock, but ... It doesn't look like she has all that much taxable income. If she still has room before she hits the top of the 15% bracket, she could sell some of the stock in the taxable account, pay 0% federal in long term capital gains tax (there might be some state tax, depending on the state. And you/she would want to determine what the additional LTCG income would do to the taxes on her social security), and then redeploy the proceeds into something more diversified. But the first step would be to get her tax return from last year and figure out a bit more about her tax status.)

(And not to get even more off track on my main question (What is the DTE?) but who is the trustee of the "Revocable Living Trust" at Wells Fargo? If it is your mother, then she'll be able to sell/buy what you and she decide on. If the trustee is someone else, then that would complicate things. Also, if it is a trust of some sort (either Revocable Living Trust under your mother's social security number, or an irrevocable trust that derived from a revocable living trust that was under your father's SS#), there is a trust document somewhere that has instructions on how this trust can be managed and what happens to it if your mother becomes incapacitated or dies. You really want to lay your hands on this document and read it. BTW, the accountant should know whether it is your mother's Revocable Living Trust or an irrevocable trust associated with your father. The tax documents associated with those two choices are very different.)

delamer
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Re: Advice needed for parent's finances

Post by delamer » Mon Nov 13, 2017 2:03 pm

Are you talking about selling some of the stock and discontinuing the dividends from the IRA (that is reinvesting them instead)?

The difference tax-wise would be that she'll pay capital gains taxes on the dfference between the sell price and her cost basis in the stock. The dividends from the IRA are taxed as ordinary income. Could be more, could be less. This is where her tax accountant can provide guidance. Your mother's tax rate is probably low.

guitarguy
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Re: Advice needed for parent's finances

Post by guitarguy » Mon Nov 13, 2017 2:16 pm

cas wrote:
Mon Nov 13, 2017 1:56 pm
guitarguy wrote:
Mon Nov 13, 2017 12:36 pm

Taxable:

$106k in DTE stock in Revocable Living Trust at Wells Fargo. I'm guessing this was setup when my Dad died? But not sure and neither is she.

<skip>

2. What should I suggest to do with the taxable stock fund?
Could you clarify exactly what the "DTE stock" you mention is?

If I type "DTE" into the Morningstar quote page, it indicates that it could be either

DTE Energy Co (a single stock)
or possibly
Deutsche Telecom (a single stock ... but it looks like it would be called DTEGY for the version trading on the US exchanges)

But then you call it a "taxable stock fund".

Which is it? A single stock? Or a stock fund (and I'm just not finding the mutual fund corresponding to that ticker on Morningstar?)

If it is a single stock, that would worry me a lot, given her situation.

(Not to jump too far ahead, before you confirm whether or not it is a single stock, but ... It doesn't look like she has all that much taxable income. If she still has room before she hits the top of the 15% bracket, she could sell some of the stock in the taxable account, pay 0% federal in long term capital gains tax (there might be some state tax, depending on the state. And you/she would want to determine what the additional LTCG income would do to the taxes on her social security), and then redeploy the proceeds into something more diversified. But the first step would be to get her tax return from last year and figure out a bit more about her tax status.)

(And not to get even more off track on my main question (What is the DTE?) but who is the trustee of the "Revocable Living Trust" at Wells Fargo? If it is your mother, then she'll be able to sell/buy what you and she decide on. If the trustee is someone else, then that would complicate things. Also, if it is a trust of some sort (either Revocable Living Trust under your mother's social security number, or an irrevocable trust that derived from a revocable living trust that was under your father's SS#), there is a trust document somewhere that has instructions on how this trust can be managed and what happens to it if your mother becomes incapacitated or dies. You really want to lay your hands on this document and read it. BTW, the accountant should know whether it is your mother's Revocable Living Trust or an irrevocable trust associated with your father. The tax documents associated with those two choices are very different.)
I misspoke using the word "fund" I think. At the top of her 1099-DIV, it says "DTE Energy Company Common Stock" so it appears it's a singular DTE stock holding. I agree this is worrisome to me as well with 1/4 of her total retirement assets in a single stock. I really need some good info on what to do here. I think the general point of direction is to somehow sell it off / break it up and then reinvest in a more diversified holding, but I don't know how to do that exactly when taking into account the tax implications of selling stock from taxable account.

I will start by looking at her tax return from last year. But what exactly do I look for? Again forgive me for being a layman here...I don't have personal experience with managing this type of account or looking at the implications of these types of transactions.

Also, on the DTE 1099 it's addressed as

My Mother's Name TR UA 11/15/04
My Mother's Name Revocable Living Trust
address, city, state, zip

So in looking at this that reads like the trust is in her name. Hopefully that is the case. Also based on the date, if that TR UA means it was established in 2004, my father passed in 1996.

guitarguy
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Re: Advice needed for parent's finances

Post by guitarguy » Mon Nov 13, 2017 2:27 pm

delamer wrote:
Mon Nov 13, 2017 2:03 pm
Are you talking about selling some of the stock and discontinuing the dividends from the IRA (that is reinvesting them instead)?

The difference tax-wise would be that she'll pay capital gains taxes on the dfference between the sell price and her cost basis in the stock. The dividends from the IRA are taxed as ordinary income. Could be more, could be less. This is where her tax accountant can provide guidance. Your mother's tax rate is probably low.
That's what I was thinking...as it seems a good idea to break up and diversify that large singular stock anyway, and the dividend from the IRA will decrease with the change in AA.

I will definitely consult with her accountant on all of this as well and seek her guidance.

cas
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Re: Advice needed for parent's finances

Post by cas » Mon Nov 13, 2017 3:29 pm

guitarguy wrote:
Mon Nov 13, 2017 2:16 pm

Also, on the DTE 1099 it's addressed as

My Mother's Name TR UA 11/15/04
My Mother's Name Revocable Living Trust
address, city, state, zip

So in looking at this that reads like the trust is in her name. Hopefully that is the case. Also based on the date, if that TR UA means it was established in 2004, my father passed in 1996.
(Leaving aside the taxable account issues for the moment ... dealing with the taxes on a taxable account isn't hard, but there are a few moving parts, and I'm hoping somebody else is busy typing away as we speak...)

On the trust...

(Usual disclaimer: I am not a lawyer. Or an accountant. Or anyone knowledgeable like that. I did sit in on the lawyer meetings where my parents created Revocable Living Trusts, and I am a current co-trustee on those trusts.)

In my (limited) experience, a Revocable Living Trust doesn't just appear out of mid-air, but requires several meetings with a lawyer, some noticeable lawyer expense, and some closing of old (non-trust) accounts and opening of new (trust) accounts. (Well, I suppose there are software/online do-it-yourself trusts, but from what you've said about your mother, I'm guessing the possibility of her doing something like that is 0.) And, in my (limited) experience, that "11/15/04" would indeed mean that the trust was created in 2004. And the rest of the trust wording on that DTE 1099 means that your mother was the one who signed the trust documents. So, it is odd that your mother is uncertain where this trust came from.

Does she perhaps remember making a will or re-doing a will in 2004? From observing various relatives, I would definitely believe that it might be possible that she might have gone to a lawyer in 2004 to "make a will," and came out of the lawyer meetings with a whole pile of paperwork including a will, a trust, durable POA, health care POA, living will, etc. and the memory of creating the revocable trust got lost in the general category of "I made a will." Except she would have also had to go create the trust account(s) at Wells Fargo (and I'm going to guess that the JP Morgan account is also titled for the revocable living trust.) Or possibly the lawyer filled out part of the paperwork for her and the trust account creation was just a few more signatures in the whole pile of document signatures.

The way the DTE 1099 is addressed, it certainly looks like your mother is the trustee. (This will make life simpler.) And it is your mother's Revocable Living Trust, which is simpler to deal with than an irrevocable trust created when your father died. (You aren't seeing any Schedule K-1 in the tax paperwork, are you? My understanding is that an irrevocable trust would require the accountant to file a form 1041 for the trust and to create a Schedule K-1.) The 1099-DIV has your mother's SS # on it, right ... not some other tax id? (If it does, I think (I am not a lawyer) that definitely means it is your mother's revocable living trust. (An irrevocable trust would be reported under its own tax id, not your mother's SS#.)

Anyway ... ask your mother if she remembers going to a lawyer and getting a will ... or something ... done for her in 2004. If she does, I'm guessing the trust paperwork is sitting in the same pile of paper as wherever she put the will. (If your mother is now turning to you to advise on financial affairs, you probably want to know whether you are named as successor trustee in the revocable living trust. This would allow you to take over management of the trust if your mother were to become unable to manage it.)

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Peter Foley
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Re: Advice needed for parent's finances

Post by Peter Foley » Mon Nov 13, 2017 4:11 pm

Guitarguy wrote: Comments in red.
1. From an asset allocation standpoint, it seems to me like she's way overexposed to the market for her age at essentially 100% stocks plus some cash. My guess is none of this has been changed or even really examined since my dad passed (1996), and just to clarify my mom has no idea what asset allocation even means. So, I think a discussion of her risk exposure is warranted, and I will likely suggest that she reallocate this IRA entirely into a Target Retirement Fund like VTXVX or maybe just do a mix of Total Stock and Total Bond or something that makes sense taking into account her taxable stock exposure as well. Basically, I would like her to understand that she doesn't need to take on this much risk and she can adjust this to protect herself. Honestly once I explain the situation I can't imagine that she won't agree with me 100% on this based on her personality and desire to not ever "gamble" on anything, never take on debt, etc. She has what I would say is a very risk averse type personality.
I agree that she is overexposed to the market and that the place to address this is in her IRA where selling a stock fund and buying something else is not a taxable event.

2. What should I suggest to do with the taxable stock fund? Leave it alone and come up with an AA strategy that lets the taxable account just remain unchanged? Her accountant is capturing gains and losses on her tax return. As far as taxable accounts go...any other considerations? We don't have any taxable investments of our own so I've never managed an account of this type. Action here depends in part on her tax bracket. She is certainly over exposed in a single stock. If she can sell some of it and stay in the 15% tax bracket where she will not be taxed for long term capital gains, she should do so. Maybe sell little by little over a few years. Selling this may reduce her dividends, but that comes with the territory.

3. She's very concerned about her dividends coming in quarterly because she saves that money to pay her tax bills and so forth. How will the changes in AA affect her dividends? Honestly I've never really payed much attention to these as we just reinvest them in all of our accounts. Less stocks and more bonds = smaller dividend checks? I know that I can explain to her the money is still there whether it's in her savings or still in the account at Vanguard...but she's a very "see it / feel it" type of person...so I know if things change and the checks coming into her quarterly are different she will wonder why. To her, the money isn't really "there" until she has it in her bank savings. If that makes sense.
Action here depends on her budget and from where she draws funds to pay for her ongoing expenses. If she were to sell some stock she would have a larger bank account balance and would not have to count on the dividends.

An unrelated question - your father died 20 years ago and your mother is 66. How is it she has been collecting SS benefits for 20 years? Is that her only source of income?

guitarguy
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Re: Advice needed for parent's finances

Post by guitarguy » Mon Nov 13, 2017 5:54 pm

Peter Foley wrote:
Mon Nov 13, 2017 4:11 pm
An unrelated question - your father died 20 years ago and your mother is 66. How is it she has been collecting SS benefits for 20 years? Is that her only source of income?
Yes. She was a stereotypical June Cleaver stay at home mom with 3 boys age 11 (me), 8, and 5 when my dad died. I never really got the details from her, and I always had clothes on my back and food in my stomach so I never asked. As I *think* I understand it though, she collected my dad’s SS, and a stipend in mine and my 2 brothers names also. The kids amounts went away as each of us turned 18. Eventually when we got older and our SS income vanished, she started working a thankless job to make ends meet, but eventually ended up with a medical condition that prohibited her from working any longer. At that time she started collecting disability. Now, the income she lives on consists of that disability, my dad’s SS, and her dividends.

Looking back on it, and it’s not the first time I’m doing so, but wow did she do an incredible job and raising 3 successful children. I just hope I can advise her and help in any way I can with her finances. Or anything else she ever needs!

mouses
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Re: Advice needed for parent's finances

Post by mouses » Mon Nov 13, 2017 8:47 pm

cas wrote:
Mon Nov 13, 2017 3:29 pm
guitarguy wrote:
Mon Nov 13, 2017 2:16 pm

Also, on the DTE 1099 it's addressed as

My Mother's Name TR UA 11/15/04
My Mother's Name Revocable Living Trust
address, city, state, zip

So in looking at this that reads like the trust is in her name. Hopefully that is the case. Also based on the date, if that TR UA means it was established in 2004, my father passed in 1996.
(Leaving aside the taxable account issues for the moment ... dealing with the taxes on a taxable account isn't hard, but there are a few moving parts, and I'm hoping somebody else is busy typing away as we speak...)

On the trust...

(Usual disclaimer: I am not a lawyer. Or an accountant. Or anyone knowledgeable like that. I did sit in on the lawyer meetings where my parents created Revocable Living Trusts, and I am a current co-trustee on those trusts.)

In my (limited) experience, a Revocable Living Trust doesn't just appear out of mid-air, but requires several meetings with a lawyer, some noticeable lawyer expense, and some closing of old (non-trust) accounts and opening of new (trust) accounts. (Well, I suppose there are software/online do-it-yourself trusts, but from what you've said about your mother, I'm guessing the possibility of her doing something like that is 0.) And, in my (limited) experience, that "11/15/04" would indeed mean that the trust was created in 2004. And the rest of the trust wording on that DTE 1099 means that your mother was the one who signed the trust documents. So, it is odd that your mother is uncertain where this trust came from.

Does she perhaps remember making a will or re-doing a will in 2004? From observing various relatives, I would definitely believe that it might be possible that she might have gone to a lawyer in 2004 to "make a will," and came out of the lawyer meetings with a whole pile of paperwork including a will, a trust, durable POA, health care POA, living will, etc. and the memory of creating the revocable trust got lost in the general category of "I made a will." Except she would have also had to go create the trust account(s) at Wells Fargo (and I'm going to guess that the JP Morgan account is also titled for the revocable living trust.) Or possibly the lawyer filled out part of the paperwork for her and the trust account creation was just a few more signatures in the whole pile of document signatures.

The way the DTE 1099 is addressed, it certainly looks like your mother is the trustee. (This will make life simpler.) And it is your mother's Revocable Living Trust, which is simpler to deal with than an irrevocable trust created when your father died. (You aren't seeing any Schedule K-1 in the tax paperwork, are you? My understanding is that an irrevocable trust would require the accountant to file a form 1041 for the trust and to create a Schedule K-1.) The 1099-DIV has your mother's SS # on it, right ... not some other tax id? (If it does, I think (I am not a lawyer) that definitely means it is your mother's revocable living trust. (An irrevocable trust would be reported under its own tax id, not your mother's SS#.)

Anyway ... ask your mother if she remembers going to a lawyer and getting a will ... or something ... done for her in 2004. If she does, I'm guessing the trust paperwork is sitting in the same pile of paper as wherever she put the will. (If your mother is now turning to you to advise on financial affairs, you probably want to know whether you are named as successor trustee in the revocable living trust. This would allow you to take over management of the trust if your mother were to become unable to manage it.)
+1

On my will, the lawyer stamped her name and contact info on the sides of some of the pages. If you can find the will or trust, that info may be there, and the lawyer may well have copies of all the documents. Hopefully the lawyer is still in business, or you can find out what happened to his or her records.

If your Mom keeps checking account records, you may find a clue to the lawyer there.

Is there a safe deposit box? That's a likely place for these documents.

My will has a provision that anything not in the trust at the time of my death goes into the trust.

cas
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Re: Advice needed for parent's finances

Post by cas » Tue Nov 14, 2017 6:38 am

guitarguy wrote:
Mon Nov 13, 2017 2:16 pm
I misspoke using the word "fund" I think. At the top of her 1099-DIV, it says "DTE Energy Company Common Stock" so it appears it's a singular DTE stock holding. I agree this is worrisome to me as well with 1/4 of her total retirement assets in a single stock. I really need some good info on what to do here. I think the general point of direction is to somehow sell it off / break it up and then reinvest in a more diversified holding, but I don't know how to do that exactly when taking into account the tax implications of selling stock from taxable account.

I will start by looking at her tax return from last year. But what exactly do I look for? Again forgive me for being a layman here...I don't have personal experience with managing this type of account or looking at the implications of these types of transactions.
Getting back to the taxes...

A few questions before getting started:

Do you have either your mother's 2016 tax return (preferably) or your own 2016 tax return available to look at, so that if I start writing about specific forms/line numbers it has a better chance of making sense?

Does your mother live in a state that has state tax?

It sounds like you know what a 1099-DIV is, since you refer to one for the Wells Fargo (DTE stock) account. If I use terms like "ordinary income," "qualified dividend," "non-qualified dividend," "cost basis", "long term capital gain," "short term capital gain," or "capital gains distribution" do you somewhat know what I'm talking about? Or will I need to explain those as I go along? (None of these are difficult concepts, but I know lots of new terminology can make things seem harder than they are.)

guitarguy
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Re: Advice needed for parent's finances

Post by guitarguy » Tue Nov 14, 2017 6:54 am

mouses wrote:
Mon Nov 13, 2017 8:47 pm
cas wrote:
Mon Nov 13, 2017 3:29 pm
guitarguy wrote:
Mon Nov 13, 2017 2:16 pm

Also, on the DTE 1099 it's addressed as

My Mother's Name TR UA 11/15/04
My Mother's Name Revocable Living Trust
address, city, state, zip

So in looking at this that reads like the trust is in her name. Hopefully that is the case. Also based on the date, if that TR UA means it was established in 2004, my father passed in 1996.
(Leaving aside the taxable account issues for the moment ... dealing with the taxes on a taxable account isn't hard, but there are a few moving parts, and I'm hoping somebody else is busy typing away as we speak...)

On the trust...

(Usual disclaimer: I am not a lawyer. Or an accountant. Or anyone knowledgeable like that. I did sit in on the lawyer meetings where my parents created Revocable Living Trusts, and I am a current co-trustee on those trusts.)

In my (limited) experience, a Revocable Living Trust doesn't just appear out of mid-air, but requires several meetings with a lawyer, some noticeable lawyer expense, and some closing of old (non-trust) accounts and opening of new (trust) accounts. (Well, I suppose there are software/online do-it-yourself trusts, but from what you've said about your mother, I'm guessing the possibility of her doing something like that is 0.) And, in my (limited) experience, that "11/15/04" would indeed mean that the trust was created in 2004. And the rest of the trust wording on that DTE 1099 means that your mother was the one who signed the trust documents. So, it is odd that your mother is uncertain where this trust came from.

Does she perhaps remember making a will or re-doing a will in 2004? From observing various relatives, I would definitely believe that it might be possible that she might have gone to a lawyer in 2004 to "make a will," and came out of the lawyer meetings with a whole pile of paperwork including a will, a trust, durable POA, health care POA, living will, etc. and the memory of creating the revocable trust got lost in the general category of "I made a will." Except she would have also had to go create the trust account(s) at Wells Fargo (and I'm going to guess that the JP Morgan account is also titled for the revocable living trust.) Or possibly the lawyer filled out part of the paperwork for her and the trust account creation was just a few more signatures in the whole pile of document signatures.

The way the DTE 1099 is addressed, it certainly looks like your mother is the trustee. (This will make life simpler.) And it is your mother's Revocable Living Trust, which is simpler to deal with than an irrevocable trust created when your father died. (You aren't seeing any Schedule K-1 in the tax paperwork, are you? My understanding is that an irrevocable trust would require the accountant to file a form 1041 for the trust and to create a Schedule K-1.) The 1099-DIV has your mother's SS # on it, right ... not some other tax id? (If it does, I think (I am not a lawyer) that definitely means it is your mother's revocable living trust. (An irrevocable trust would be reported under its own tax id, not your mother's SS#.)

Anyway ... ask your mother if she remembers going to a lawyer and getting a will ... or something ... done for her in 2004. If she does, I'm guessing the trust paperwork is sitting in the same pile of paper as wherever she put the will. (If your mother is now turning to you to advise on financial affairs, you probably want to know whether you are named as successor trustee in the revocable living trust. This would allow you to take over management of the trust if your mother were to become unable to manage it.)
+1

On my will, the lawyer stamped her name and contact info on the sides of some of the pages. If you can find the will or trust, that info may be there, and the lawyer may well have copies of all the documents. Hopefully the lawyer is still in business, or you can find out what happened to his or her records.

If your Mom keeps checking account records, you may find a clue to the lawyer there.

Is there a safe deposit box? That's a likely place for these documents.

My will has a provision that anything not in the trust at the time of my death goes into the trust.
OK...I talked with her last night and she does remember doing a will in 2004. This included the healthcare POA, durable POA, etc. Pretty much everything mentioned above. My 2 brothers and I are listed such that we each get 33.33% of all of the assets if my mom should die. I don't have the paperwork in front of me to read and I'm certainly not a lawyer so my terminology isn't spot on...but that's the gist of it from what she tells me.

It is a revocable living trust and not anything associated with my dad really. It's all in her name and yes it's her SS# on all of the paperwork.

The lawyer's information is on the paperwork as well so we could contact if necessary. But is it?

Can she liquidate this JP Morgan thing for $2k and start selling off DTE stock in chunks and reinvesting it into Vanguard without dealing with lawyers? These are both titled revocable living trusts.

guitarguy
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Re: Advice needed for parent's finances

Post by guitarguy » Tue Nov 14, 2017 7:26 am

cas wrote:
Tue Nov 14, 2017 6:38 am
guitarguy wrote:
Mon Nov 13, 2017 2:16 pm
I misspoke using the word "fund" I think. At the top of her 1099-DIV, it says "DTE Energy Company Common Stock" so it appears it's a singular DTE stock holding. I agree this is worrisome to me as well with 1/4 of her total retirement assets in a single stock. I really need some good info on what to do here. I think the general point of direction is to somehow sell it off / break it up and then reinvest in a more diversified holding, but I don't know how to do that exactly when taking into account the tax implications of selling stock from taxable account.

I will start by looking at her tax return from last year. But what exactly do I look for? Again forgive me for being a layman here...I don't have personal experience with managing this type of account or looking at the implications of these types of transactions.
Getting back to the taxes...

A few questions before getting started:

Do you have either your mother's 2016 tax return (preferably) or your own 2016 tax return available to look at, so that if I start writing about specific forms/line numbers it has a better chance of making sense?

Does your mother live in a state that has state tax?

It sounds like you know what a 1099-DIV is, since you refer to one for the Wells Fargo (DTE stock) account. If I use terms like "ordinary income," "qualified dividend," "non-qualified dividend," "cost basis", "long term capital gain," "short term capital gain," or "capital gains distribution" do you somewhat know what I'm talking about? Or will I need to explain those as I go along? (None of these are difficult concepts, but I know lots of new terminology can make things seem harder than they are.)
She has copies of her tax returns...I don't have them in front of me.

We live in MI, so yes.

I'm loosely familiar with some of these terms, but I wouldn't say I have good knowledge on all of them. If I have any questions I can certainly google and read too and then apply to this context, but if it's convenient to slip in some short explanations along the way that would be great too!

After talking with her last night, her plan with the investments is:

1. Reallocate Vanguard IRA assets so that she's closer to 50/50 or 60/40 in bonds/stocks across all accounts. I discussed her risk and exposure and she was in instant agreement with this. Set the account to reinvest the dividends. She wants to do this right away.
2. Sell off DTE stock in chunks. Use some to replace the quarterly dividend income she was relying on from Vanguard as well as what was coming in from DTE (as that will also change as we liquidate the stock), and reinvest the rest in a Vanguard in a taxable account in a more diversified fund.

I mentioned this will also eventually consolidate all of her assets at Vanguard and she was very happy with the simplicity of that idea, so this plan would accomplish that as well as reducing her risk in both major areas (stock/bond mix + holding so much stock in DTE alone).

So, in a nutshell we should be looking to sell off as much DTE as possible annually while keeping her below 15% tax rate to avoid capital gains? That's probably way too simplified an explanation. We have an appointment scheduled with her accountant for later this week so we'll have help with the tax implications of all of this. Basically I just need advice on how to most tax efficiently help her redistribute the DTE stock over time.

AA wise, I'd love to set everything into target retirement funds, but I'm guessing this won't be the best choice for her taxable account. So maybe just a mix of total stock and total bond, or maybe a 3-fund portfolio split, across the IRA and her new taxable account at Vanguard would be a better choice. I don't mind rebalancing annually or whatever for her as needed. I may post a separate thread on this in the investments forum.

Thanks all for the great advice. It really is appreciated.

cas
Posts: 147
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Re: Advice needed for parent's finances

Post by cas » Tue Nov 14, 2017 8:25 am

guitarguy wrote:
Tue Nov 14, 2017 6:54 am
It is a revocable living trust and not anything associated with my dad really. It's all in her name and yes it's her SS# on all of the paperwork.

The lawyer's information is on the paperwork as well so we could contact if necessary. But is it?

Can she liquidate this JP Morgan thing for $2k and start selling off DTE stock in chunks and reinvesting it into Vanguard without dealing with lawyers? These are both titled revocable living trusts.
Short answer: Since it is her own revocable trust, with her as trustee, using her SS#, she can do anything she wants with the assets in it. You two can proceed as you see fit.

(The problem would have been if it was an irrevocable trust associated with your father and either
-appointed someone else as trustee (e.g. Wells Fargo trust department), which would mean that that the outside trustee (not you and your mother) had complete decision-making authority over the assets in the trust.
-contained some unexpected restrictions (e.g. "Thou shalt never sell the DTE stock") in the wording.

But there is no problem since it is your mother's revocable living trust. I doubt there is anything unexpected in there, but even if there is, she has full power to revoke it.

Medium answer: If you do decide to open an account at Vanguard (or any new account anywhere, even a bank account), you'll need to decide whether to open the account in the name of the revocable living trust or directly in your mother's name. The paperwork is different.

And, to make that decision (open in name of trust or not), you might want to read the actual trust document, make sure you have a general grasp of the provisions in it. For example...
-What wording does the trust say should be used for a new account opened in the name of the trust?
-Who is the successor trustee, and in what situations do they become the successor trustee?
-Since the sucessor trustee is quite possibly you, what does the document say your sucessor trustee duties will be?
-Or, if the document says all 3 brothers will be successor co-trustees, do you think that is a workable scenario?)

And you'll want to make sure there aren't any surprises in the trust provisions. Given that the trust seems to have been created as part of general estate planning package, my best guess is that the lawyer recommended it as a more powerful and reliable (compared to a durable POA) way for your mother to specify who/how she wants to her assets managed if she becomes incapacitated and to avoid probate after her death. But one never really knows ... for all I know, the lawyer scared your mother about estate taxes (not relevant at your mother's level of assets) or a child getting sued/divorced/being spendthrift or something and the revocable trust has wording that creates some sort of irrevocable trust at your mother's death. And your mother may not even be aware of exactly what the lawyer did after your mother sort of generally nodded agreement about the scariness of some scenario that the lawyer proposed. My best guess is that the trust wording is pretty plain vanilla, but if it were me I would want to read it and make sure the provisions are still suitable for you, your mother, and your brothers. It may be slow reading (legalese), but if you can get the document, you probably should be able to read it for yourself with no need for involvement of a lawyer. You would need to involve a lawyer only if you become concerned that there was something really important in the trust that either you didn't understand or that seemed completely wrong for you mother's or your family's situation and needed changed.

I don't want to make this seem scary or hard. A revocable living trust can be a powerful way to bypass some of the troubles people are currently encountering with banks refusing to recognize durable POAs (See current Bogleheads thread "POAs may not be that powerful" viewtopic.php?p=3617038#p3617038 ), so if your mother went to the trouble of getting the revocable trust document drawn up, you'll probably want to title a new account in the name of the trust.

But, because revocable trusts are powerful, they are also one more financial thing you should probably get a handle on, just to make sure the power doesn't backfire in some unexpected direction.

(Example: My parents had revocable livings trusts. My parents told me the provisions, but I had never read the trust. Several years after the trusts were created, a grandchild arrived into my parent's lives, which caused me to ask to read the trust. The trust didn't do what my parents said it did. I confirmed with them what they thought it did and what their wishes were. Their understanding and wishes didn't match the actual trust language. We ended up going back to the lawyer and doing a substantial revision to the provisions in the trust to better match what my parents wanted. I didn't know a thing about trusts before this episode, so I was pretty much in the same situation you are now. However, learning all this stuff has been very influential in my own retirement and estate planning.)

Jack FFR1846
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Re: Advice needed for parent's finances

Post by Jack FFR1846 » Tue Nov 14, 2017 8:56 am

On the "getting rid of things" front, I can understand this slow progress and reluctance to throw things out. Our in-laws did this even after we answered that no....we did not want the 1961 crib as it was considered unsafe by the time our kids were born. They saved everything anyways. When my mother in law passed about 3 years ago, my father in law took it as a full time job to empty the small bungalo house where he still lives. Even now, there's masses of junk that needs to go.

Having cleaned out my grandmother's house when she passed, we did a couple things. If your mother reads and saves newspapers, there's a starting point. In my case, I separated paper from everything else first. I filled at least 5 pickup beds full of newspapers that went to the scrap paper dealer. Then it was on to other things separated into trash and not trash. Finally, we held a yard sale, selling boxes of random stuff for $5 a box in the morning and $1 a box after noon, ridding about 30 yards of junk.

If your mom's house is anything like these, you're going to want to do something similar in order to remove bulk. I would also think that an interim move into an apartment might be in order. This allows her to take along everything needed for the future condo and for you to clean out and sell the house. Once the house is sold, a condo can be purchased. Financially, this keeps stress off of her. She may think she has good credit but without credit cards, mortgage or loans, she likely doesn't. Combined with no job, I doubt she'd qualify for a mortgage. Work with her to sign up for Credit Karma and check her credit score. It's free, fast and easy and doesn't ding her score.
Bogle: Smart Beta is stupid

cas
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Re: Advice needed for parent's finances

Post by cas » Tue Nov 14, 2017 9:02 am

One other question:

Is Wells Fargo charging fees on the brokerage account that holds the DTE? An AUM fee? (Banks are usually really big on fees, so I would be surprised if they weren't, but I have no knowledge on how WF does brokerage accounts. And I'm guessing that no WF financial advisor is involved ... my recollection of people posting on bogleheads who have WF financial advisors is that they have 53 different stocks, not just 1. So I'm guess there is no FA. But I don't know how the fees work in a WF brokerage account with no FA involved.)

If there isn't a fee, there is less urgency to get the assets out of there.

If there is a fee ... like a 1% AUM fee or something ... getting out of there may produce something very tangible for your mother. Morningstar says that DTE has about a 2.9% dividend. If WF has a 1% AUM fee (for example), then that means they are getting more than a third of the dividend, and your mother is getting less than 2 thirds. With her focus on dividends, I'm sure she would be thrilled to be getting the whole thing and not just two-thirds. And ... even if you switched to something more diverse with a dividend more down toward 2% held in account without a 1% AUM fee, your mother would still be getting same amount into her pocket.


Actually ... I have another question while you are looking at WF statements. Does the statement show what the "cost basis" and "unrealized capital gains (losses)" are for the DTE stock? Cost basis is what was originally paid to buy the DTE stock. Unrealized capital gains (losses) are how much the DTE has increased (decreased) in value after it was purchased. Does the statement show the date(s) that the DTE was purchased? If it was purchased more than a year ago, then if you sell, you will have "long term capital gains" which are taxed at a lower rate. If it was purchased less than a year ago, then that may change your approach to selling it because those will be "short term capital gains" that will be taxed at a higher rate.

Also, stray tidbit ... if you open a Vanguard brokerage account, you should be able to move the DTE "in-kind" from the old brokerage account to the new brokerage account. This involves no selling, so there are are no tax consequences to the transfer from one account to another. (The account fees plus fees involved in selling at one brokerage vs the other would probably decide which place was better to sell. But that whole issue is getting ahead of ourselves. I just wanted to let you know that "in-kind" transfer of an individual stock is (almost certainly) an option, i.e. you don't have to sell before transferring.)

guitarguy
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Joined: Mon Dec 20, 2010 4:10 pm

Re: Advice needed for parent's finances

Post by guitarguy » Tue Nov 14, 2017 9:29 am

cas wrote:
Tue Nov 14, 2017 9:02 am
One other question:

Is Wells Fargo charging fees on the brokerage account that holds the DTE? An AUM fee? (Banks are usually really big on fees, so I would be surprised if they weren't, but I have no knowledge on how WF does brokerage accounts. And I'm guessing that no WF financial advisor is involved ... my recollection of people posting on bogleheads who have WF financial advisors is that they have 53 different stocks, not just 1. So I'm guess there is no FA. But I don't know how the fees work in a WF brokerage account with no FA involved.)

If there isn't a fee, there is less urgency to get the assets out of there.

If there is a fee ... like a 1% AUM fee or something ... getting out of there may produce something very tangible for your mother. Morningstar says that DTE has about a 2.9% dividend. If WF has a 1% AUM fee (for example), then that means they are getting more than a third of the dividend, and your mother is getting less than 2 thirds. With her focus on dividends, I'm sure she would be thrilled to be getting the whole thing and not just two-thirds. And ... even if you switched to something more diverse with a dividend more down toward 2% held in account without a 1% AUM fee, your mother would still be getting same amount into her pocket.


Actually ... I have another question while you are looking at WF statements. Does the statement show what the "cost basis" and "unrealized capital gains (losses)" are for the DTE stock? Cost basis is what was originally paid to buy the DTE stock. Unrealized capital gains (losses) are how much the DTE has increased (decreased) in value after it was purchased. Does the statement show the date(s) that the DTE was purchased? If it was purchased more than a year ago, then if you sell, you will have "long term capital gains" which are taxed at a lower rate. If it was purchased less than a year ago, then that may change your approach to selling it because those will be "short term capital gains" that will be taxed at a higher rate.
This info isn't displayed on the 1099, which is all I have from this WF account right now. I'm working on getting online access, but since she has no email address on file, they're sending her required ID or whatever to signup for her online account via regular mail. I suspect I'll be able to investigate the fees, cost basis, etc, once I have access to her online account info.
cas wrote:
Tue Nov 14, 2017 9:02 am
Also, stray tidbit ... if you open a Vanguard brokerage account, you should be able to move the DTE "in-kind" from the old brokerage account to the new brokerage account. This involves no selling, so there are are no tax consequences to the transfer from one account to another. (The account fees plus fees involved in selling at one brokerage vs the other would probably decide which place was better to sell. But that whole issue is getting ahead of ourselves. I just wanted to let you know that "in-kind" transfer of an individual stock is (almost certainly) an option, i.e. you don't have to sell before transferring.)
Good thought on the transfer in kind! Especially if they're charging a fee...likely would be higher than what she'd be paying at Vanguard...I will suggest this to her to do immediately to avoid/lessen this.

guitarguy
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Joined: Mon Dec 20, 2010 4:10 pm

Re: Advice needed for parent's finances

Post by guitarguy » Tue Nov 14, 2017 9:41 am

Jack FFR1846 wrote:
Tue Nov 14, 2017 8:56 am
She may think she has good credit but without credit cards, mortgage or loans, she likely doesn't. Combined with no job, I doubt she'd qualify for a mortgage. Work with her to sign up for Credit Karma and check her credit score. It's free, fast and easy and doesn't ding her score.
I just looked into this (with her permission).

Her CK scores are pushing 800...so it appears her credit picture isn't too bad. (I realize these are VantageScore numbers).

She actually has 4 dept store credit cards (Lord & Taylor, Kohls, Sears, and "Amex Dept Stores" - not sure what that one is) open and all with a $0 balance. I will ask her about these. Likely she was encouraged to signup by sales cashiers to "open and save 20% today" or whatever at the time and didn't even remember she had them.

Since she's intrigued by online bill pay (I offered to help simplify her life by helping with this) perhaps opening a simple cash back (real, non dept store) credit card and paying a couple monthly bills with it for her just to keep it active would be a good idea. It would hurt her average age of accounts in the short term, but wouldn't be a bad idea to have open in the long term.

She also appears to have cosigned (says joint responsibility) for my brother's student loan ($10k balance). He is graduated and doing great in a very stable career and is crushing his debt and ramping up his retirement savings...a BH in training for sure. I don't suspect this will have any negative impact on her credit.

Her auto loan for her current car was PIF and closed in 2015.

She has a total of 28 total open and closed accounts, no derogatory marks or late payments, 1 hard inquiry on record, and 100% on time payment record. The only minor negative is a short age of open accounts (the dept store cards).

I'm not sure how all this will affect her getting approved for a mortgage when taking into account her SS income and assets. Perhaps if the outlook is bleak I will have to work with her to find another way to get this done.

cas
Posts: 147
Joined: Wed Apr 26, 2017 8:41 am

Re: Advice needed for parent's finances

Post by cas » Tue Nov 14, 2017 2:06 pm

Back to the "how do taxes on investment accounts work" issue...

Basic, important concept: qualified dividends and long term capital gains get special (advantageous) tax rates. I like to picture how they work in terms of a bar chart. The Finance Buff created one a while back. See the bar chart in this sub-post: viewtopic.php?t=86849#p1247382

(Sorry, I can't cut/paste the image into this post, so I have to redirect you off to that other post.)

Does that picture help at all in understanding how taxes for a taxable account work? Or do you still feel like you need some additional information before the bar chart makes sense? (If you go back and read the rest of that thread, that might help ... and you will also see that you are not alone in trying to learn how these taxes work.)

-----------

Some notes:

You will know what your qualified dividends are because you will be sent a 1099-DIV.

You will know what your long term capital gains are because you will be sent either a 1099-DIV (if they are in the form of capital gains distributions (i.e. the manager of a mutual fund sold appreciated assets within the fund) or a 1099-B if they are capital gains (i.e. you yourself sold your shares of stock or mutual fund).

Slight complication # 1:

Before 2011, the owner of the stock was responsible for knowing the cost basis of the stock (what you originally paid for the stock). If shares of a stock were purchased before 2011, the brokerage is required only to report the sale price/date on the 1099-B (although some also report the purchase price/date as a courtesy, if they know it.) Then when the owner sold the stock, the owner was responsible for filling in (on IRS Form 1040 Schedule D) the cost basis of the stock (and purchase date), the amount they sold the stock for (and sale date), and the realized capital gains (sale price minus purchase price). (Only capital gains are taxed. You are NOT taxed on your original cost basis when you sell the stock. So if you bought stock for $1000 and sold it for $1500, you are taxed only on $500.)

If the stock was purchased after 2011, then the brokerage is required to include both purchase and sale information on the 1099-B. (Although it is still up to you to confirm that the brokerage reported the correct numbers.)

Hopefully, once you get access to the Wells Fargo account, you will be able to see if the DTE was purchased before or after 2011. And if it was purchased before 2011, hopefully either your mother has records of the purchase or the WF transaction records go back to the year when the stock was purchased or will list the purchase price (cost basis) on the statement. (The IRS won't be overly happy with that last option, if they happen to audit your mother in a year she sells the DTE (probably unlikely), but if it is the best you have, it is the best you have.)

Slight complication #2: the bar chart shows how federal taxes work. Many states don't give special treatment to qualified dividends or capital gains. So, even if you get a 0% federal tax rate on QD/LTCG, don't forget that there will likely be state tax owed.

Slight complication #3: social security has its own tax quirks that can interact with qualified dividends and long term capital gains. See bogleheads wiki "Taxation of Social Security Benefits" https://www.bogleheads.org/wiki/Taxatio ... y_benefits

How this ties in with long term capital gains (or qualified dividends) is this:

-Suppose you sell some DTE stock and generate $1 worth of long term capitals gains. (I know, $1 isn't realistic, but bear with me.) Suppose you (your mother) is still below the top of the 15% tax bracket after this additional $1 of LTCG income. Great! You qualify for the 0% LTCG rate and owe $0 tax on this additional $1 of LTCG income.

-But! Depending exactly where your mother's income is, this additional $1 in LTCG, even though it is taxed at 0% itself, might also cause an additional $0 or $0.50 or $0.85 of *social security income* to become taxable at the ordinary tax rate (see the wiki article listed above). So suppose your mother was within the 15% marginal tax bracket for ordinary income, and the additional $1 in LTCG caused an additional $0.50 of social security to become taxable. So, indirectly, it is sort of like the $1 in LTCG was taxed at 7.5% ($1 in LTCG taxed at 0% LTCG rate + 0.50 social security taxed at 15% ordinary income rate.)

Possible slight complication #4: I'm not sure what other credits (if any) your mother might be eligible for. But if the credits have a phase-in/phase-out income range, then, similar to what can happen with social security and its 50% and 85% phase-in/phase-out, the extra LTCG dollars can cause unexpected tax side-effects. This might be something you want to discuss with the accountant during your meeting. Or, many bogleheads check this ahead of selling a stock using TaxCaster or standard tax software (if you use it for yourself), just to make sure something odd doesn't happen with taxes when they add the anticipated amount of LTCG that will result from the sale to their predicted income.


I'm sorry ... all those little notes may have added up to Too Much Information. Any questions? (If your head is spinning, try going back and looking at the bar chart I initially mentioned. The concept of how LTCG/qualified dividends interact with the top of the 15% tax bracket is the really important concept to grasp.)

guitarguy
Posts: 1718
Joined: Mon Dec 20, 2010 4:10 pm

Re: Advice needed for parent's finances

Post by guitarguy » Tue Nov 14, 2017 2:47 pm

First off thanks for the detailed info! :beer
cas wrote:
Tue Nov 14, 2017 2:06 pm
Back to the "how do taxes on investment accounts work" issue...

Basic, important concept: qualified dividends and long term capital gains get special (advantageous) tax rates. I like to picture how they work in terms of a bar chart. The Finance Buff created one a while back. See the bar chart in this sub-post: viewtopic.php?t=86849#p1247382

(Sorry, I can't cut/paste the image into this post, so I have to redirect you off to that other post.)

Does that picture help at all in understanding how taxes for a taxable account work? Or do you still feel like you need some additional information before the bar chart makes sense? (If you go back and read the rest of that thread, that might help ... and you will also see that you are not alone in trying to learn how these taxes work.)
As a simplified approach, I think I'm understanding this correctly: She has a taxable income number of some sort after all income and deductions, and she pays $Y in taxes on that income.

If that income number number is below the top of the 15% bracket by $Z, she can generate essentially $Z more in income from selling stocks, and essentially pay no more than $Y in taxes. Do I have that close...?
cas wrote:
Tue Nov 14, 2017 2:06 pm
You will know what your qualified dividends are because you will be sent a 1099-DIV.

You will know what your long term capital gains are because you will be sent either a 1099-DIV (if they are in the form of capital gains distributions (i.e. the manager of a mutual fund sold appreciated assets within the fund) or a 1099-B if they are capital gains (i.e. you yourself sold your shares of stock or mutual fund).
Her DTE 1099 says all of her dividends are qualified. I'm fairly certain she hasn't bought any additional stock within the last year (or several years), so this makes sense.

Her Vanguard IRA dividends are taxed as ordinary income anyway right since it's coming out of an IRA? So qualified isn't applicable here.

I don't think we'll have to worry about cap gain distributions because she's just holding a singular stock in taxable right now, and after we diversify it, it's going to just probably be TSM index...so shouldn't see any cap gain distributions there either.
cas wrote:
Tue Nov 14, 2017 2:06 pm
Slight complication # 1:

Before 2011, the owner of the stock was responsible for knowing the cost basis of the stock (what you originally paid for the stock). If shares of a stock were purchased before 2011, the brokerage is required only to report the sale price/date on the 1099-B (although some also report the purchase price/date as a courtesy, if they know it.) Then when the owner sold the stock, the owner was responsible for filling in (on IRS Form 1040 Schedule D) the cost basis of the stock (and purchase date), the amount they sold the stock for (and sale date), and the realized capital gains (sale price minus purchase price). (Only capital gains are taxed. You are NOT taxed on your original cost basis when you sell the stock. So if you bought stock for $1000 and sold it for $1500, you are taxed only on $500.)

If the stock was purchased after 2011, then the brokerage is required to include both purchase and sale information on the 1099-B. (Although it is still up to you to confirm that the brokerage reported the correct numbers.)

Hopefully, once you get access to the Wells Fargo account, you will be able to see if the DTE was purchased before or after 2011. And if it was purchased before 2011, hopefully either your mother has records of the purchase or the WF transaction records go back to the year when the stock was purchased or will list the purchase price (cost basis) on the statement. (The IRS won't be overly happy with that last option, if they happen to audit your mother in a year she sells the DTE (probably unlikely), but if it is the best you have, it is the best you have.)
I don't know the answer to this. It very well may have been purchased before 2011. Maybe long before...could be decades I don't know. Hopefully once I get access to the WF account I can locate the cost basis info somehow.
cas wrote:
Tue Nov 14, 2017 2:06 pm
Slight complication #2: the bar chart shows how federal taxes work. Many states don't give special treatment to qualified dividends or capital gains. So, even if you get a 0% federal tax rate on QD/LTCG, don't forget that there will likely be state tax owed.
I will consult her accountant on this. She will end up owing state taxes.
cas wrote:
Tue Nov 14, 2017 2:06 pm
Slight complication #3: social security has its own tax quirks that can interact with qualified dividends and long term capital gains. See bogleheads wiki "Taxation of Social Security Benefits" https://www.bogleheads.org/wiki/Taxatio ... y_benefits

How this ties in with long term capital gains (or qualified dividends) is this:

-Suppose you sell some DTE stock and generate $1 worth of long term capitals gains. (I know, $1 isn't realistic, but bear with me.) Suppose you (your mother) is still below the top of the 15% tax bracket after this additional $1 of LTCG income. Great! You qualify for the 0% LTCG rate and owe $0 tax on this additional $1 of LTCG income.

-But! Depending exactly where your mother's income is, this additional $1 in LTCG, even though it is taxed at 0% itself, might also cause an additional $0 or $0.50 or $0.85 of *social security income* to become taxable at the ordinary tax rate (see the wiki article listed above). So suppose your mother was within the 15% marginal tax bracket for ordinary income, and the additional $1 in LTCG caused an additional $0.50 of social security to become taxable. So, indirectly, it is sort of like the $1 in LTCG was taxed at 7.5% ($1 in LTCG taxed at 0% LTCG rate + 0.50 social security taxed at 15% ordinary income rate.)
I read the wiki. This is a bit tricky. So basically we want to, ideally, stay in the range where she sells enough stock to stay below that point where it affects taxes on her SS, not just the point where she crosses the top of the 15% rate total......? :|
cas wrote:
Tue Nov 14, 2017 2:06 pm
Possible slight complication #4: I'm not sure what other credits (if any) your mother might be eligible for. But if the credits have a phase-in/phase-out income range, then, similar to what can happen with social security and its 50% and 85% phase-in/phase-out, the extra LTCG dollars can cause unexpected tax side-effects. This might be something you want to discuss with the accountant during your meeting. Or, many bogleheads check this ahead of selling a stock using TaxCaster or standard tax software (if you use it for yourself), just to make sure something odd doesn't happen with taxes when they add the anticipated amount of LTCG that will result from the sale to their predicted income.
Another question for her accountant, which I'll ask.
cas wrote:
Tue Nov 14, 2017 2:06 pm
I'm sorry ... all those little notes may have added up to Too Much Information. Any questions? (If your head is spinning, try going back and looking at the bar chart I initially mentioned. The concept of how LTCG/qualified dividends interact with the top of the 15% tax bracket is the really important concept to grasp.)
No way...this was an awesome read and gave me a much better understanding of how this concept works. I think the only area where I'm still a little fuzzy is the concept of staying below the point at which a portion of her SS starts getting taxed.

Either way, it seems like getting on this now is a good idea, before she hits 70 1/2 and has to start taking distributions from the IRA...which will make it that much harder to redistribute the DTE stuff and avoid the cap gains taxes and the top of the 15% bracket.

EDIT: So if I'm understanding correctly, none of her SS income will be taxable if we keep her income from liquidating DTE stock under $15k? I'm gathering this from the wiki...

She will be taking in whatever amount from SS and have no ordinary income from her IRA yet (because we'll switch to reinvesting the dividends). So her only "non-SS" income would be, in this case, from selling DTE stock.

cas
Posts: 147
Joined: Wed Apr 26, 2017 8:41 am

Re: Advice needed for parent's finances

Post by cas » Tue Nov 14, 2017 5:25 pm

guitarguy wrote:
Tue Nov 14, 2017 2:47 pm
I read the wiki. This is a bit tricky. So basically we want to, ideally, stay in the range where she sells enough stock to stay below that point where it affects taxes on her SS, not just the point where she crosses the top of the 15% rate total......? :|

<skip>

I think the only area where I'm still a little fuzzy is the concept of staying below the point at which a portion of her SS starts getting taxed.

<skip>

EDIT: So if I'm understanding correctly, none of her SS income will be taxable if we keep her income from liquidating DTE stock under $15k? I'm gathering this from the wiki...

She will be taking in whatever amount from SS and have no ordinary income from her IRA yet (because we'll switch to reinvesting the dividends). So her only "non-SS" income would be, in this case, from selling DTE stock.
If anyone else reading this has any insight into dealing with the SS taxation issue, please chime in. That isn't something I've ever had to deal with personally, so I don't know much beyond the fact that the SS taxation issue exists.

(I'll be back with some more comments on the other stuff tomorrow morning, probably. But,yes, you seemed to have grasped the main points of taxable account taxes.)

cas
Posts: 147
Joined: Wed Apr 26, 2017 8:41 am

Re: Advice needed for parent's finances

Post by cas » Wed Nov 15, 2017 8:50 am

Guitarguy ...

Did you see the Social Security Tax Impact Calculator mentioned in the Wiki page on Social Security Taxation? (I just now noticed it.)

https://www.bogleheads.org/wiki/Social_ ... calculator

(Disclaimers: I haven't downloaded the spreadsheet, and I haven't played with it. And I don't know if it is up to date with 2017/2018 tax info. (I'm seeing the mention of 2015 dates.) And use your own judgement on whether your computer hygiene permits downloading a spreadsheet from what should be a fairly reputable Boglehead's wiki site.)

The disclaimers aside, the spreadsheet looks like it might be useful to you. (Although I think it will give a lot more information than you need. (Reading through it briefly, there was stuff on the graph I definitely didn't immediately understand.))

But if you scroll down to around here on the wiki page for the calculator ( https://www.bogleheads.org/wiki/Social_ ... first_look ) , it looks like you could enter just the 3 relevant numbers for your mother - SS amount, ordinary income, and long term capital gains/qualified dividends - and get a graph of what she is taxed (federal) and how far she is from getting pushed into a higher marginal tax rate due to social security considerations.

(In your mother's case, from what you have said...
social security - ss payments as listed on her 1099-SSA
ordinary income - distributions from the IRA, interest income from bank accounts
long term capital gains/qualified dividends - currently the DTE dividends. In the future, possibly LTCG from DTE sale in the future, possibly dividends from mutual fund(s) you buy with the DTE proceeds, possibly dividends from DTE that is still owned.
)

And it looks like you can do comparative what-if scenarios, too, which might help in seeing various interesting things like
- how much DTE you can sell (i.e. how much LTCG you can take) before stepping up to various marginal rates
- how switching from ordinary income (from taking IRA distributions) to QD/LTCG income (from taxable qualified dividends/selling DTE) might affect things.

First steps, though would probably be

1. Get your mother's 2016 IRS 1040 so that you are in the correct ballpark about the amounts of her social security, ordinary income, and QD/LTCG ... and any other surprise income that might be on there. (SS is a bit tricky because Medicare premiums are taken out before the check is deposited in her bank account. So you can't just multiply the SS deposit into her bank account by 12. The SSA sends out a 1099-SSA every year that is entered onto the Form 1040.)
2. Get access to the WF account and figure out how much of the DTE is cost basis and how much is unrealized long/short capital gains.

In the wiki page, it also says there is a dedicated Boglehead's forum thread to get more help on the calculator (and perhaps this SS taxation issue in general). Again, I don't know if the creator(s) of this calculator are still around and keeping things updated. (I am seeing some 2017 updates on the thread.)
Support and on-going discussion is available in this forum thread: Spreadsheet to show how the taxable SS benefits will affect you: viewtopic.php?f=2&t=173592

guitarguy
Posts: 1718
Joined: Mon Dec 20, 2010 4:10 pm

Re: Advice needed for parent's finances

Post by guitarguy » Wed Nov 15, 2017 2:38 pm

cas wrote:
Wed Nov 15, 2017 8:50 am
Guitarguy ...

Did you see the Social Security Tax Impact Calculator mentioned in the Wiki page on Social Security Taxation? (I just now noticed it.)

https://www.bogleheads.org/wiki/Social_ ... calculator

(Disclaimers: I haven't downloaded the spreadsheet, and I haven't played with it. And I don't know if it is up to date with 2017/2018 tax info. (I'm seeing the mention of 2015 dates.) And use your own judgement on whether your computer hygiene permits downloading a spreadsheet from what should be a fairly reputable Boglehead's wiki site.)

The disclaimers aside, the spreadsheet looks like it might be useful to you. (Although I think it will give a lot more information than you need. (Reading through it briefly, there was stuff on the graph I definitely didn't immediately understand.))

But if you scroll down to around here on the wiki page for the calculator ( https://www.bogleheads.org/wiki/Social_ ... first_look ) , it looks like you could enter just the 3 relevant numbers for your mother - SS amount, ordinary income, and long term capital gains/qualified dividends - and get a graph of what she is taxed (federal) and how far she is from getting pushed into a higher marginal tax rate due to social security considerations.

(In your mother's case, from what you have said...
social security - ss payments as listed on her 1099-SSA
ordinary income - distributions from the IRA, interest income from bank accounts
long term capital gains/qualified dividends - currently the DTE dividends. In the future, possibly LTCG from DTE sale in the future, possibly dividends from mutual fund(s) you buy with the DTE proceeds, possibly dividends from DTE that is still owned.
)

And it looks like you can do comparative what-if scenarios, too, which might help in seeing various interesting things like
- how much DTE you can sell (i.e. how much LTCG you can take) before stepping up to various marginal rates
- how switching from ordinary income (from taking IRA distributions) to QD/LTCG income (from taxable qualified dividends/selling DTE) might affect things.

First steps, though would probably be

1. Get your mother's 2016 IRS 1040 so that you are in the correct ballpark about the amounts of her social security, ordinary income, and QD/LTCG ... and any other surprise income that might be on there. (SS is a bit tricky because Medicare premiums are taken out before the check is deposited in her bank account. So you can't just multiply the SS deposit into her bank account by 12. The SSA sends out a 1099-SSA every year that is entered onto the Form 1040.)
2. Get access to the WF account and figure out how much of the DTE is cost basis and how much is unrealized long/short capital gains.

In the wiki page, it also says there is a dedicated Boglehead's forum thread to get more help on the calculator (and perhaps this SS taxation issue in general). Again, I don't know if the creator(s) of this calculator are still around and keeping things updated. (I am seeing some 2017 updates on the thread.)
Support and on-going discussion is available in this forum thread: Spreadsheet to show how the taxable SS benefits will affect you: viewtopic.php?f=2&t=173592
Thanks for more detailed info!

I messed around with the calculator a little...unfortunately I don't have a great grasp on the key things to look for while contemplating "what if" scenarios. What are the red flags?

For example, if I guestimate her SS income at $30k, put $500 in for ordinary income as an estimate from interest earned on bank savings accounts (no longer collecting dividends from her IRA - income replaced with LTCG from DTE stock sales), I read that she could sell about $25k of DTE stock to generate LTCG income and still be at a 0% tax rate.

1. That is before the thick red line on the calculator rises above 0 - so I guess that makes sens with a 0% rate there.
2. However, this is substantially past the point where the green dotted line starts - thereby isn't she now paying taxes on her SS money at this point?

Does this make sense?

A little confused here. Is the objective to keep her taxable (orange tick mark) below the point where the red line for marginal (and dotted red for regular taxable) rates jump from zero?

What does the graph tell me as far as the "key" thing to look for to minimize the taxes and avoid the pitfall the data shows (the hump in marginal tax rate)?

Note: I realize these are all estimates, old deduction and bracket data, etc.

cas
Posts: 147
Joined: Wed Apr 26, 2017 8:41 am

Re: Advice needed for parent's finances

Post by cas » Wed Nov 15, 2017 4:40 pm

guitarguy wrote:
Wed Nov 15, 2017 2:38 pm
I messed around with the calculator a little...unfortunately I don't have a great grasp on the key things to look for while contemplating "what if" scenarios. What are the red flags?
Well, now, that is a VERY good question. It might even be worth asking on that dedicated thread, to see if you get a response from someone who actually knows what they are talking about.

I definitely didn't know the answer when I first read your question. I've stared at the graph (the example one in the wiki, since I still haven't downloaded the actual worksheet), and I might be beginning to have an idea at the answer.

But you should definitely consider anything I think about it as being from some random,non-expert stranger on the internet. I could well be wrong.

Let's call Gross Income = total SS payments + other ordinary income + LTCG/QD. (This is the bottom horizontal axis on the graph, as it relates to the types of income your mother has.)


I think there are probably two key "Gross Income" points along the bottom horizontal axis on that graph.

The first would be the $ amount along the horizontal axis (at the bottom of the graph) where the thick red line (the marginal tax rate) jumps above 0. If you can keep the Gross Income, including the LTCG from selling the DTE, below that number, then the sale of whatever amount of DTE keeps you below that number would be taxed at 0%.

The question then becomes whether selling that amount of DTE (whatever it is) is significant enough to reduce the single stock risk to your and your mother's satisfaction, at least for this year. (You could still do the same manuever next year to reduce the single stock risk more.))

If the single stock risk is still bothering you after the sale of that amount, this might well be a case where it might be better to just pay some taxes in order to reduce the risk in the portfolio. (The tax payment might be way less that what could happen if the value of the single stock suddenly took a nose dive.)

In that case, the next $ amount on that lower horizontal axis I would look at is the place where the solid red line jumps from its first non-0 level to the second non-zero level. (What is the first non-zero level for the solid red line that you see on your graph? 7.5% maybe? ) If it is 7.5% ... well, if that would let you get the portfolio to a place where you are more comfortable with the risk, then there are worse things than paying 7.5% on part of the LTCG from the sale of the DTE. This might be one of those "don't let the tax tale wag the risk dog" situations.

A couple of side comments:
guitarguy wrote:
Wed Nov 15, 2017 2:38 pm
I read that she could sell about $25k of DTE stock to generate LTCG income and still be at a 0% tax rate
This may well be a case of "that's what I meant, but not exactly what I said" but I want to make sure you understand what is taxable when a stock is sold. (Let's assume the stock has been held more than a year, so we are talking only about long term capital gains.)

Sale price: what you sell the stock for. (This is NOT the amount that is taxed!)
Cost basis: what you originally bought the stock for.
Long term capital gain: Sale price - cost basis (*This* is what is taxed.)

Example: you bought 100 shares of stock for $1000 ($10 per share). The cost basis per share is $1000/100 = $10/share.
More than a year later, you sell 50 shares of the stock for $750 ($15/share)
Long term capital gain = sale price of 50 shares - purchase price of 50 shares = $750 - $500 = $250. ($5 per share)

The $250 (NOT the $750 sale price) is what will be be included in your taxable income on the IRS 1040 (line 13). The $250 (not the $750 sale price) is also what is included in the Gross Income that forms that bottom horizontal axis on the graph.

Side comment #2: This may or may not make sense, right now. Just let it pass if it doesn't. What I am calling Gross Income (which appears along the bottom horizontal axis on the graph) is larger than the "Adjusted Gross Income" (AGI) that appears on the last line of the front page of the IRS 1040. This is because only part of the total SS payments are included in Adjusted Gross Income. (Due to that whole complex discussion on the Social Security Taxation wiki page that you read). But "Gross Income" (the bottom horizontal axis on the graph) includes the whole SS payment. Both Gross Income and Adjusted Gross Income are greater than the IRS definition of Taxable Income (line 42 on the back side of the IRS 1040), because the standard deduction and standard exemption are subtracted from Adjusted Gross Income to get Taxable Income. (So, even though you mother's income might be high enough that part of her SS is included in her adjusted gross income, that "potentially taxable" SS might not be actually taxed if it is less than standard exemption + standard deduction.) The relationship between those three terms is driving a lot of what appears on that graph and I think a lot of what may be confusing you. It would be a lot easier to explain if I was sitting across a table from you and could point at a real IRS 1040 and draw pictures.)

guitarguy
Posts: 1718
Joined: Mon Dec 20, 2010 4:10 pm

Re: Advice needed for parent's finances

Post by guitarguy » Thu Nov 16, 2017 8:45 am

cas wrote:
Wed Nov 15, 2017 4:40 pm
guitarguy wrote:
Wed Nov 15, 2017 2:38 pm
I messed around with the calculator a little...unfortunately I don't have a great grasp on the key things to look for while contemplating "what if" scenarios. What are the red flags?
Well, now, that is a VERY good question. It might even be worth asking on that dedicated thread, to see if you get a response from someone who actually knows what they are talking about.

I definitely didn't know the answer when I first read your question. I've stared at the graph (the example one in the wiki, since I still haven't downloaded the actual worksheet), and I might be beginning to have an idea at the answer.

But you should definitely consider anything I think about it as being from some random,non-expert stranger on the internet. I could well be wrong.

Let's call Gross Income = total SS payments + other ordinary income + LTCG/QD. (This is the bottom horizontal axis on the graph, as it relates to the types of income your mother has.)


I think there are probably two key "Gross Income" points along the bottom horizontal axis on that graph.

The first would be the $ amount along the horizontal axis (at the bottom of the graph) where the thick red line (the marginal tax rate) jumps above 0. If you can keep the Gross Income, including the LTCG from selling the DTE, below that number, then the sale of whatever amount of DTE keeps you below that number would be taxed at 0%.

The question then becomes whether selling that amount of DTE (whatever it is) is significant enough to reduce the single stock risk to your and your mother's satisfaction, at least for this year. (You could still do the same manuever next year to reduce the single stock risk more.))

If the single stock risk is still bothering you after the sale of that amount, this might well be a case where it might be better to just pay some taxes in order to reduce the risk in the portfolio. (The tax payment might be way less that what could happen if the value of the single stock suddenly took a nose dive.)

In that case, the next $ amount on that lower horizontal axis I would look at is the place where the solid red line jumps from its first non-0 level to the second non-zero level. (What is the first non-zero level for the solid red line that you see on your graph? 7.5% maybe? ) If it is 7.5% ... well, if that would let you get the portfolio to a place where you are more comfortable with the risk, then there are worse things than paying 7.5% on part of the LTCG from the sale of the DTE. This might be one of those "don't let the tax tale wag the risk dog" situations.

A couple of side comments:
guitarguy wrote:
Wed Nov 15, 2017 2:38 pm
I read that she could sell about $25k of DTE stock to generate LTCG income and still be at a 0% tax rate
This may well be a case of "that's what I meant, but not exactly what I said" but I want to make sure you understand what is taxable when a stock is sold. (Let's assume the stock has been held more than a year, so we are talking only about long term capital gains.)

Sale price: what you sell the stock for. (This is NOT the amount that is taxed!)
Cost basis: what you originally bought the stock for.
Long term capital gain: Sale price - cost basis (*This* is what is taxed.)

Example: you bought 100 shares of stock for $1000 ($10 per share). The cost basis per share is $1000/100 = $10/share.
More than a year later, you sell 50 shares of the stock for $750 ($15/share)
Long term capital gain = sale price of 50 shares - purchase price of 50 shares = $750 - $500 = $250. ($5 per share)

The $250 (NOT the $750 sale price) is what will be be included in your taxable income on the IRS 1040 (line 13). The $250 (not the $750 sale price) is also what is included in the Gross Income that forms that bottom horizontal axis on the graph.

Side comment #2: This may or may not make sense, right now. Just let it pass if it doesn't. What I am calling Gross Income (which appears along the bottom horizontal axis on the graph) is larger than the "Adjusted Gross Income" (AGI) that appears on the last line of the front page of the IRS 1040. This is because only part of the total SS payments are included in Adjusted Gross Income. (Due to that whole complex discussion on the Social Security Taxation wiki page that you read). But "Gross Income" (the bottom horizontal axis on the graph) includes the whole SS payment. Both Gross Income and Adjusted Gross Income are greater than the IRS definition of Taxable Income (line 42 on the back side of the IRS 1040), because the standard deduction and standard exemption are subtracted from Adjusted Gross Income to get Taxable Income. (So, even though you mother's income might be high enough that part of her SS is included in her adjusted gross income, that "potentially taxable" SS might not be actually taxed if it is less than standard exemption + standard deduction.) The relationship between those three terms is driving a lot of what appears on that graph and I think a lot of what may be confusing you. It would be a lot easier to explain if I was sitting across a table from you and could point at a real IRS 1040 and draw pictures.)
Super interesting. Definitely going to discuss all of this with her accountant this weekend! I'm expecting that she'll be able to run some numbers and help us determine the most tax efficient way to make these moves.

So...I definitely understand how LTCG income is calculated better now thanks to your explanation. Makes total sense. So, essentially, she'll be able to sell: shares*current share price - shares*cost basis share price = $25k and we'd be looking at virtually no additional taxable income (just ballpark numbers). Need to dig into details of course, but if she can make a maneuver here in 2017 and then make another early in 2018, I think she could be in a good position to reallocate a lot (if not all) of that DTE stock rather quickly.

If the share price when the stocks was very low when they were purchased however (quite possible since I'm guessing it was LONG ago), then the LTCG will add up quickly as she decides to sell more and more shares. If that is the case, and if making a "non-impactful-to-taxes" move this year and next year doesn't do it, you're right in that she may be better off just paying a little bit of tax on the money in exchange for reducing her risk sooner.

My question is, how does one sift through the bucket and determine "which" shares of the stock are being sold if they weren't all bought at the same cost basis price? For example, purchase 100 shares of a stock at $50/share. A year later purchase another 100 shares at $100/share. Hold for 5 years after that (so we're not dealing with any STCG tax rates on any of the shares), and then decide to sell 50 shares at $150/share. How would one calculate the LTCG on the shares being sold?

cas
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Re: Advice needed for parent's finances

Post by cas » Thu Nov 16, 2017 9:30 am

guitarguy wrote:
Thu Nov 16, 2017 8:45 am
My question is, how does one sift through the bucket and determine "which" shares of the stock are being sold if they weren't all bought at the same cost basis price? For example, purchase 100 shares of a stock at $50/share. A year later purchase another 100 shares at $100/share. Hold for 5 years after that (so we're not dealing with any STCG tax rates on any of the shares), and then decide to sell 50 shares at $150/share. How would one calculate the LTCG on the shares being sold?
The brokerage will have the stock separated out by "lots." A "lot" is a batch of stock shares all bought on the same date/time at the same price ... i.e. you have two "lots" in your example above.

When you enter the sale into the computer (or talk to a broker who is doing the same thing), it will list all the "lots" of the stock and ask you to specify which lot(s) the shares you are selling are coming from. (In your example, you would specify whether the 50 shares you were selling were from the lot with the $50/share basis or the lot with the $100/share basis or a mix of both.) You should note this in your records (maybe take a screen shot of the sale screen before you hit submit, if you are entering the sale yourself.) Come tax time, the brokerage will send you the 1099-B that will probably have a separate line for how many stock shares were sold from each different lot. (I've never had a brokerage do it incorrectly, but it is a good idea to confirm that the brokerage has it correct by referring back to the record you kept.)

Side note: Holding time of a stock share to make the shift from short term capital gains to long term capital gains is currently 1 year (not 5 years). The "5 years" in your example was probably just that ... an example. But, there really was a 5 year holding requirement to get to long term capital gains at one point (within my memory), so I just wanted to make sure you didn't think you had to hold the stock for 5 years before you could qualify for long term capital gains.

Anyway ... an important step is to get access to those WF records and see what is going on with lots, cost basis, and (unrealized) capital gains. (Side note: under current law, the cost basis of an inherited stock "steps up" to its fair market value on the day of death of the person it was inherited from. So if this stock was originally in your father's name, and your mother inherited it from him, you may see a single "lot" all with a date in 1996. On the other hand, if there turns out to be a forgotten financial advisor involved sometime after your father died ... who knows what the purchase date(s) and cost basis situation might be.

Another side note: when you are deciding how much in capital gains you can fit in this year, keep in mind that the DTE distributes dividends quarterly, so you mother has already gotten 75% of the annual dividends she usually gets from them for 2017. That amount will be included in her 2017 income. (See http://www.morningstar.com/stocks/xnys/dte/quote.html and scroll down to the dividends section to see when DTE dividends have been/will be distributed.) I'm guessing the the DTE dividends are qualified dividends, but I haven't checked that. (You could tell from last year's 1099-DIV and whether it listed them as qualified dividends.) Also, if she has been taking distributions from the IRA more than once a year, she probably has some income from there to include on her 2017 taxes as well. The IRA distributions would be ordinary income. If you get your mother's 2016 IRS 1040 when you visit the accountant, you'll see on the front page where it has all these different types of income broken out.

guitarguy
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Re: Advice needed for parent's finances

Post by guitarguy » Thu Nov 16, 2017 9:58 am

cas wrote:
Thu Nov 16, 2017 9:30 am
guitarguy wrote:
Thu Nov 16, 2017 8:45 am
My question is, how does one sift through the bucket and determine "which" shares of the stock are being sold if they weren't all bought at the same cost basis price? For example, purchase 100 shares of a stock at $50/share. A year later purchase another 100 shares at $100/share. Hold for 5 years after that (so we're not dealing with any STCG tax rates on any of the shares), and then decide to sell 50 shares at $150/share. How would one calculate the LTCG on the shares being sold?
The brokerage will have the stock separated out by "lots." A "lot" is a batch of stock shares all bought on the same date/time at the same price ... i.e. you have two "lots" in your example above.

When you enter the sale into the computer (or talk to a broker who is doing the same thing), it will list all the "lots" of the stock and ask you to specify which lot(s) the shares you are selling are coming from. (In your example, you would specify whether the 50 shares you were selling were from the lot with the $50/share basis or the lot with the $100/share basis or a mix of both.) You should note this in your records (maybe take a screen shot of the sale screen before you hit submit, if you are entering the sale yourself.) Come tax time, the brokerage will send you the 1099-B that will probably have a separate line for how many stock shares were sold from each different lot. (I've never had a brokerage do it incorrectly, but it is a good idea to confirm that the brokerage has it correct by referring back to the record you kept.)

Side note: Holding time of a stock share to make the shift from short term capital gains to long term capital gains is currently 1 year (not 5 years). The "5 years" in your example was probably just that ... an example. But, there really was a 5 year holding requirement to get to long term capital gains at one point (within my memory), so I just wanted to make sure you didn't think you had to hold the stock for 5 years before you could qualify for long term capital gains.

Anyway ... an important step is to get access to those WF records and see what is going on with lots, cost basis, and (unrealized) capital gains. (Side note: under current law, the cost basis of an inherited stock "steps up" to its fair market value on the day of death of the person it was inherited from. So if this stock was originally in your father's name, and your mother inherited it from him, you may see a single "lot" all with a date in 1996. On the other hand, if there turns out to be a forgotten financial advisor involved sometime after your father died ... who knows what the purchase date(s) and cost basis situation might be.

Another side note: when you are deciding how much in capital gains you can fit in this year, keep in mind that the DTE distributes dividends quarterly, so you mother has already gotten 75% of the annual dividends she usually gets from them for 2017. That amount will be included in her 2017 income. (See http://www.morningstar.com/stocks/xnys/dte/quote.html and scroll down to the dividends section to see when DTE dividends have been/will be distributed.) I'm guessing the the DTE dividends are qualified dividends, but I haven't checked that. (You could tell from last year's 1099-DIV and whether it listed them as qualified dividends.) Also, if she has been taking distributions from the IRA more than once a year, she probably has some income from there to include on her 2017 taxes as well. The IRA distributions would be ordinary income. If you get your mother's 2016 IRS 1040 when you visit the accountant, you'll see on the front page where it has all these different types of income broken out.
Yeah...I was using "5 years" to illustrate the STCGs are long gone.

She's been getting quarterly dividends from the IRA (ordinary income) and the DTE (all qualified). Definitely aware that these would have to be included in the calculations for 2017 tax year.

Thanks again for all of your time and detailed posts...they've been a huge help! :beer

I may post back once I have this meeting with her accountant and get access to the DTE online account.

I think step one may be to investigate a transfer in kind to Vanguard for everything and work from there.

guitarguy
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Re: Advice needed for parent's finances

Post by guitarguy » Thu Nov 16, 2017 12:28 pm

Another thing I was thinking about that I don't have experience with: Roth conversions.

Would it make sense at all for her to convert small chunks of this tIRA to a Roth because she's in such a low tax bracket? After all, her eventual forced distributions from the tIRA at 70 1/2 will increase her regular income by a lot. Essentially from now until then it could remain at 0 + small amount of earned interest from taxable savings if she chooses to reinvest her dividends in the tIRA.

Or is this all more trouble than it's worth?

cas
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Re: Advice needed for parent's finances

Post by cas » Thu Nov 16, 2017 2:48 pm

guitarguy wrote:
Thu Nov 16, 2017 12:28 pm
Would it make sense at all for her to convert small chunks of this tIRA to a Roth because she's in such a low tax bracket? After all, her eventual forced distributions from the tIRA at 70 1/2 will increase her regular income by a lot. Essentially from now until then it could remain at 0 + small amount of earned interest from taxable savings if she chooses to reinvest her dividends in the tIRA.
I'm assuming you are thinking about the Roth conversions for after you get possible sales of DTE done.

I have to make a whole bunch of assumptions, but...

From what you have said about the mix of her current income (especially after she quits taking pre-RMD distributions from the IRA), I'm guessing she is quite possibly in the 0% tax bracket now and may even still have some room in the 0% tax bracket that she could fill up with Roth conversions. (You'll have to get solid numbers on her SS and other income when you see the accountant - get that 2016 tax return! - to see if that guess is anywhere near true.)

So - after you finish with the taxable account re-jiggering - if she had room in the 0% bracket, a case could be made that there is absolutely no reason NOT to do Roth conversions up to the top of the 0% (and possibly the 10%) bracket.

Some downsides I can think of:
  • If the DTE stock has been held a long time, it will probably take you at least a couple of years to complete any sales that you want to do. (And during those years, those sales would be using up all the 0% tax bracket space.) That would leave probably only a couple of years until RMD time. Could you really do enough Roth conversions to really make a significant difference in eventual RMDs?
  • Related to the first point, adding a Roth would be yet another account with a different tax behavior. It would be more complexity (although not all that much more.)
  • Again making a lot of assumptions, even after RMDs start, I think your mother's income (under current laws) might still stay in the 0% bracket for a while, then possibly creep up into the 10% bracket, then maybe sometime in her 80s creep up into the 15% bracket. (That statement is VERY dependent on exactly what her SS income is.) But - her tax bracket would probably creep up only if everything, especially her health, goes well. If she got to her mid-70s or 80s and encountered significant health expenses or long term care, then a large medical deduction (again, under current law) might put her right back in the 0% bracket ... and it wouldn't really matter whether she had done Roth conversions or not. (And if she had done conversions to the top of the 10% bracket, the Roth conversions might end up being a worse deal.)
My sense is that Roth conversions wouldn't make a whole lot of difference either way, but you'd really have to run the numbers each pre-RMD year with real, solid income numbers.

basspond
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Re: Advice needed for parent's finances

Post by basspond » Fri Nov 17, 2017 1:53 am

1. She is not over exposed once you add the value of SS and house.

2 and 3. I wouldn't make any changes here until she gets settled in to her new condo. Don't want to add stress to her.

4. Ensure you have the blessing of your siblings before making any changes

5. Have her start selling/getting rid of stuff. Moving is going to be tough for her as you described she has a hard time of letting go of things.

Second set of questions

1. As you stated she has good credit and she doesn't need any new debt. Automize as much as you can as long as both her and your siblings understand what you are doing.

2. I would not recommend a mortgage.

Good luck. My mom was very active in their finances before my dad passed which has helped her to understand a lot. There are some things I recommend and some things, even though there seems like better options, I don't touch.

mouses
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Re: Advice needed for parent's finances

Post by mouses » Fri Nov 17, 2017 7:19 am

I only had time to read some of the replies, but if you do a 1040 return by hand as a trial with estimated numbers you can tweek, you can see pretty clearly when Social Security taxability happens.

JW-Retired
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Re: Advice needed for parent's finances

Post by JW-Retired » Fri Nov 17, 2017 10:14 am

mouses wrote:
Fri Nov 17, 2017 7:19 am
I only had time to read some of the replies, but if you do a 1040 return by hand as a trial with estimated numbers you can tweek, you can see pretty clearly when Social Security taxability happens.
If the spreadsheet has a learning curve and by hand is slow, the online tax calculator I use is quite fast at tweeking. You could quickly put in your basic tax status and amounts of say dividends, cap gains, SS, IRA withdrawals, ..... and get the tax. Then at the "view results" page it gives you the option of making a change to one or more of the income categories. So it's very quick to tweek one category by $1000 and see the actual tax change for that type of income. Dividing that tax change number by 10 and you have the real marginal tax on that income category for the particular income mix.
https://www.hrblock.com/tax-calculator/#/en/te/

It goes pretty fast. You can run through a different tweek case in a minute or two.

It's always shocking to SS taxation novices to find out that there can be some some combinations of income (the "hump") where some "other" income types are effectively marginally taxed up to 5X times that of SS income. :shock:
JW
Retired at Last

guitarguy
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Re: Advice needed for parent's finances

Post by guitarguy » Tue Nov 21, 2017 1:28 pm

OK...updating with info from her tax returns. Here is a summary of what I found from 2016:

9a/b: - $3969 - (her ordinary dividend income - qualified dividends from DTE stock)
13: - variable - (the amount of LTCGs she would incur from selling off DTE stock - was $0 in 2016)
15b: - $5710 - (IRA distributions - dividends - from her Vanguard account)
16b: - $2675 - (small annual pension she collects)
20a: - $22,499 - (her total annual SS benefit - currently all non-taxable)
22: - $12,354 - (total income)

37: - $12,354 - (AGI)

40: - $7850 - (standard deduction for senior)
42: - $4050 - (personal exemption)
43: - $454 - (taxable income)
44: - $45 - (tax)


Tentative Plan
1. Set her IRA to reinvest the dividends rather than take them as distributions (keep ordinary income as low as possible)
2. Sell off DTE stock in chunks over 2-3 years before her forced IRA distributions kick in, maintaining LTCG taxes in the 0% LTCG/QDI bracket. This would come at a cost of eating tax on a portion of her SS benefit, but at only a 10% rate. From some calculations, she should be able to net roughly $23k of LTCG before she pops out of the 0% rate on these, and before she hits "the hump" and sees a 40-something % marginal tax rate kick in too. Seems like a good trade off, and although I'm still waiting to get access to the cost basis on the DTE stock, it seems viable to liquidate/reinvest it within a few years.
3. Keep some DTE stock proceeds to replace dividends from IRA and from DTE as income that she's used to receiving quarterly
4. Take remaining DTE stock proceeds and invest in Vanguard taxable account in TSM index so it's more diversified

I definitely believe it's a smart move portfolio management wise to reallocate the DTE stock into a mutual fund. Does the plan seem like a smart move tax wise?

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