Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

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avoidingdumbmistakes
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Joined: Thu Mar 29, 2018 11:38 am

Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by avoidingdumbmistakes » Sat Apr 14, 2018 7:46 am

I met with Schwab yesterday to sign a bunch of paperwork for my mother's estate. The IRA and taxable brokerage accounts are very straightforward and easy to split 50/50 except for one thing...the muni bond ladder. My sister and I are the only 2 heirs and we get along great so there is zero friction with any of this so that's good. Schwab gave us a list with all the bonds and told me that my sister and I should figure out how to split the bond ladder because quantity increments have to be in 5k pieces so it becomes a logic puzzle of sorts.

Total market value of the bond ladder is around $470k and it's divided into 16 bonds. I have the detailed holdings list including qty, cusip, name, maturity date, and market value.What is the easiest way to divide a portfolio like this 50/50? I'll gladly post that info if it helps strategize the split.

I'm meeting with my local Schwab branch on Thursday to start laying out the groundwork of my appropriate AA for the entire Schwab inheritance. Right now the assets are allocated for an 80 year old so it's going to be a major overhaul. Also, I'm not a fan of the current AA anyways because there are too many individual stocks and such (plenty of funds/bonds but enough ind stocks to make me uncomfortable).

I want to go 3-5 fund route across the board. I'll keep the bond portion of the allocation in the inherited IRA or my current tIRAs and go all stocks in the taxable account. I'm considering putting the entire inherited IRA in a target date fund but that's only a consideration at this time. I've made no decisions yet.

I've done some basic research with Schwab index funds and these are the ones that seem to be the most popular with bogleheads:

SWAGX bonds
SWPPX SP500
SWISX total international
SCHC small cap international
SCHE emerging large caps
SCHF large cap international
SCHB total US stock market
SWTSX total US stock market


Am I missing any popular Schwab funds to discuss on Thursday? I already made it clear when I set up the appointment that I prefer simple/diversified/index investing and NOT ind stocks or speculation. If I feel like I'm being steered away from my personal philosophy I'm going to move it all to VG or Fidelity.

Lastly...I have tIRAs with TRowe and around $250k cash in various high yield savings accounts that I've been keeping on the sidelines for a couple years. I'm not sure I want to move all of that to Schwab. I definitely don't want to keep it at TRowe though. Since I have to take RMDs from the inherited IRA I'm going to have to put as much of that to work in tIRAs, Roth IRAs, and a SEP or i401k (wife is self employed). I'm thinking about doing all of that with VG on my own (or even Etrade for the i401k if I go that route). Is it really that big of a deal to hold assets at 2-3 brokerages or should I do it all with just one?

dbr
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by dbr » Sat Apr 14, 2018 10:16 am

avoidingdumbmistakes wrote:
Sat Apr 14, 2018 7:46 am

Total market value of the bond ladder is around $470k and it's divided into 16 bonds. I have the detailed holdings list including qty, cusip, name, maturity date, and market value.What is the easiest way to divide a portfolio like this 50/50? I'll gladly post that info if it helps strategize the split.
The easiest way from a problem solving point of view is to look at the list and see if it isn't obvious. It is mathematically probable that there is no exact 50/50 split, but if nobody cares, then close enough is good enough, which makes it easier. If necessary one person can compensate the other based on current market value. Absent thinking through an algorithm for solving such problems or looking one up on the Internet, trial and error is usually a good problem solving strategy when there are only 16 bonds to allocate.

A second easy way to divide such an asset is to liquidate all the bonds and split the cash down to the nearest one cent. There would be a loss due to transaction costs.

avoidingdumbmistakes
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by avoidingdumbmistakes » Sat Apr 14, 2018 10:52 am

dbr wrote:
Sat Apr 14, 2018 10:16 am
avoidingdumbmistakes wrote:
Sat Apr 14, 2018 7:46 am

Total market value of the bond ladder is around $470k and it's divided into 16 bonds. I have the detailed holdings list including qty, cusip, name, maturity date, and market value.What is the easiest way to divide a portfolio like this 50/50? I'll gladly post that info if it helps strategize the split.
The easiest way from a problem solving point of view is to look at the list and see if it isn't obvious. It is mathematically probable that there is no exact 50/50 split, but if nobody cares, then close enough is good enough, which makes it easier. If necessary one person can compensate the other based on current market value. Absent thinking through an algorithm for solving such problems or looking one up on the Internet, trial and error is usually a good problem solving strategy when there are only 16 bonds to allocate.

A second easy way to divide such an asset is to liquidate all the bonds and split the cash down to the nearest one cent. There would be a loss due to transaction costs.
I tried working on the simple solution this morning. The 5k quantity increment requirement leaves 9 of the 16 bonds with an odd number. I tried a couple alternating methods with one of us taking all 25k of one and then the other getting all 25k of another etc but the corresponding market value of them makes it "hard" to do it the "easy way". The range in market value of the bonds that aren't dividable equally is $26k to $38k.

I consider myself at least "average" as an investor but I've never dealt with a bond ladder before so my previous knowledge doesn't go very far.

The one easiest way is to split the ones that can go 50/50 and then liquidate the ones that can't and just divide up the dollars but I have a hunch that liquidating is leaving money on the table. I'll have to talk to Schwab on Monday and get their opinion. The branch manager was off on Friday and the guy helping me with paperwork was just an assistant. He couldn't give me the most cost effective and easy solution off the top of his head.

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by dbr » Sat Apr 14, 2018 10:55 am

avoidingdumbmistakes wrote:
Sat Apr 14, 2018 10:52 am
dbr wrote:
Sat Apr 14, 2018 10:16 am
avoidingdumbmistakes wrote:
Sat Apr 14, 2018 7:46 am

Total market value of the bond ladder is around $470k and it's divided into 16 bonds. I have the detailed holdings list including qty, cusip, name, maturity date, and market value.What is the easiest way to divide a portfolio like this 50/50? I'll gladly post that info if it helps strategize the split.
The easiest way from a problem solving point of view is to look at the list and see if it isn't obvious. It is mathematically probable that there is no exact 50/50 split, but if nobody cares, then close enough is good enough, which makes it easier. If necessary one person can compensate the other based on current market value. Absent thinking through an algorithm for solving such problems or looking one up on the Internet, trial and error is usually a good problem solving strategy when there are only 16 bonds to allocate.

A second easy way to divide such an asset is to liquidate all the bonds and split the cash down to the nearest one cent. There would be a loss due to transaction costs.
I tried working on the simple solution this morning. The 5k quantity increment requirement leaves 9 of the 16 bonds with an odd number. I tried a couple alternating methods with one of us taking all 25k of one and then the other getting all 25k of another etc but the corresponding market value of them makes it "hard" to do it the "easy way". The range in market value of the bonds that aren't dividable equally is $26k to $38k.

I consider myself at least "average" as an investor but I've never dealt with a bond ladder before so my previous knowledge doesn't go very far.

The one easiest way is to split the ones that can go 50/50 and then liquidate the ones that can't and just divide up the dollars but I have a hunch that liquidating is leaving money on the table. I'll have to talk to Schwab on Monday and get their opinion. The branch manager was off on Friday and the guy helping me with paperwork was just an assistant. He couldn't give me the most cost effective and easy solution off the top of his head.
It is highly likely there is no solution that does not require liquidating a little bit of the holding or one person compensating the other for the inequality. What would be the problem with the latter?

Dottie57
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by Dottie57 » Sat Apr 14, 2018 10:59 am

Liquidating will give the most equal results. My grandfather's estate was handled that way.

avoidingdumbmistakes
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by avoidingdumbmistakes » Sat Apr 14, 2018 11:00 am

dbr wrote:
Sat Apr 14, 2018 10:55 am

It is highly likely there is no solution that does not require liquidating a little bit of the holding or one person compensating the other for the inequality. What would be the problem with the latter?
I agree and I personally see zero problem doing it that way. I think the bigger issue is my OCD tendencies and the fact that I didn't get a presented with "options" on Friday. lol. All I have is a printed spread with the holdings and columns to fill out for quantity in each of our names. I'm sure I'm making this much harder than it needs to be but I can't get past my own head sometimes. I'm a stickler for accuracy to a fault. I've been in the loan risk underwriting and portfolio management field for 20 years...and with that profession comes with some mental baggage. lol

avoidingdumbmistakes
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by avoidingdumbmistakes » Sat Apr 14, 2018 11:03 am

Dottie57 wrote:
Sat Apr 14, 2018 10:59 am
Liquidating will give the most equal results. My grandfather's estate was handled that way.
I believe that will end up the way we go. We're both too young to hold a muni bond ladder. I'd prefer to put the money to work elsewhere in index funds sooner rather than later. Some of the maturities run out to 2023. Unless someone can show me why I should hold a 5% muni through 2023 versus index investing...I think liquidating some or all is the best solution.

ofckrupke
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by ofckrupke » Sat Apr 14, 2018 11:18 am

If one of the heirs wanted to liquidate promptly and the other wanted to retain to maturity, then some consideration could be given in the division to providing the liquidator with bonds likely to be less egregiously discounted if impatiently sold. In such case, the liquidator might agree to compensate the retainer modestly for bearing the greater illiquidity risk - even after which the liquidator might come out ahead relative to splitting the baby as close to the midline as possible. Conceivably the most illiquid issue could be the source of a dollar pool to be divided unevenly for equalization of the two interests.

WRT Schwab funds, you might add SCHO short term treasury ETF, and strike SWPPX and SWTSX, since you can get ~ the same diversity and results from SCHX and SCHB at the same ~0.03% ER with less risk of unexpected capital gain distributions. Similar reasoning for SWISX - it's basically SCHF but with CG exposure. Great for tax-advantaged accounts though since automatic reinvestment is cleaner and no tax consequences from CG distributions.
Last edited by ofckrupke on Sat Apr 14, 2018 11:28 am, edited 1 time in total.

Dottie57
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by Dottie57 » Sat Apr 14, 2018 11:27 am

avoidingdumbmistakes wrote:
Sat Apr 14, 2018 11:03 am
Dottie57 wrote:
Sat Apr 14, 2018 10:59 am
Liquidating will give the most equal results. My grandfather's estate was handled that way.
I believe that will end up the way we go. We're both too young to hold a muni bond ladder. I'd prefer to put the money to work elsewhere in index funds sooner rather than later. Some of the maturities run out to 2023. Unless someone can show me why I should hold a 5% muni through 2023 versus index investing...I think liquidating some or all is the best solution.
Exactly. Liquidating equalizes the payout and everyone can use the money in the way they want.

avoidingdumbmistakes
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Joined: Thu Mar 29, 2018 11:38 am

Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by avoidingdumbmistakes » Sat Apr 14, 2018 12:10 pm

ofckrupke wrote:
Sat Apr 14, 2018 11:18 am
If one of the heirs wanted to liquidate promptly and the other wanted to retain to maturity, then some consideration could be given in the division to providing the liquidator with bonds likely to be less egregiously discounted if impatiently sold. In such case, the liquidator might agree to compensate the retainer modestly for bearing the greater illiquidity risk - even after which the liquidator might come out ahead relative to splitting the baby as close to the midline as possible. Conceivably the most illiquid issue could be the source of a dollar pool to be divided unevenly for equalization of the two interests.

WRT Schwab funds, you might add SCHO short term treasury ETF, and strike SWPPX and SWTSX, since you can get ~ the same diversity and results from SCHX and SCHB at the same ~0.03% ER with less risk of unexpected capital gain distributions. Similar reasoning for SWISX - it's basically SCHF but with CG exposure. Great for tax-advantaged accounts though since automatic reinvestment is cleaner and no tax consequences from CG distributions.
Great advice. Thank you so much. I'll get past the bond thing this week and am feeling more confident that it will be methodical and correct in the end no matter how we go.

One thing I'm going to end up with is a fairly large taxable account (close to $800k is my math is right). There's no way around that. I need to be efficient from a tax perspective. Having the RMD's from the inherited IRA mostly or completely go towards tax advantaged tIRAs/roth IRAs/SEP or i401k should that should take care of keeping my tax situation clean from the RMDs but I don't want to be inefficient in the taxable account. My broad brush total AA across everything is fairly straightforward. 65/35 or 70/30 stocks and bonds with a standard boglehead 30% international or somewhere close to that.

I'm leaning towards 70/30 AA because I'm a little behind in my goal to retire (or at least not have to work) by the time I'm 60. That's 12 years down the line. I'm good with 70/30 I think but that's still in development. However, the 800k in taxable needs extra attention. In your opinion, which of the Schwab equity funds are the most tax efficient to hold in a taxable account?

ofckrupke
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by ofckrupke » Sat Apr 14, 2018 12:35 pm

avoidingdumbmistakes wrote:
Sat Apr 14, 2018 12:10 pm
In your opinion, which of the Schwab equity funds are the most tax efficient to hold in a taxable account?
In my opinion the answer(s) probably depend on the household's tax rate specifics. Rank ordering could easily differ depending on state taxation, etc. It's not enough to know that the taxable account is 800k.

For example for a couple living off the land (or munis) in a zero tax state, with small enough RMDs from inherited IRAs to be in the 12% bracket, 800k of SCHX could throw off ~$17k of (taxwise-treatable-as-)100% qualified dividends all taxed at 0%....whereas 800k of SCHB would (the past couple of years anyway) have produced maybe 15-15.5k of dividends, but like VTSAX at vanguard just missing the 95% threshold on the qualified fraction, so around 6% of that would be taxed at 12% if the RMD income ate up the standard deduction and the 10% bracket...so $120 federal tax. Not a lot of difference, but favoring SCHX. In a higher bracket, in a taxing state, the rank order of efficiency could be flipped.

I don't really mean to equivocate, but without specifics the confidence in the answer will be lower.

avoidingdumbmistakes
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by avoidingdumbmistakes » Sat Apr 14, 2018 9:09 pm

ofckrupke wrote:
Sat Apr 14, 2018 12:35 pm
avoidingdumbmistakes wrote:
Sat Apr 14, 2018 12:10 pm
In your opinion, which of the Schwab equity funds are the most tax efficient to hold in a taxable account?
In my opinion the answer(s) probably depend on the household's tax rate specifics. Rank ordering could easily differ depending on state taxation, etc. It's not enough to know that the taxable account is 800k.

For example for a couple living off the land (or munis) in a zero tax state, with small enough RMDs from inherited IRAs to be in the 12% bracket, 800k of SCHX could throw off ~$17k of (taxwise-treatable-as-)100% qualified dividends all taxed at 0%....whereas 800k of SCHB would (the past couple of years anyway) have produced maybe 15-15.5k of dividends, but like VTSAX at vanguard just missing the 95% threshold on the qualified fraction, so around 6% of that would be taxed at 12% if the RMD income ate up the standard deduction and the 10% bracket...so $120 federal tax. Not a lot of difference, but favoring SCHX. In a higher bracket, in a taxing state, the rank order of efficiency could be flipped.

I don't really mean to equivocate, but without specifics the confidence in the answer will be lower.
I should have included my tax rates with my post...careless oversight...

My income is performance based as is my wife's. I typically experience large YoY swings with my tax rates. Last year was high at 28% and 7% state. This year could easily be as low as 15% (maybe even 12%). I'm in a unique position with my company because I can defer salary to future years any time I want. So I can play games with pegging my tax rate low with specific years as a strategy. I have to take an RMD from my inherited IRA this year but it's based on my mom's age (80) so it's going to be a pretty big distribution. I'm already planning on deferring a large portion of my comp so I can drop my w2 income down to 12% Fed and maybe as low as 5% state depending on how the new standard deduction works out.

With this being said, I can't defer every year indefinitely. I have to catch up at certain times. That's why I was in a fairly high tax bracket for 2017. I had too much revenue deferred and we had to clean it up. I really like having this kind of flexibility but it can only do so much.

ofckrupke
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by ofckrupke » Sat Apr 14, 2018 11:30 pm

There won't be a 15% bracket for ordinary income for 2018, but the threshold between 12% and 22% is at 77.4k taxable for MFJ.
And the jump from 0% to 15% taxation of LTCG/QDIV income is at $77.2k taxable income. So there are two limbo bars but at least they're set at about the same height.

If being able to tune earned income to pack taxable investment income under the LTCG/QDIV threshold were a perennial opportunity,
then some mix of SCHX (large cap US) and SCHF (FTSE Developed Markets, Large Cap) in taxable, with the complements SCHA, SCHE and SCHC in tax-advantaged would be the way to hold total world stock market. Well, OK, total world less small cap emerging markets.
[SCHB = about 8 parts SCHX + 1 part SCHA, by the way.]

SCHX and SCHF together comprise about 80% of the world stock pie - or around 83-84% if targeting 30% international.
From the 12+5% bracket these two would have zero and approximately zero tax drag respectively.

From 22%+5/6/7 with 15% QDIV taxation, SCHX is still lowest, but tax drag of SCHF leapfrogs SCHA; and if 70+% of portfolio is in taxable then it's a coin flip as to whether to hold the 70% as SCHX+SCHA or as SCHB - some years SCHX will have over 95% qualified dividends so be countable as 100% QDIV where SCHB is under 95% so that 5+% fraction gets taxed as ordinary income; other years both will be over 95%, and since SCHB is always lower, getting to count its nonqualified sub-5% fraction as qualified for taxation will be the bigger break in these years - will be like being able to count the nonqualified part of SCHA's yield as qualified too....which will never happen when the broad US market is held separately as SCHX and SCHA.

avoidingdumbmistakes
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by avoidingdumbmistakes » Mon Apr 16, 2018 11:21 am

ofckrupke wrote:
Sat Apr 14, 2018 11:30 pm
There won't be a 15% bracket for ordinary income for 2018, but the threshold between 12% and 22% is at 77.4k taxable for MFJ.
And the jump from 0% to 15% taxation of LTCG/QDIV income is at $77.2k taxable income. So there are two limbo bars but at least they're set at about the same height.

If being able to tune earned income to pack taxable investment income under the LTCG/QDIV threshold were a perennial opportunity,
then some mix of SCHX (large cap US) and SCHF (FTSE Developed Markets, Large Cap) in taxable, with the complements SCHA, SCHE and SCHC in tax-advantaged would be the way to hold total world stock market. Well, OK, total world less small cap emerging markets.
[SCHB = about 8 parts SCHX + 1 part SCHA, by the way.]

SCHX and SCHF together comprise about 80% of the world stock pie - or around 83-84% if targeting 30% international.
From the 12+5% bracket these two would have zero and approximately zero tax drag respectively.

From 22%+5/6/7 with 15% QDIV taxation, SCHX is still lowest, but tax drag of SCHF leapfrogs SCHA; and if 70+% of portfolio is in taxable then it's a coin flip as to whether to hold the 70% as SCHX+SCHA or as SCHB - some years SCHX will have over 95% qualified dividends so be countable as 100% QDIV where SCHB is under 95% so that 5+% fraction gets taxed as ordinary income; other years both will be over 95%, and since SCHB is always lower, getting to count its nonqualified sub-5% fraction as qualified for taxation will be the bigger break in these years - will be like being able to count the nonqualified part of SCHA's yield as qualified too....which will never happen when the broad US market is held separately as SCHX and SCHA.
This is excellent advice and I appreciate it. I want to walk into my meeting Thursday with my own plan hammered out in advance so I can hear Schwab's and then see how far we are apart with our philosophies. I'm not married to Schwab and will switch to another house right away if I feel like Schwab is steering me in any way away from what I want to do.

I have a lot of semi-complicated stuff going on right now and I'm finding myself thinking too much about it and it's distracting. I went through a bit of a financial disaster when the financial markets melted down 10 years ago. I was well on my way with all accounts and early retirement plans. Then I lost my business and spent 3 years whittling away at my nest egg. I had no choice but I have no regrets because millions felt similar pain. I've done a good job rebuilding since then but instead of being well ahead with retirement plans I'm currently well behind.

My original post about this was here but the #s below are more accurate now that I've reviewed everything closer:

viewtopic.php?f=1&t=245615

My current situation looks like this:

His IRA $65k with TRowe split between a target date fund and large cap index fund
Her IRA $40k with TRowe in a target date fund
HSA $14k
Cash in high yield savings $275k (probably closer to $300k now) that needs to be invested in taxable brokerage over the coming weeks

Taxable brokerage with Schwab $510k but needs a complete overhaul and I will be adding at least another $300k to the account with my cash on hand and my mom's final RMD happening right now from her IRA.

$740k inherited IRA with Schwab. My original post showed a higher amount because I didn't realize a $120k RMD is coming out right now that will be split between myself and my sister.

I plan on rolling both tIRAs with TRowe to Schwab or whomever I decide on within the next month. I plan of funding our tIRAs and HSA for 2018 within the next month with cash on hand. Since I'm getting an additional $60k from my mom's 2018 RMD I'm going to immediately fund my retirements and HSA once that goes through.

Things I'm struggling with...

I have a great W-2 position with a close friend and I run an arm of his business. The good thing is I can defer income into the future for individual year tax strategies. The bad things are that I have no 401k option so I'm stuck with trad or roth IRAs and my HSA as my only retirement accounts. The other bad thing is that I can't defer income indefinitely and have to clean up every few years. Last year was one of those years and it affected my ability for funding a Roth. This year I should be able to start funding a Roth but I don't know if I should stick with tIRAs. I'm going to leave that up to my accountant and advice from this forum.

My general plan is a 4 fund index portfolio across all of my accounts. I will keep the bond portion in the inherited IRA and will focus on keeping the most tax efficient equity funds in my taxable accounts. I don't think it needs to be any more complicated than that from everything I've researched the last couple months.

curmudgeon
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by curmudgeon » Mon Apr 16, 2018 7:24 pm

As a side note, you should look into the "SIMPLE IRA" option with your W2 work. Very low overhead from the employer perspective (much less work than a 401K), but higher contribution limit than a regular IRA.

Selling the muni bonds gives you a clean slate, which is convenient (but not necessary) for dividing the account. Note that you will need to establish a valuation for the bonds in any case (as of date of death), and any change in what you realize will be taxable gain/loss. If you distribute "in-kind", I think it will make tax filing a little easier (but you may have to do K1s anyway if there are dividend distributions to account for before the assets are transferred to you/sis).

For your taxable investments, I'd keep in mind that you may find it convenient to have access to some of that money without having to recognize capital gains. If it's all equities in your taxable account, 10 years from now that might be awkward. Probably not a critical issue, but one to keep in mind.

not4me
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by not4me » Tue Apr 17, 2018 3:49 pm

avoidingdumbmistakes wrote:
Sat Apr 14, 2018 11:03 am

I believe that will end up the way we go. We're both too young to hold a muni bond ladder. I'd prefer to put the money to work elsewhere in index funds sooner rather than later. Some of the maturities run out to 2023. Unless someone can show me why I should hold a 5% muni through 2023 versus index investing...I think liquidating some or all is the best solution.
I'm a bit confused as to whether you're wanting "help splitting" the ladder (see title of thread) or wanting to confirm your decision to liquidate the ladder. I wouldn't try to defend a 5% muni versus "index investing" -- although clearly all muni/index aren't equal or comparable. If you've made your decision, you might skip the rest of this post. But, I will share a tale that shows an alternate approach.

I was involved a couple of years back with a situation with several similarities as this, but also some key differences. A parent died leaving a taxable account to be split evenly between 2 heirs. The 3 individuals lived in different states & different brokers were involved. The broker for the deceased, realizing the 2 heirs lived out of state & wouldn't leave the $ there, suggested liquidation as the "fair" approach. I seem to recall there being about a dozen different munis, with some not being able to be split under $25k.

I don't know if you've looked at the cost of liquidation. In this case, some were very illiquid & spreads wide. Initial look indicated about 7-8% to sell, although not all would be that expensive. Took a harder look. A couple were due to mature in about 2 years. Another couple were from the same state as one of the heirs (making after tax return that much better). Bottom line, I think the bond with the longest maturity was the only one sold. There was no attempt made to even out "credit quality" nor illiquidity risk. There were some non-muni bonds as well. Both sets were lumped together to somewhat even out maturity & cash in the settlement fund made both heirs get same $ day one.

The broker was the only one unhappy with the arrangement.

To your other question, I don't think it is a problem to have multiple brokers unless you are giving up "volume" discounts.

Gill
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by Gill » Tue Apr 17, 2018 3:57 pm

Your post illustrates the problems that almost always arise in trying to distribute an estate in kind when there are multiple beneficiaries. Unless there are compelling reasons to the contrary such as the very firm wishes of the beneficiaries, I have almost always liquidated estates shortly after being appointed as personal representative and distributed cash. This avoids the problem of a loss in value after the death of the decedent and also enable beneficiaries to reinvest according to their own investment needs and not the investment requirements of the decedent. Trying to distribute a bond portfolio equitably is nearly impossible.
Gill

avoidingdumbmistakes
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by avoidingdumbmistakes » Tue Apr 17, 2018 7:18 pm

not4me wrote:
Tue Apr 17, 2018 3:49 pm

I'm a bit confused as to whether you're wanting "help splitting" the ladder (see title of thread) or wanting to confirm your decision to liquidate the ladder. I wouldn't try to defend a 5% muni versus "index investing" -- although clearly all muni/index aren't equal or comparable. If you've made your decision, you might skip the rest of this post. But, I will share a tale that shows an alternate approach.

I was involved a couple of years back with a situation with several similarities as this, but also some key differences. A parent died leaving a taxable account to be split evenly between 2 heirs. The 3 individuals lived in different states & different brokers were involved. The broker for the deceased, realizing the 2 heirs lived out of state & wouldn't leave the $ there, suggested liquidation as the "fair" approach. I seem to recall there being about a dozen different munis, with some not being able to be split under $25k.

I don't know if you've looked at the cost of liquidation. In this case, some were very illiquid & spreads wide. Initial look indicated about 7-8% to sell, although not all would be that expensive. Took a harder look. A couple were due to mature in about 2 years. Another couple were from the same state as one of the heirs (making after tax return that much better). Bottom line, I think the bond with the longest maturity was the only one sold. There was no attempt made to even out "credit quality" nor illiquidity risk. There were some non-muni bonds as well. Both sets were lumped together to somewhat even out maturity & cash in the settlement fund made both heirs get same $ day one.

The broker was the only one unhappy with the arrangement.

To your other question, I don't think it is a problem to have multiple brokers unless you are giving up "volume" discounts.
Appreciate the insight. We haven't made any decisions yet. I'm meeting with a different Schwab office on Thursday to discuss the pros and cons of all options. I'll make the call once I fully understand what the options are. Me and my sister get along really well so I don't foresee any problems in that regard. My personal AA is too low on bonds right now anyway so if the best way to go is to hold some then it may actually help me fill a gap.

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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by avoidingdumbmistakes » Tue Apr 17, 2018 7:22 pm

Gill wrote:
Tue Apr 17, 2018 3:57 pm
Your post illustrates the problems that almost always arise in trying to distribute an estate in kind when there are multiple beneficiaries. Unless there are compelling reasons to the contrary such as the very firm wishes of the beneficiaries, I have almost always liquidated estates shortly after being appointed as personal representative and distributed cash. This avoids the problem of a loss in value after the death of the decedent and also enable beneficiaries to reinvest according to their own investment needs and not the investment requirements of the decedent. Trying to distribute a bond portfolio equitably is nearly impossible.
Gill
I have some time to think things through as we're still in the process of opening accounts so the assets can be transferred. I'll know much more about the various options after my meeting on Thursday. Thankfully my mother's financial life was very simple in regards to # of accounts so the process of splitting/transferring is pretty straightforward. The bond ladder is the only set of assets that can't simply be sliced down the middle.

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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by Kevin M » Tue Apr 17, 2018 8:31 pm

In addition to our PM conversation about this, here are some additional thoughts--maybe some repeat of what I've already said in PM.

Before selling, I would determine if any of the munis are attractive holdings for either of you, considering marginal tax rates and maturities. For example, I have been buying individual AA and AAA munis with maturities out to three years, as these provide me with higher taxable-equivalent yields than Treasuries or CDs--higher enough IMO to justify the historical 3-year default rate of 0% for AA and AAA munis. I would want to hold any such munis if it were me, since you probably will lose at least 0.5% in selling due to bid ask spread, and another 0.1% or more in commissions (depending on broker and account size).

Let's say it makes sense for you to hold some, and you want to, but for your sibling it does not. I'd pick the ones I want to hold, then sell a comparable amount of the ones I didn't want to own for your sibling's share. Then sell the rest and split the proceeds, making any adjustments with the proceeds. You can get bid quotes on the ones you want to hold to determine their fair market value.

Say you both want to continue holding the munis, or as many as possible with a fair split. Divide in half the ones where there are an even multiple of 10, since the minimum lot size is 5. For the others, split what you can, and either sell the rest and split the cash, or get quotes to see if there are comparable values in the quantity 5 lots.

For example, say you have 25 of one and 35 of another. You each take 10 of the first and 15 of the other, then either sell 5 of the first and 5 of the other and split the cash, or get bid quotes on them and make up the difference with other cash.

A Vanguard or Schwab broker helped my three siblings and me split up some individual bonds we received from my Dad some years ago. We didn't sell any of the bonds before the split, and he was very helpful in coming up with what seemed like a fair way to dole out the bonds where we could split the holding four ways evenly. Then we each did what we wanted with them. As I recall, this was in an IRA, and no one had any authority to transact in this account until it was split into four inherited IRAs, so in this situation some kind of division was required without selling. This is not exactly your situation, since you or someone has power as successor trustee or executor to sell assets in trust or subject to probate.

I agree that for something like real estate, it's usually best to sell it and divide the proceeds, as continuing to hold can become a family nightmare. That's what I did with my dad's condo (as trustee of his trust). But I wouldn't just blindly sell assets that can be divided in a reasonable way if one or more of the heirs would like to continue to own some of the assets, and the transaction costs are high.

Kevin
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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by avoidingdumbmistakes » Thu Apr 19, 2018 12:43 pm

Kevin M wrote:
Tue Apr 17, 2018 8:31 pm
In addition to our PM conversation about this, here are some additional thoughts--maybe some repeat of what I've already said in PM.
I was going to PM you about this but since someone might search up this thread some day with a similar question I figured I'd close it out with this post. I really do appreciate your insight and advice though. Very helpful.

I met with a very intelligent Schwab person today and a bond expert stepped in for 15 minutes. In this specific case, liquidating the bonds and re-investing into my appropriate allocation is going to be the right play. None of the bonds have State tax benefits for either me or my sister and the total loss to liquidate all $470k is under $7k. Split between 2 people, the loss is minimal and will also help offset some of my mother's RMD that is coming out this year. It's still a bit of a gamble with returns going forward as to which way makes the most money but I'm good with just making a clean break and liquidating. The proceeds will be re-allocated into tax efficient ETF index funds and left to grow in the taxable account for years.

I went over what I thought would be a good AA across my taxable and tax advantaged accounts and it was nice to hear Schwab totally agree with the strategy, AA, and choice of funds. The advisor said it is rare to have a client walk in like this and have a great plan already thought through and that I won't need any type of private client or extra fee based service. That made me feel confident but I didn't take credit. I told him I learned/researched my plan on this forum and gave credit to all the intelligent and helpful folks that frequent this forum. Bogleheads is no doubt the best forum I've found for investing advice. I'm thankful to be a part of this place and thankful for all the great minds that frequent here.

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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by not4me » Thu Apr 19, 2018 1:09 pm

Glad you got a resolution you are comfortable with. In case I cited upthread, I knew the broker was higher cost than Schwab, but would still have expected higher cost. Congrats on that. I didn't point this out before, so will raise another matter to keep your eyes on. I think you were saying you would liquidate in the estate (& pay income tax there)?. Part of the downside in many cases is the opportunity cost of being out of the market (which may help or hurt). So, the timing & placement of liquidating is something to consider

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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by avoidingdumbmistakes » Thu Apr 19, 2018 1:22 pm

not4me wrote:
Thu Apr 19, 2018 1:09 pm
Glad you got a resolution you are comfortable with. In case I cited upthread, I knew the broker was higher cost than Schwab, but would still have expected higher cost. Congrats on that. I didn't point this out before, so will raise another matter to keep your eyes on. I think you were saying you would liquidate in the estate (& pay income tax there)?. Part of the downside in many cases is the opportunity cost of being out of the market (which may help or hurt). So, the timing & placement of liquidating is something to consider
Since my mom was sick for so long, we had a lot of time to get things in order so there actually isn't a typical estate at all in this case. I was joint owner on checking/savings/car, the house was held in a trust, and the 3 Schwab accounts are POD 50/50 to the 2 beneficiaries. That's all there is. It's a remarkably simple process that came with plenty of pre-planning and advice. My mother's final tax return will only include a few months of pension and SS income so there will barely be a tax bill due for her final return. The simplicity was only possible due to proper planning and having time on our side. If my mother passed suddenly 5 years ago things would have been exponentially more complicated.

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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by ThrowinDarts » Thu Apr 19, 2018 1:32 pm

liquidate and split

or have a rock paper scissors fight for 1st pick and then have a bond draft!

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Re: Need help splitting a muni bond ladder 50/50 between heirs and general Schwab Question

Post by Kevin M » Thu Apr 19, 2018 2:24 pm

avoidingdumbmistakes wrote:
Thu Apr 19, 2018 12:43 pm
Kevin M wrote:
Tue Apr 17, 2018 8:31 pm
In addition to our PM conversation about this, here are some additional thoughts--maybe some repeat of what I've already said in PM.
I was going to PM you about this but since someone might search up this thread some day with a similar question I figured I'd close it out with this post. I really do appreciate your insight and advice though. Very helpful.

I met with a very intelligent Schwab person today and a bond expert stepped in for 15 minutes. In this specific case, liquidating the bonds and re-investing into my appropriate allocation is going to be the right play. None of the bonds have State tax benefits for either me or my sister and the total loss to liquidate all $470k is under $7k.
Since you've already decided, it's a moot point, but the lack of state tax benefits should not be a deciding factor. What matters is taxable-equivalent yield, and the federal tax exemption will increase TEY above the state yield. I own more muni bonds with no state exemption than with it, because I often find higher TEYs in out of state bonds than in state bonds.

Your liquidiation cost is about 1.5% (7/450), which is much higher than my rough estimate of 0.6%. And how are you calculating that? If that is for commission only, then it's MUCH higher than the roughly 0.1% commission you'd pay at Fidelity. I assume that a lot of this is the bid/ask spread, so how much you get in selling vs. how much you'd pay to buy same bond.

Now you may consider this a very fair price for the simplicity of the solution, and you may not want to own individual muni bonds, and that's fair. No one can argue with those reasons.

I haven't looked at your latest PMs yet, but will to see if you provided any additional details there.

Kevin
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