My daughter's inheritance.

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Luke Duke
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Re: My daughter's inheritance.

Post by Luke Duke » Wed Sep 12, 2018 11:08 am

You've received some good advice here. After the dust settles and your daughter begins to take interest in managing the money, you should do your best to ensure that she understands the freedom that the money could allow her, if it is properly managed. She could retire in her 40's, she could set up future generations, she can afford to take the risk of starting her own business, she can choose to use the money to help others, etc.

It would probably be wise to get as much of the money as allowed into a ROTH IRA while she is in a low tax bracket. She will need earned income to do this.

afan
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Re: My daughter's inheritance.

Post by afan » Wed Sep 12, 2018 11:32 am

Gill wrote:
Wed Sep 12, 2018 10:50 am
afan wrote:
Wed Sep 12, 2018 9:48 am
Do not sign up with anyone who will charge more than 0.3% of assets.
I'm glad I'm no longer selling bank trust services when I see comments like this! :happy :happy :happy
Gill
Well, I did say they had no need of trust services. Just money management, if that.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

psteinx
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Re: My daughter's inheritance.

Post by psteinx » Wed Sep 12, 2018 11:32 am

1) Many folks here on BH will post that it is easy and obvious - you should do X, Y, and Z.

2) But, the specifics of X, Y, and Z will vary, perhaps dramatically, among these posters.

3) In the outside world, a similar phenomenon will exist. Whether you're talking to specific financial advisors, or reading advice in books, magazines, or on websites.

4) Ergo, it's probably not as simple as many would suggest.

5) But that doesn't necessarily mean you should pay an advisor $10K/year for advice!!!! The advisor is one of many voices, offering a specific recipe of advice, portfolio suggestions, etc., but at a much higher cost that the free or very cheap alternatives.

6) So, you need to start by educating yourself (and ideally, encouraging your daughter to educate herself).

7) You also have a feel for what's right for your daughter, and for you.

8) It's going to be really hard to avoid regrets of some sort. If you invest in "safe" assets (money markets, CDs, and the like), the money will earn around 2%, which is basically treading water against inflation (and probably lagging a bit, after taxes). But if the market continues to rise, then 2 or 5 years from now you or she may look back and regret not taking a more aggressive approach. Conversely, if you go into the market in a significant way, and another 2008-9 occurs, or even something milder, you'll be kicking yourself for that.

9) There are sub-species of #8, for different types of investments. If you read widely on these forums, you'll see folks advocating/mourning investments in international markets, value-tilted portfolios (a form of factor based investing), and many other flavors of investing. The decisions you make with regard to these things may impact future returns substantially. The problem is, it's hard to know in advance which way they'll make an impact. :(

10) Re: More re regrets and such. A basic problem is that, while we can debate what expected future returns for different kinds of investments are, for the riskier ones (i.e. most equities), the variability is pretty high, in comparison to the expected returns. So, you can think that equities have an expected return of ~7%, and that's obviously higher than ~2% on typical, safe, short-term interest bearing investments (CDs, MMs, etc). But that 7% is only the midpoint of a wide range. When you're looking back in 3 years, and the ACTUAL returns were -15%, or +35%, or whatever, there will be no shortage of folks saying it was OBVIOUS that returns were gonna be lousy/great.

11) This issue is a little worse because you're helping someone else make the investments. It's at least possible that your daughter may be the one looking back saying "it's obvious you/we should have done [something very different from what we did]".

12) Unfortunately, there's no easy answer to this conundrum. Even sticking the money under a mattress is a choice, with consequences (and a pretty poor one IMO).

As for **MY** recommended recipe :)

13) Simple, "set and forget" is easy, and probably a good target.

14) There will be tax consequences in pretty much any reasonable case, necessitating that you/your daughter dive a bit deeper down the tax filing rabbit hole a little sooner than might otherwise have been the case. But it doesn't need to be SO bad. Still, this would encourage me (were I in your shoes) to avoid paths that involve lots of different holding entities (the multiple CDs at different banks approach).

15) If you feel at all self-confident, after reading up on this stuff, and not too freaked out about the likelihood that, in retrospect whatever you recommend will look sub-optimal, then I would lean towards a more self-directed approach, or one at most lightly directed by professional advice. (i.e. A cheap service like Vanguard's or a pay by the hour/session type advisor or whatever).

16) Vanguard is a reasonable custodian, but the lack of physical offices is a negative. It can also be a semi-positive (less chance to be upsold on some mediocre investments). Fidelity and Schwab are also reasonable choices, with more offices.

17) Money markets are OK for the short term, and I wouldn't be unduly worried about them, safety-wise (relative to say, CDs).

18) But really, for a young person who won't likely NEED the money in any short term way, equities have, in my opinion, a far higher expected return than money markets. (Note though, my concerns about actual returns versus expected).

19) So, bottom line, I'd lean towards a heavy equity portfolio, in a simple portfolio construction - 2 or 3 fund would be fine.

20) Good luck!
Last edited by psteinx on Wed Sep 12, 2018 12:49 pm, edited 1 time in total.

adam1712
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Re: My daughter's inheritance.

Post by adam1712 » Wed Sep 12, 2018 12:14 pm

Along with taking your time before deciding where to invest the money, don't forget that it all doesn't have to be moved out of cash or CDs at once. You might consider starting an investment account in index funds with $50k-100k that is self-managed to see how it goes. You might be surprised how simple it is.

Just remember that stock investments are risky. It may grow much faster than CDs or have a significant loss over short periods of time. But over the long run stocks on average have had higher returns.

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Meg77
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Re: My daughter's inheritance.

Post by Meg77 » Wed Sep 12, 2018 12:36 pm

I'm so sorry for the tragic loss of your daughter's father. It's great that you are stepping in to help her. I am a CFP and a private banker, and I also manage a 7 figure portfolio for my mother who recently moved it from Edward Jones to Vanguard at my suggestion. Here are a few points from my perspective.

1. I have family members and friends who have worked for Edward Jones and Morgan Stanley as well as many other banks and brokerages. Not all of those advisors are bad, and not all fees are bad, but given your daughter's needs (buy and hold and generally ignore the money for years if not decades), the higher fees charged by those full service firms are not warranted.

This is particularly true given your daughter's interest level and life stage. One of the things you get for your money at places like Morgan Stanley especially are networking opportunities with other high net worth clients, golf outings and free lunches at the club with your advisor, invitations to investment seminars with the managers of the underlying funds, and access to IPOS, private equity and other investment opportunities for accredited investors. Presumably your daughter would not be participating in any of those activities. In addition, you get a full time advisor ready to hold your hand through setting up an estate plan, hiring CPAs or attorneys, structuring an income distribution plan, making sure required minimum distributions are taken and structured properly from retirement accounts, and setting up trusts for children etc. Again, your daughter needs no such high touch service at this stage. So don't pay for it yet!

2. In this situation it appears she/you just need to select an asset allocation (I recommend 80% stocks and 20% fixed income) and the underlying investments (I recommend index funds as do most on this forum) and then leave the portfolio alone for decades. The best and easiest and cheapest way to do this is to go to Vanguard or Schwab or Fidelity, open a brokerage account, and do that. If you want to pay a financial planner by the hour to help you, go right ahead. But as others have pointed out, reps from those firms will be happy to help you as well. It's really very simple; the process is the same whether you are investing $10,000 or $100,000 or $1,000,000. Given the amount of money involved, I'd invest 25% of it each quarter for a year rather than lump sum investing all of it into the market at one time. But that's up to you; statistically speaking it shouldn't matter especially over the long term.

3. Keep a relationship with one bank and one brokerage. Setting up deposit accounts for a trust is a pain, especially as you and your daughter will both have to sign everything as co-trustees. You do not want to go about setting up a CD ladder at multiple banks and going through this process continually - and dealing with statements from multiple institutions (a nightmare at tax time, trust me). Besides, CDs aren't paying much more than money market funds now. Just keep the funds in a money market earning 2% rather than tying it up in CDs to earn 2.25% or whatever you are seeing.

4. You daughter will need to develop an interest and aptitude in money over time in order to become a good steward of these funds and her future income. Worst case this money sits untouched for decades and she can check saving for retirement off her list. But best cash it is a source of funds for her for graduate school, buying a home(s), starting a business, or any other life milestones that may arise.

Good luck to you both.
"An investment in knowledge pays the best interest." - Benjamin Franklin

afan
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Re: My daughter's inheritance.

Post by afan » Wed Sep 12, 2018 2:06 pm

you get a full time advisor ready to hold your hand through setting up an estate plan, hiring CPAs or attorneys, structuring an income distribution plan, making sure required minimum distributions are taken and structured properly from retirement accounts, and setting up trusts for children etc.
Interesting point, Meg. But have you found that the salespeople from these brokers are actually useful for this planning?

I thought they got where they were because of their ability to sell stocks, annuities or whatever, not their knowledge of financial planning.

Also an interesting explanation of why someone would want to go to concerts or presentations with a group of people when all they had in common was where they parked their money. I routinely dump all these invitations but I can see my attitude might be different if I were trying to sell stuff to the participants.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Boglegrappler
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Re: My daughter's inheritance.

Post by Boglegrappler » Wed Sep 12, 2018 2:28 pm

Some of the advice has been overly complicated. If it were my daughter, I'd invest the money mostly in short term US treasury bills (2-3 years maturity) through a good discount broker (Fidelity or Schwab or Vanguard), and then slowly work it into the market using an S&P500 index fund. The t-bills will throw off about 2.5% yield currently. She'll have between 25 and 30k of interest income to start out, and will have to remember to file estimated taxes since there won't be any tax withholding by the broker. You could move 10-15% of it into the stock market every year or even six months until you get the stock allocation up to where you'd like it to be.

It's "borrowing trouble" to touch on this next point, but I think its worthwhile to mention. I hope that the valuation of the deceased father's business is something that everyone concerned is comfortable with. There is more than a reasonable chance that the number you're expecting to receive is lower than it ought to be. However,this is an issue of what the ownership agreements say, and who is representing you in the determination of the value of the interest. Obviously, re-opening valuation discussions would create a great deal of bad blood, and expense, and wouldn't be a good idea to do unless there was a valuation "error" that was an order of magnitude rather th an just a couple hundred thousand.

Luke Duke
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Re: My daughter's inheritance.

Post by Luke Duke » Wed Sep 12, 2018 4:13 pm

Boglegrappler wrote:
Wed Sep 12, 2018 2:28 pm
I hope that the valuation of the deceased father's business is something that everyone concerned is comfortable with. There is more than a reasonable chance that the number you're expecting to receive is lower than it ought to be. However,this is an issue of what the ownership agreements say, and who is representing you in the determination of the value of the interest. Obviously, re-opening valuation discussions would create a great deal of bad blood, and expense, and wouldn't be a good idea to do unless there was a valuation "error" that was an order of magnitude rather th an just a couple hundred thousand.
If insurance was recently purchased by the ex-husband and his business partner to buy the other out, then I would imagine that the valuation was agreed upon by the business owners.

jdb
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Re: My daughter's inheritance.

Post by jdb » Wed Sep 12, 2018 6:59 pm

Been there done that. At least with respect to several children’s trusts for more monies. Sorry for your daughter’s loss. Make it simple. Vanguard account. 50 percent equity, I like 500 equity index fund. 50 percent bonds. Since taxable account I suggest Vanguard intermediate tax exempt for 40 percent and short term tax exempt for 10 percent. And no need to pay advisors. Good luck.
Last edited by jdb on Thu Sep 13, 2018 8:30 am, edited 1 time in total.

SoAnyway
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Re: My daughter's inheritance.

Post by SoAnyway » Wed Sep 12, 2018 7:33 pm

SoAnyway wrote:
Tue Sep 11, 2018 10:37 pm
NancyABQ wrote:
Tue Sep 11, 2018 8:56 pm
Given that this is a revocable living trust, that seems a lot simpler. There are no weird tax consequences -- the income would be under your daughter's taxes directly.

I don't think any financial advisor is necessary, but if OP is not used to handling this amount of money, you might consider getting some advice (but there is no reason to rush into getting an advisor involved).

Personally I'd consider transferring the whole amount to your broker of choice (I like Schwab, many here would suggest Vanguard -- make sure the account is titled correctly as a living trust, with the trustees setup, etc), and then put it all in a Money Market fund while you figure out how to invest it. If you're uncomfortable with the Money Market (not FDIC insured) then 3-6mo Treasuries? You can also buy a bunch of brokered CDs at the brokerage firm, just making sure no more than $250K per banking institution.

That seems (much) simpler than trying to setup multiple trust accounts in different online banks, to stay under the FDIC limits.

Once you have taken time to figure things out, then it's just a matter of investing the money according to the plan you come up with, using the same brokerage where the money will already be located -- the account will already be setup. You can take your time coming up with that plan (asset allocation, tax efficiency, etc). Bogleheads here will be happy to help you work out a good investment plan. There is no rush.

P.S. Please consider editing your original message (first one in this thread) to include the important information that you are talking about a revocable living trust. That will help late-comers get caught up. Use the pencil icon at the top right of your original post.
+1

OP, my condolences to you and your daughter. It's no fun dealing with this financial minutiae in the current emotional situation. On the up side, you and your ex raised a great kid with a terrific head on her shoulders. Moreover, from what I've seen in your posts, "like mother, like daughter". :happy

My thoughts:
1. No financial advisor necessary, esp. not EJ, Morgan Stanley, "wealth management branch" of a local bank, or any of their "ilk". OP, no one here benefits financially from the advice offered here, and most of it is exceptional. Be confident that you can do this.
2. You can decide whether you need an advisor later. The most immediate need is to get the distribution to someplace that you feel is safe for your daughter. Personally, I'd move it all to Vanguard and stick it in the Prime Money Market Fund until you and your daughter have gotten your bearings. BTW, I have accounts at Vanguard, Schwab and Fidelity - the only 3 options I'd consider in your situation. For your situation, I'd recommend that you start with Vanguard. (If you want to know why, PM me.)
3. You're an amazing Mom, and your daughter is lucky to have you.
OP, many of the subsequent posts have offered very good and very well-intentioned advice on where you should invest the funds later. I stand by my original assertion in #2 above, and I'd add that you can make decisions later on your investment allocations, etc. For now, forget about where the funds should be invested ultimately and definitely don't sign on with EJ/MS/other high-fee, high-churn salespeople/sharks "advisors".

The best thing you can do as a Mom is just get the funds someplace safe and low-risk/low-maintenance/low-cost that you and your daughter are comfortable with (CDs/MMF/T-bills/whatever you decide) while you and your daughter attend to the immediate emotional shock and the more important issue of your mental/emotional health. This money will be around for your daughter's lifetime and she's young, so you lose very little by getting it to a safe place, taking the time to attend to your emotional matters while getting educated on why most here advocate for Vanguard/Schwab/Fidelity and a diversified portfolio of low-cost index funds, and then (and only then) making the investment decisions. BTW, I reiterate my #3 above.

Dottie57
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Re: My daughter's inheritance.

Post by Dottie57 » Wed Sep 12, 2018 9:08 pm

Gill wrote:
Tue Sep 11, 2018 8:30 pm
desiderium wrote:
Tue Sep 11, 2018 8:27 pm
At the risk of being contrary to the dominant paradigm here:

You daughter’s youth and understandable lack of focus on the financial work involved plus tax and trust issues do argue for considering a full service fiduciary fee only financial adviser. I would suggest exploring Buckingham asst management, Larry Swedroe’s firm. They have the depth needed to steer things well for many years to come. They do not profit off the investments and the fees may be reasonable for what she needs. I do not use them myself but would readily consider if my interest in investing was not as strong.
There really are no trust or tax issues here. Retaining such an advisor would be overkill.
Gill
+1

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FIREchief
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Re: My daughter's inheritance.

Post by FIREchief » Wed Sep 12, 2018 10:38 pm

Luke Duke wrote:
Wed Sep 12, 2018 11:08 am
She could retire in her 40's, she could set up future generations, she can afford to take the risk of starting her own business, she can choose to use the money to help others, etc.
If I read this correctly, we're talking about $1.25M, not $12.5M. This is likely not enough money to even consider all of those things. As many others have suggested, just stick it in a two or three fund portfolio (or perhaps just a target date fund) at VG or Fidelity and go back to life/school/work. Check it in thirty years and then think about FIRE, philanthropy, etc.

Also, IMHO, investing a once in a lifetime opportunity like this in a small business is likely the most certain way to lose it all.....
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Luke Duke
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Re: My daughter's inheritance.

Post by Luke Duke » Thu Sep 13, 2018 10:28 am

FIREchief wrote:
Wed Sep 12, 2018 10:38 pm
Luke Duke wrote:
Wed Sep 12, 2018 11:08 am
She could retire in her 40's, she could set up future generations, she can afford to take the risk of starting her own business, she can choose to use the money to help others, etc.
If I read this correctly, we're talking about $1.25M, not $12.5M. This is likely not enough money to even consider all of those things. As many others have suggested, just stick it in a two or three fund portfolio (or perhaps just a target date fund) at VG or Fidelity and go back to life/school/work. Check it in thirty years and then think about FIRE, philanthropy, etc.

Also, IMHO, investing a once in a lifetime opportunity like this in a small business is likely the most certain way to lose it all.....
According to this website the S&P is up 479.357% with dividends reinvested and AFTER INFLATION since 9/1993 (25 years). If you can't retire at 45 with over $7MM in today's money, you are doing something wrong.

It is up 2044.712% over the past 40 years after inflation and with dividends reinvested. If $20+MM isn't enough to setup future generations, I don't know what is.

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FIREchief
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Re: My daughter's inheritance.

Post by FIREchief » Thu Sep 13, 2018 5:25 pm

Luke Duke wrote:
Thu Sep 13, 2018 10:28 am
FIREchief wrote:
Wed Sep 12, 2018 10:38 pm
Luke Duke wrote:
Wed Sep 12, 2018 11:08 am
She could retire in her 40's, she could set up future generations, she can afford to take the risk of starting her own business, she can choose to use the money to help others, etc.
If I read this correctly, we're talking about $1.25M, not $12.5M. This is likely not enough money to even consider all of those things. As many others have suggested, just stick it in a two or three fund portfolio (or perhaps just a target date fund) at VG or Fidelity and go back to life/school/work. Check it in thirty years and then think about FIRE, philanthropy, etc.

Also, IMHO, investing a once in a lifetime opportunity like this in a small business is likely the most certain way to lose it all.....
According to this website the S&P is up 479.357% with dividends reinvested and AFTER INFLATION since 9/1993 (25 years). If you can't retire at 45 with over $7MM in today's money, you are doing something wrong.

It is up 2044.712% over the past 40 years after inflation and with dividends reinvested. If $20+MM isn't enough to setup future generations, I don't know what is.
No doubt (and thanks for posting those numbers). My point was that the time to think about all those good things you mentioned is AFTER all that spectacular compounding. Not now, when it is $1.25M. That's the risk for a situation like this. That somebody will suddenly feel rich and instead of just investing it wisely, with a high probability of future wealth, they will start to live "like a millionaire," and wind up with nothing. I also understand that some make big money by starting their own business, but many more wind up blowing big money by starting their own business. If DD can project a good future without the risk of running a business, then that is the path I would choose.

I don't know anything about starting a small business, except that about two in three fail misserably, and that having a tremendous concept/business model is just as important, if not more so, then having a million dollars.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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