Help - Expect to inherit relatively large sum

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lnknebr
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Help - Expect to inherit relatively large sum

Post by lnknebr » Thu Nov 08, 2018 10:07 am

I am in my mid-30s and will soon inherit what I expect to be ~ 1 mil due to an early death. About 25% seems to be in a rollover IRA (where I think he consolidated various retirement plans) and the remainder in a taxable equity account. The accounts also seem to have been actively managed and contains about an even mixture of individual stocks and index funds. It looks like he has it ~ 50% US / 20% international / and 30% bonds. (I am still in the process of getting everything organized; I can post a more details portfolio summary soon).

I am a relatively high-income earner (320-340k/year). I have been in practice for a few years and have been aggressively paying down student loan debt (~85k remaining, split between 4.5 and 6.5%). We owe ~290k on a 350k house (3.8%?) We currently have around 200k in savings (usually between 30-40k cash, 40k taxable account, 5k roth IRA, and 130k in 401k). I have recently increased my 401k contribution after having built a cash cushion and max out the employer match.

My plan is to pay off the student loan debt immediately. After taking some time to research what individual companies he owns, I would like to consolidate most into index funds. He was using a private adviser which was charging between .6-.8% (?) - I may continue that in the short-term mostly to assist in best maximize tax strategy (I assume they would do that?). Also, my understanding is that withdrawals from an inherited IRA are based on his age; not mine (he died at 62). Mandatory withdrawals would then begin a year or two before the age that my oldest would start college, I was thinking I could possibly partially divert that towards college?

I can provide a better report of the portfolio, and my own standing soon if needed. At the moment I am trying to get some high-level advice on strategies to investigate.

MotoTrojan
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Re: Help - Expect to inherit relatively large sum

Post by MotoTrojan » Thu Nov 08, 2018 10:45 am

Sorry for your loss. Your basis will be stepped up in taxable, thus I would suggest you sell everything in both accounts as soon as you receive them. No need to maintain the potentially inefficient allocation you inherit.

Compound
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Re: Help - Expect to inherit relatively large sum

Post by Compound » Thu Nov 08, 2018 11:12 am

Welcome to the forum and sorry for your loss.

Completely agree with MotoTrojan: Sell it all upon inheritance to take advantage of the step up in basis, and then invest how you see fit.

I would definitely do away with the student loans, and would even consider paying off the mortgage. The leftovers would go into index funds.

I think RMDs of an inherited IRA (not from a spouse or trust) must be based upon the beneficiary’s age. Hopefully someone more knowledgeable will chime in on this point for you.

b42
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Re: Help - Expect to inherit relatively large sum

Post by b42 » Thu Nov 08, 2018 11:40 am

Welcome to the forums.

The first thing I would do is take an hour to read through this wiki page before making any immediate desicions:

https://www.bogleheads.org/wiki/Managing_a_windfall

After that, if you format your first post similar to this post here you will get better responses:

viewtopic.php?f=1&t=6212

nesdog
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Re: Help - Expect to inherit relatively large sum

Post by nesdog » Thu Nov 08, 2018 5:39 pm

We have two inherited IRA's. RMD's are based on beneficiary's age if the original person was not yet taking distributions.

delamer
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Re: Help - Expect to inherit relatively large sum

Post by delamer » Thu Nov 08, 2018 6:41 pm

MotoTrojan wrote:
Thu Nov 08, 2018 10:45 am
Sorry for your loss. Your basis will be stepped up in taxable, thus I would suggest you sell everything in both accounts as soon as you receive them. No need to maintain the potentially inefficient allocation you inherit.
If the taxable assets were held in certain kinds of trusts — a credit shelter trust, for example — then there will not be a step up in the cost basis.

It is very important thatyou make that determination before you sell anything. The attorney handling the estate or the asset management company should have that information.

Even if there is a step up in the basis, there is no reason to sell everything immediately. Take the time to see what the accounts hold, and make considered decisions once you’ve determined the asset allocation that you want going forward.

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Watty
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Re: Help - Expect to inherit relatively large sum

Post by Watty » Thu Nov 08, 2018 6:42 pm

Compound wrote:
Thu Nov 08, 2018 11:12 am
Completely agree with MotoTrojan: Sell it all upon inheritance to take advantage of the step up in basis, and then invest how you see fit.
+1

There is a wiki on the stepped up cost basis.

https://www.bogleheads.org/wiki/Step-up_in_basis

A lot of mutual funds have dividend distributions in December, if you will not be selling them right away while you figure out what to do then you should have the mutual funds set to not automatically reinvest any dividends and capital gains distributions. This will help you avoid buying more of something you may not keep for very long and make your taxes simpler.

The one exception would be if there are any individual short term bonds(< 1 year) then you might want to keep them until they mature. The reason is that these can be expensive to sell not only because of the fees but also because you typically take a hidden reduction in the selling price since they are not as liquid as stocks.

There can also be some special cases like some savings bonds which are good and worth keeping.

The stepped up cost basis is based on the stock price on the day the death occurred so you may have a small capital gain or loss since then.

Do not be sentimental about the holdings and feel that since the deceased works for some company for decades or that they thought an investment was a good idea that you should keep a stock.
Compound wrote:
Thu Nov 08, 2018 11:12 am
I would definitely do away with the student loans, and would even consider paying off the mortgage.
+1 on the student loans.

The mortage is more complicated and a less clear choice but that would be a risk free 3.8% return so I would do it. That would also make the amount you have to invest smaller and less complex. In some situations your home equity may have some protection if you lose a lawsuit.

You would also want to make sure that you are maxing out your retirement accounts for 2018 and 2019.
lnknebr wrote:
Thu Nov 08, 2018 10:07 am
He was using a private adviser which was charging between .6-.8% (?) - I may continue that in the short-term mostly to assist in best maximize tax strategy (I assume they would do that?)
They may have also been putting the money into high cost mutual funds. If you feel that you want to use an advisor Vanguard will do that for only 0.3% and not put you into high cost mutual funds. You can use them for a year or two to get things cleaned up and on automatic pilot then stop paying them for advice when you feel more comfortable about managing the money yourself.

https://investor.vanguard.com/advice/personal-advisor
lnknebr wrote:
Thu Nov 08, 2018 10:07 am
At the moment I am trying to get some high-level advice on strategies to investigate.
Even if you are not in a medical field you should check out the White Coat Investor web site since with your income you will have a lot in common with them. This is run by a regular poster her who is a doctor.

https://www.whitecoatinvestor.com/

If the person who owned the IRAs was over 70, or they had an inherited IRA that they inherited from someone else, then they they may have needed to have taken an RMD in 2018. If they did not do that before they died then you will need to figure out how that needs to be taken.

Here are few general things that I suggest when people get a windfall, but since you already have a high income you are likely already doing these;

Max out your retirement accounts.

Make sure your will and beneficiaries on your retirement accounts are up to date.

Have ample car insurance and an umbrella policy, you are more likely be sued if you have more assets.

Consider what will happen to the money if you get divorced. Nobody plans on that but it happens way too often. You may need to talk with a lawyer about this since the rules can vary a lot by state.

This is just my personal opinion; Make sure that you are driving relatively safe cars. There have been a lot of new safety features that have come out in the last few years and you can afford them. I'm not saying that you should buy $50,000 cars with all the bells and whistles but if you are driving an older car then you can probably buy a lot safer car for a reasonable price.

bsteiner
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Re: Help - Expect to inherit relatively large sum

Post by bsteiner » Thu Nov 08, 2018 7:17 pm

Have the person provide for you in a trust that you control rather than outright, to keep your inheritance out of your estate for estate tax purposes, and to better protect it against your potential creditors and spouses.

lnknebr
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Re: Help - Expect to inherit relatively large sum

Post by lnknebr » Thu Nov 08, 2018 7:44 pm

b42 wrote:
Thu Nov 08, 2018 11:40 am
After that, if you format your first post similar to this post here you will get better responses:

viewtopic.php?f=1&t=6212
Yes, thank you - I will do that after I have a chance to fully review his portfolio. I'm still waiting for some paperwork to go through, so the information I have is at least a quarter old. If I need advice on more discrete decisions I'll post a detailed rundown when I have it.

Thank you

lnknebr
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Re: Help - Expect to inherit relatively large sum

Post by lnknebr » Thu Nov 08, 2018 8:07 pm

Watty wrote:
Thu Nov 08, 2018 6:42 pm
The mortage is more complicated and a less clear choice but that would be a risk free 3.8% return so I would do it. That would also make the amount you have to invest smaller and less complex. In some situations your home equity may have some protection if you lose a lawsuit.

You would also want to make sure that you are maxing out your retirement accounts for 2018 and 2019.
I will probably continue to step it up some, but I have been hesitant because of the high fees (its administered by Principal with limited investment options). I also have a bit of a tin-foil hat, and am nervous that putting most of my eggs in one basket could leave me open to some kind of "You Have Too Much Money 401k Tax" ... or just higher taxes in the future. So my initial plan included spreading risk across pre- and post-tax dollars. Although this obviously unexpectedly tilts me way towards post-tax.
Watty wrote:
Thu Nov 08, 2018 6:42 pm
They may have also been putting the money into high cost mutual funds. If you feel that you want to use an advisor Vanguard will do that for only 0.3% and not put you into high cost mutual funds. You can use them for a year or two to get things cleaned up and on automatic pilot then stop paying them for advice when you feel more comfortable about managing the money yourself.
Yes - there are a mix of low-cost funds (iShares S&P500 index) but also some international funds I've never heard of. And then the individual stocks, which I will research. He used to give me a hard time for my (fledgling) index investing. "You have to beat the market!" he would say. Unfortunately, now that I have access to some of his documents, it looks like he's been underperforming for a while.
Watty wrote:
Thu Nov 08, 2018 6:42 pm
Even if you are not in a medical field you should check out the White Coat Investor web site since with your income you will have a lot in common with them. This is run by a regular poster her who is a doctor.
I have read White Coat Investor before and am mostly in line with that (and this site's) philosophy. I am maybe a little more loose. I spent my entire 20s and some of my 30s working long hours with nothing nice to show for it. I want to enjoy life a little, but we still save.
Watty wrote:
Thu Nov 08, 2018 6:42 pm
Have ample car insurance and an umbrella policy, you are more likely be sued if you have more assets.
I have good insurance and an umbrella policy which I got as soon as I went into practice. I will probably increase it, though.
Watty wrote:
Thu Nov 08, 2018 6:42 pm
This is just my personal opinion; Make sure that you are driving relatively safe cars. There have been a lot of new safety features that have come out in the last few years and you can afford them. I'm not saying that you should buy $50,000 cars with all the bells and whistles but if you are driving an older car then you can probably buy a lot safer car for a reasonable price.
I left that out of my post. We both have lightly used, low-mileage cars (~40k owed between both of them). It's more than I'd like to have in debt, but we left residency with new kids and old, unreliable cars. To our advantage is our good credit score, so the interest rate is only around 1.9%.

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Watty
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Re: Help - Expect to inherit relatively large sum

Post by Watty » Thu Nov 08, 2018 10:16 pm

lnknebr wrote:
Thu Nov 08, 2018 8:07 pm
You would also want to make sure that you are maxing out your retirement accounts for 2018 and 2019.
I will probably continue to step it up some, but I have been hesitant because of the high fees (its administered by Principal with limited investment options). I also have a bit of a tin-foil hat, and am nervous that putting most of my eggs in one basket could leave me open to some kind of "You Have Too Much Money 401k Tax" ... or just higher taxes in the future. So my initial plan included spreading risk across pre- and post-tax dollars. Although this obviously unexpectedly tilts me way towards post-tax.
The 401k wiki has a section on how to deal with expensive retirement plans. There are some really bad plans out there but many are more mediocre than terrible.

https://www.bogleheads.org/wiki/401(k)# ... re_choices

Be sure to look at all the details of the retirement plan, sometimes they have at halfway reasonably priced index fund buried in it that they use to defend themself if they are ever sued. If you have at least one OK choice you can use that then use your other accounts to get a balanced portfolio when you look at all your investments combined.

There is also a wiki on how to try to get better 401k choices and a number of posters have had success with requesting improvements, but it can take several years because any plan changes take a while to implement.

https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan

You will have RMDs from the inherited IRA unless it was your spouse's IRA. If you would not otherwise be maxing out all your retirement accounts then one strategy would be to indirectly use the RMD to fund your 401k(or similar). For example you could increase your 401k payroll withholding by $1,000 a month and also take out $1,000 a month from the inherited IRA for your living expenses or taxable savings. There might be a few very special exceptions but usually these would cancel each other out on your taxes.

Having more money in retirement accounts could also be good for your estate planning so it would be good to have professional estate planning.

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Mr Winston
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Re: Help - Expect to inherit relatively large sum

Post by Mr Winston » Thu Nov 08, 2018 10:47 pm

There may be one thing worse that not inheriting a large sum and that may well be inheriting a large sum. I agree, pay your loans, then find a cause and give it all away. Or use it to give your talents away to the world and work for free. That may just be the way that money can buy happyness.

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bigROI
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Re: Help - Expect to inherit relatively large sum

Post by bigROI » Fri Nov 09, 2018 1:13 pm

Mr Winston wrote:
Thu Nov 08, 2018 10:47 pm
There may be one thing worse that not inheriting a large sum and that may well be inheriting a large sum. I agree, pay your loans, then find a cause and give it all away. Or use it to give your talents away to the world and work for free. That may just be the way that money can buy happyness.
Sorry for the loss. Give some away when you are settled but not now with debt. For all you know the cause you are giving to may not be something the benefactor ever intended to support. Have more kids since you can afford them, expand your family, bring more good people into the world and then at the end if you have the means give some away but all seems drastic. Some causes or charities are so inefficient they are paying over 50% overhead so if you do give some find the ones that do the most good.
A penny saved is much more then a penny earned when you consider the tax/SS/medicare cut.

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