Inheritance for ex wife tax questions

[Third Son]

Good morning. I am asking this question here because I figured you folks would know the answer.

A good friend of our's recently experienced the death of her ex-husband. They remained amicable following the divorce. She was told after his death that she inherited $150K from her ex-husband's insurance policy through Franklin Templeton (FT). FT told her that they would be able to keep her money and would be able to give her 1% per year on the balance ( ). She could also receive a lump sum which she could use as needed. I am sure she could do better than 1%. Since I am sure FT is taking a cut (but I am not sure how much)

She wants to put the money somewhere to grow for a few years before she retires (she is 59 1/2) but would still like some liquidity. She doesn't want to deal with online bank accounts. I felt setting up a brokerage account with one of the low cost providers would be reasonable.

Questions?

1) any tax implications for receiving a lump sum in the state of Michigan? I think no, but thought I would check.
2) Could she simply transfer that money to a low cost brokerage and let it ride in some index funds? Fidelity took care of transfers I had with a FA some time ago and it was fairly seamless.
3) Any other options besides index funds for the money once transferred? This is just a portion of her retirement so I don't know the total that he has saved.

Thanks for any input. There should be an easy solution but I wanted to run it buy all of you...thanks.

[dbr]

I think it is a mistake to handle this money as a separate entity. The rational thing to do is to add it to the total investment portfolio, some of which is held in tax deferred account and some of which will now be held in a taxable account. At that point one considers the overall asset allocation and also where different kinds of assets should be held. That can easily imply some changes in how the retirement accounts are invested. A major change in asset value like this is a classic reason for a do-over of the whole financial and investing plan.

For more help posting everything according to the recommended format might be useful: viewtopic.php?f=1&t=6212

It is probably also time to think through the whole financial plan: viewtopic.php?f=1&t=6211

As far as I know life insurance proceeds are never taxable to the recipient, but I am not an expert.

The money should not be left at FT.

Fidelity is an excellent choice of a brokerage. Just be sure they don't talk her into an advisory account or try to sell her any funds in particular. She can pick good choices of low cost mutual funds or ETFs without them.

[arcticpineapplecorp.]

1) any tax implications for receiving a lump sum in the state of Michigan? I think no, but thought I would check.
2) Could she simply transfer that money to a low cost brokerage and let it ride in some index funds? Fidelity took care of transfers I had with a FA some time ago and it was fairly seamless.
3) Any other options besides index funds for the money once transferred? This is just a portion of her retirement so I don't know the total that he has saved.

Thanks for any input. There should be an easy solution but I wanted to run it buy all of you...thanks.

of course franklin templeton would take a cut and a big one. Withouth knowing specifically what they're providing, I typed in "Franklin templeton 1% payment" and came up with a FT income fund (FKIQX).
https://www.franklintempleton.com/inves ... fund/FKIQX
https://www.franklintempleton.com/inves ... come-funds

Actually I came up with FKINX, looked at the fees and then had to click on FKIQX because that's not available to new investors. Go figure, the "new" fund (FKIQX actually charges 0.72% net expense ratio instead of 0.62% with FKINX (and old fund no longer available charged 0.15% 12b-1 fee, instead of 0.25% for FKINX):

Net Expense Ratio Further Information 0.72%
Max Initial Sales Charge 3.75%
CDSC 6 7 1.00%
12b-1 Fee 0.25%

those are high fees and would eat at her returns.

they may also want to put her into some kind of annuity (and charge a lot for that too).

my advice, run, do not walk away from Franklin Templeton.

There doesn't appear to be an inheritance tax in Michigan and generally life insurance proceeds paid directly to a named beneficiary on the policy is not subject to estate tax (and likely the deceased was under the limit anyway).

She could certainly roll money over to brokerage.

She could use Vanguard PAS if she's not sure how to invest the money (they charge 0.30% per year in addition to the expense ratio of the funds...which are WAY cheaper than FT above, no sales charge (commission) and no 12b-1 fee and no contingent deferred sales charge, wow FT gets you coming (3.75%) and going (1%). That's highway robbery!! Vanguard's costs are better for her than FT.

Index funds are generally the way to go because they're cheaper and match the benchmark.

The issue is how much liquidity does she want/need. If she needs it all liquid, it has to be in lower earning vehicles (bonds, tips, etc). If she can tie some of it up she could have a mix of assets (stocks and bonds). She has to figure out how much she wants to keep liquid and accept the low rate of return in exchange for safety. That's how it works, no way around that.

if she doesn't have an IPS she should write one up (or use Vanguard's PAS to help her determine how/what to invest the money in):
https://www.bogleheads.org/wiki/Investm ... _statement

[NotWhoYouThink]

Contrary view on the Franklin Templeton offer. She should probably keep her money there at 1% until she figures out what to do with it. It's a better rate than she can get in most money market accounts. And it probably isn't one of their funds that you could buy as a regular customer, it is a product they offer beneficiaries of their insurance policies.

This is typical for an insurance payout that they would offer you 3 options -
- take the cash
- leave it with them at a fixed percent interest
- buy an annuity from them.

She definitely should NOT buy an annuity or even spend time listening to a sales pitch. But the 1% interest is not a bad deal now, and she doesn't need to do anything right away. Leaving it there for a few months or even a year is better than doing something foolish with it.

Most people on this forum don't recommend buying any life insurance except level term, or any annuities except Single Premium Immediate Annuities. Many here are also near rabid in their contempt for insurance companies. There are some good reasons for that, but there is no reason to turn down a very acceptable offer just because it came from an insurance company.

[Third Son]

I think it is a mistake to handle this money as a separate entity. The rational thing to do is to add it to the total investment portfolio, some of which is held in tax deferred account and some of which will now be held in a taxable account. At that point one considers the overall asset allocation and also where different kinds of assets should be held. That can easily imply some changes in how the retirement accounts are invested. A major change in asset value like this is a classic reason for a do-over of the whole financial and investing plan.

For more help posting everything according to the recommended format might be useful: viewtopic.php?f=1&t=6212

It is probably also time to think through the whole financial plan: viewtopic.php?f=1&t=6211

As far as I know life insurance proceeds are never taxable to the recipient, but I am not an expert.

The money should not be left at FT.

Fidelity is an excellent choice of a brokerage. Just be sure they don't talk her into an advisory account or try to sell her any funds in particular. She can pick good choices of low cost mutual funds or ETFs without them.

I agree, however I do not have knowledge of her other assets. I will try to get more information from her. I believe she will let me know her situation since my wife and her are close friends. I just think FT is the wrong approach.