Receiving Inheritance - need advice

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Spanish70horses
Posts: 4
Joined: Fri Jun 09, 2023 12:44 am

Receiving Inheritance - need advice

Post by Spanish70horses »

Inheriting a solid amount of money and looking for advice and guidance you all can provide based on experience.

I should mention that we know very little about investments or protecting assets from tax liabilities etc.

Inheriting 3 mil.
Currently renting out a home with a low interest rate : 3% at a profit of $500 a month after expenses. Remaining 300k on this mortgage. Other debt is just on one car and we plan on paying it off.

Own two other homes paid for- one we live in, one generates 5k a month in short term rental income. Our “job” is now managing the properties.

Paying a financial adviser (fiduciary) 1% to manage 150k 401k and only 12 k in IRA. He also manages 3 mutual funds he set up for us with less than 20 k in those. Not impressive returns, but I view them as more diversification.

We do have a trust set up with assets.
One of us has Spanish European Union citizenship, so we potentially could diversify overseas?

Plan so far:
Would like to purchase more short term rentals or multi unit housing rentals.
Considering 529 education fund for our 3 kids.
Would like to invest more in the stock market, without paying our advisor the 1%. Have read up briefly on 3-fund portfolio. Have been advised to get Whole Life insurance by financial advisor and not feeling confident on it being a good “investment”. Want to diversify as much as possible to protect assets.

Planning on talking to trust lawyer, CPA and financial advisor. We are planning to continue living the same, while living off rental incomes/ additional rental incomes.

We would really appreciate any other advice you can provide! What would you do? From a tax liability reduction, asset diversification, asset protection etc standpoint?
Pinotage
Posts: 611
Joined: Sat Nov 12, 2011 5:02 am
Location: Springfield

Re: Receiving Inheritance - need advice

Post by Pinotage »

Welcome to the forum!

This is a frequently asked question, check out the "Managing a Windfall" section for lots of good advice. Also consider searching for some past threads.

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

Your plans so far sound reasonable - take your time and read up on options.

Strongly emphasize the "tell no one" standard advice.

Good luck!
backpacker61
Posts: 1613
Joined: Wed May 20, 2020 6:36 am

Re: Receiving Inheritance - need advice

Post by backpacker61 »

Spanish70horses wrote: Fri Jun 09, 2023 1:05 am Inheriting a solid amount of money and looking for advice and guidance you all can provide based on experience.
I'm sorry for the loss of your family member.
Spanish70horses wrote: Fri Jun 09, 2023 1:05 am Have been advised to get Whole Life insurance by financial advisor and not feeling confident on it being a good “investment”. Want to diversify as much as possible to protect assets.
This should be a big red flashing light that you need to get away from that financial advi$sor as quickly as possible.

Full stop.

Unlike some on this board, I'm not averse to having a financial advisor, but whole life policies are almost never in your interest.
Spanish70horses wrote: Fri Jun 09, 2023 1:05 am Planning on talking to trust lawyer, CPA and financial advisor. We are planning to continue living the same, while living off rental incomes/ additional rental incomes.

We would really appreciate any other advice you can provide! What would you do? From a tax liability reduction, asset diversification, asset protection etc standpoint?
See the above note on your "financial advisor".
There are probably better message boards than this one about real estate investing, which is primarily emphasizing an indexing approach to equities and fixed income securities.

I would move your 401(K) and IRA into low cost index mutual funds or ETF's, if they aren't already. The generally preferred brokerages here are e*Trade, Fidelity, Schwab, or Vanguard. Merrill Edge could work, too.

If you have earned income from wages, continue contributing to the 401(K) and IRA, and invest in a Health Savings Account if participating in a High Deductible Health insurance plan. Having assets in employer-sponsored retirement savings plans or individual IRA's is an excellent strategy for asset protection.

https://www.bogleheads.org/wiki/Asset_protection
The managing a windfall wiki mentioned is an excellent reference and should be read many times.
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
chemocean
Posts: 1575
Joined: Mon Dec 19, 2016 8:45 pm

Re: Receiving Inheritance - need advice

Post by chemocean »

You did not indicate in what form the $3 mil is coming to you. Cash, CDs, I-bonds, securities in taxable brokerage accounts, tax-deferred, or Roth? Although the type of account would not affect your overall investment strategy once you develop your investment plan, asset location (in what type of account each security is located) will affect your tax liability

Tax-deferred and Roths funds usually come to you as in an inherited account needing to be closed within 10 years. Distribution from inherited tax-deferred accounts during the 10 years will be a taxable event for you. If tax-deferred and the owner was required to take RMDs, confirm that the year of death RMDs were taken. If not, you will need to tax the RMD from your inherited IRA as a taxable distribution this year.

For Securities in taxable accounts, make sure to obtain the value of each security on the death of the owner so that you can claim the step-up in basis if the transfer to your account does not reflect the step-up. Better to get the step-up in basis recorded now, rather than have to deal with the basis 20 years from now when you sell the security.
Topic Author
Spanish70horses
Posts: 4
Joined: Fri Jun 09, 2023 12:44 am

Re: Receiving Inheritance - need advice

Post by Spanish70horses »

Hi, it is coming from a Trust, so I’m still not entirely clear what that means. The trustees indicated they would be “dispersing the funds”, so I’m hoping I get more info soon.
chemocean wrote: Fri Jun 09, 2023 10:40 am You did not indicate in what form the $3 mil is coming to you. Cash, CDs, I-bonds, securities in taxable brokerage accounts, tax-deferred, or Roth? Although the type of account would not affect your overall investment strategy once you develop your investment plan, asset location (in what type of account each security is located) will affect your tax liability

Tax-deferred and Roths funds usually come to you as in an inherited account needing to be closed within 10 years. Distribution from inherited tax-deferred accounts during the 10 years will be a taxable event for you. If tax-deferred and the owner was required to take RMDs, confirm that the year of death RMDs were taken. If not, you will need to tax the RMD from your inherited IRA as a taxable distribution this year.

For Securities in taxable accounts, make sure to obtain the value of each security on the death of the owner so that you can claim the step-up in basis if the transfer to your account does not reflect the step-up. Better to get the step-up in basis recorded now, rather than have to deal with the basis 20 years from now when you sell the security.
Your information is super helpful. I think I’ve decided we need a different fee based fiduciary financial advisor, and probably an increase in the qualifications of our CPA, especially noting what you’ve mentioned.
Topic Author
Spanish70horses
Posts: 4
Joined: Fri Jun 09, 2023 12:44 am

Re: Receiving Inheritance - need advice

Post by Spanish70horses »

Thank you! Super helpful links. Appreciate it. Still finding my way around here.
Pinotage wrote: Fri Jun 09, 2023 5:41 am Welcome to the forum!

This is a frequently asked question, check out the "Managing a Windfall" section for lots of good advice. Also consider searching for some past threads.

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

Your plans so far sound reasonable - take your time and read up on options.

Strongly emphasize the "tell no one" standard advice.

Good luck!
Topic Author
Spanish70horses
Posts: 4
Joined: Fri Jun 09, 2023 12:44 am

Re: Receiving Inheritance - need advice

Post by Spanish70horses »

Thank you for this advice. We are currently working for ourselves, and will create an LLC, so is there a reason you recommend moving the 401k? Rather than letting it sit there?



backpacker61 wrote: Fri Jun 09, 2023 5:46 am
Spanish70horses wrote: Fri Jun 09, 2023 1:05 am Inheriting a solid amount of money and looking for advice and guidance you all can provide based on experience.
I'm sorry for the loss of your family member.
Spanish70horses wrote: Fri Jun 09, 2023 1:05 am Have been advised to get Whole Life insurance by financial advisor and not feeling confident on it being a good “investment”. Want to diversify as much as possible to protect assets.
This should be a big red flashing light that you need to get away from that financial advi$sor as quickly as possible.

Full stop.

Unlike some on this board, I'm not averse to having a financial advisor, but whole life policies are almost never in your interest.
Spanish70horses wrote: Fri Jun 09, 2023 1:05 am Planning on talking to trust lawyer, CPA and financial advisor. We are planning to continue living the same, while living off rental incomes/ additional rental incomes.

We would really appreciate any other advice you can provide! What would you do? From a tax liability reduction, asset diversification, asset protection etc standpoint?
See the above note on your "financial advisor".
There are probably better message boards than this one about real estate investing, which is primarily emphasizing an indexing approach to equities and fixed income securities.

I would move your 401(K) and IRA into low cost index mutual funds or ETF's, if they aren't already. The generally preferred brokerages here are e*Trade, Fidelity, Schwab, or Vanguard. Merrill Edge could work, too.

If you have earned income from wages, continue contributing to the 401(K) and IRA, and invest in a Health Savings Account if participating in a High Deductible Health insurance plan. Having assets in employer-sponsored retirement savings plans or individual IRA's is an excellent strategy for asset protection.

https://www.bogleheads.org/wiki/Asset_protection
The managing a windfall wiki mentioned is an excellent reference and should be read many times.
cadreamer2015
Posts: 1536
Joined: Wed Apr 08, 2015 1:52 pm
Location: North County San Diego

Re: Receiving Inheritance - need advice

Post by cadreamer2015 »

You mention that the inheritance is coming from a trust. It is probably important to know what kind of trust you are the beneficiary of. If it is a revocable living trust, then the assets would normally get a step up in basis to the value on the date of death of the grantor. If that is the case there would be little to no capital gains tax owed by selling the assets and redeploying the inheritance in whatever manner you prefer. If it was an irrevocable trust, however, it is likely that the assets do not get a step up in basis, and thus significant capital gains taxes could be due if the assets are sold now. If that is the case it might be preferable to have the assets in the trust distributed to you “in-kind,” that is receive shares of stock, bonds and mutual funds held by the trust. You could then decide which assets you might want to sell and control your capital gains tax liability.

You should talk to the trustee and probably also talk to your own attorney.
De gustibus non disputandum est
User avatar
Wiggums
Posts: 7051
Joined: Thu Jan 31, 2019 7:02 am

Re: Receiving Inheritance - need advice

Post by Wiggums »

We have been investing for 37 years using the three fund portfolio or something very close to it. In addition to the fee, a lot of times in advisor will sell you variable annuities and churn the account to get more commission.

Whole life insurance is not an investment. Term insurance is ok to consider.

It’s a little premature to plan on what to do with this money until you have more details. It’s important to take your time and develop a detailed plan on paper before executing it. In other words, don’t rush into a solution.
"I started with nothing and I still have most of it left."
chemocean
Posts: 1575
Joined: Mon Dec 19, 2016 8:45 pm

Re: Receiving Inheritance - need advice

Post by chemocean »

Spanish70horses wrote: Fri Jun 09, 2023 10:59 am Hi, it is coming from a Trust, so I’m still not entirely clear what that means. The trustees indicated they would be “dispersing the funds”, so I’m hoping I get more info soon.
chemocean wrote: Fri Jun 09, 2023 10:40 am You did not indicate in what form the $3 mil is coming to you. Cash, CDs, I-bonds, securities in taxable brokerage accounts, tax-deferred, or Roth? Although the type of account would not affect your overall investment strategy once you develop your investment plan, asset location (in what type of account each security is located) will affect your tax liability

Tax-deferred and Roths funds usually come to you as in an inherited account needing to be closed within 10 years. Distribution from inherited tax-deferred accounts during the 10 years will be a taxable event for you. If tax-deferred and the owner was required to take RMDs, confirm that the year of death RMDs were taken. If not, you will need to tax the RMD from your inherited IRA as a taxable distribution this year.

For Securities in taxable accounts, make sure to obtain the value of each security on the death of the owner so that you can claim the step-up in basis if the transfer to your account does not reflect the step-up. Better to get the step-up in basis recorded now, rather than have to deal with the basis 20 years from now when you sell the security.
Your information is super helpful. I think I’ve decided we need a different fee based fiduciary financial advisor, and probably an increase in the qualifications of our CPA, especially noting what you’ve mentioned.
A cadreamer2015 indicated, you need to know what type of trust, who the trustee is, the governing text of the trust and whether it needs to be closed immediately. My understanding is that IRA and Roth accounts cannot be in a trust, but the trust can be a beneficiary of the IRA and Roth accounts. As a beneficiary, I understand they you should have legal access to the trust documents. If the trust is a beneficiary of the owner's tax-deferred and Roth accounts, there are plenty of treads on BH on the strategy of timing the distributions the accounts to the trust and then to you. .
User avatar
Hacksawdave
Posts: 809
Joined: Tue Feb 14, 2023 4:44 pm

Re: Receiving Inheritance - need advice

Post by Hacksawdave »

Let’s not get the cart before the horse yet. I was the beneficiary of a trust several years ago and as others have posted you need to understand the type of the trust and the type of distribution it is making. As a beneficiary of the trust (and how your state laws are set up), you should be entitled to a set of the trust document and a current inventory. This should give the ‘pecking order’ on distribution order, specific distributions, and the residuals disposition.

I dealt directly with the trust attorney who filed the trust as the successor trustee was very passive. She provided ‘most’ of the documents I needed and answered my questions. As I saw where my portion fell, I did not have a need to seek additional documents. I hope you already have the above information.

If all looks well and you find what the trust distribution type is, then consult with a tax CPA. You want a tax CPA to verify the type of trust disposition to ensure its type of taxation. The distribution type in my case was a one-time principal distribution and was tax free. If yours is considered a one-time cash distribution and not residuary over time or from the trust's earned income. It ‘should’ be tax free. This is where you need a tax CPA to provide the guidance, not a financial advisor.

Once you have this determined and taxes settled (if applicable), then follow the guidelines as mentioned in previous post on the link to "Managing a Windfall." There is no sense of urgency or rush to do anything except park to funds into a ‘safe’ money market fund. So far there seems to be about 4-6 items you planned for the funds. Give this thought and time before acting on anything as these potential investments are not going to disappear by morning.

Dealing with these first set of items should take you a few months. I wouldn’t (and didn’t) go any farther than that at this point. When the time came for the distribution, I had the trust attorney wire the funds to my Vanguard CA tax-exempt MM fund. I sat upon the principal for almost two years while the tax-free income was exchanged into other funds, then I deployed the remainder over a course of another year.
Post Reply