Handling Large Inheritance

[ed123]

Hello All!

I made this same post on Bogleheads but wanted to get the unique perspective of another community that has had an invaluable impact on my financial intelligence. Before I get into my financial situation I just want to give a little info about myself since this is my first post. I am a recent college grad and I currently dabble in a few income methods which bring several thousand dollars (based off this years estimates). I have lurked these forums frequently for the past year and have read a fair share of books on the topics of financial independence, the stock market, taxes, etc... so I am familiar with MOST (but not all) of the terminology and ideas passed around here.

MAIN INFO:

~ STATE: I reside in Florida currently (may move within next few years)
~FILING STATUS: Single
TAX BRACKET: 2018 will be the first year I will be filing for myself since this was the first year I will be the full account owner and since I just started earning income following my graduation. I assume I would be in 15% bracket given the few grand I earn and the dividends distributed this year from the account.
~DEBT: None
~AGE: Early 20s
~DESIRED ASSET ALLOCATION: 60-65% Stocks / 35-40% Bonds
~DESIRED INTERNATIONAL ALLOCATION: 20-25% of Total Stocks
~EMERGENCY FUNDS: Currently have around 6 months of expenses in a savings account right now.
~EXPENSES: Expenses are low right now but after numerous accounting calculations I expect them to rise soon to around $30,000/year once I am off the health insurance of my parents and pay my own rent (living free at home right now). I hope to be able to sustain myself off of small income paths which garner a few grand a year along with safe withdrawals from the portfolio.

Alright! Let me get into the inheritance:

~I received an inheritance of around $1.4 million in a brokerage account roughly 6 years ago. This inheritance was left untouched (except for college tuition payments) because my parents did not wanting me using it at such a young age. However, the situation has changed now and I am going to now fully utilize this account.
~Currently, the portfolio of this inheritance is made up of approximately:
- 42.1% Large Cap Equity (individuals stocks)
- 4.8% Small Cap Equity (individual stocks)
- 0.5 International Equity (individual stocks)
- 31.9% Fixed-Income Bonds (Florida Municipal Bonds)
- 20.8% Cash
*DIVIDENDS ARE NOT BEING REINVESTED

HERE ARE PICTURES OF THE STOCKS/BONDS ALONG WITH THEIR CAPITAL GAINS/LOSSES:





QUESTIONS:
1) I want to sell most of the portfolio and reinvest that money into new investments. I prefer to keep the account where it currently is (Schwab) but not totally anchored down yet (Schwab). I just closed a smaller brokerage account I had with Vanguard because of multiple customer service issues I have had with them in the few months I had the account. I have more faith in Schwab handling any account issues in the future as their customer service has been above and beyond so not sure if Vanguard is the route I want to go down... The portfolio I am considering now might look something like:
-Schwab Total Stock Market Index Fund (SWTSX) 50 %
-Schwab International Stock Market Index Fund (SWISX) 15%
-Bonds- Here it gets slightly messy. In a perfect world I would like to hold 25% Vanguard Intermediate-Term Tax-Exempt Fund (VWITX) and 10% Vanguard Short-Term Tax-Exempt Fund (VWSTX) but neither of these come in ETF form. All of these investments will of course be in taxable accounts so what would you recommend putting in place for the bond side of the portfolio? Would it be worth it to switch from Schwab to Vanguard in order to pick up these funds mentioned? Would I be better off just picking up Vanguard Bond ETFs through Schwab regardless of tax-exemption because my tax bracket is already low as is?

2) I would love to hear opinions on the best way to handle the capital gains associated with this account (225k worth approximately). These capital gains are at a step-up basis from the point in which I inherited the account. I would love to get out of the individual stocks and into more consolidated mutual funds but do not want to take huge tax hits while doing so. Advice?

3) Any advice on whether this portfolio is a sustainable long-term plan given the estimated expenses and side income I am earning? I may or may not continue on this path for the very long-term but just want to know if this would be considered an aggressive plan if we are talking about a 20-30 outlook.

Lastly, I am totally aware of the current high valuations in the market but I am in this for the long term! I am capable of picking up an even smaller withdrawal rate if things go sour early on since my expenses are flexible and because I can pick up more work for cash. I think that about covers it but will add any extra insights if I think of them or if asked. Thanks so much! This community is really a blessing!

[waltworks]

I would pretend the account does not exist at all, and go about my life (supporting myself) for the next decade or so, then revisit.

Certainly a fine idea to transition to an index fund. I don't think there is any easy way to avoid capital gains, so just pay up (you didn't earn this money, so it shouldn't be too hard mentally to pay the taxes) and then go to grad school or find a cool job or do *something* interesting and support yourself for a while. Your perspective on the money may change quite dramatically with more actual life experience.

-W

[davisgang90]

Your desired bond position seems really high for someone as young as you. 

[FIPurpose]

I don't really have any advice, I was just curious: why all the 1 and 2 share holdings? What was the hope there? Just out of simplifying things down, I would sell off all the minor holdings that are <$1000. Then re-evaluate the larger holdings, see if you want to potentially rebalance or diversify differently. Honestly most of the major stock holdings look pretty solid to me. They're mostly, high dividend paying, consistent companies. Looks like whoever you inherited from really knew what they were doing.

[GizmoTX]

What is your degree? Are you/will you be working full time?

Just pay the capital gains. You can get yourself into real trouble trying schemes to avoid them. The stocks already have a stepped-up basis, so that's a considerable savings. Maybe start by identifying any poor performers & converting them to index funds first. At your age, I agree about lowering or even avoiding bonds.

I agree about pretending the inheritance doesn't exist, & let it compound rather than living off the distributions now. This represents your FU money, so you can get on with building your life.

[Vindicated]

Posting to see what advice others offer.

You're in a great position.  Don't blow it!

I agree with Walt that you should focus on what you want to do with your life, and not count on living off of this money.  However, you didn't ask about life-style, so maybe you already have some ideas here.

[pbkmaine]

Do not sell anything until and unless you get the advice of an experienced CPA. There are strategies you can employ to offset gains and losses. There are tax brackets where capital gains are lower. Doing this carefully can greatly reduce the taxes you pay.

[MarioMario]

I second the idea of talking to a Great accountant, or 3.

Sent from my Nexus 6P using Tapatalk

[Spork]

Is this a taxable account?  Or is this inside an inherited IRA?  Or... something altogether different?

That certainly is a large pile of individual stocks... and I can understand your desire to simplify.  If this is in a taxable account, like others have said: be careful.  Don't think you need to do this all at once.  Sort out your capital gains and go slowly.  With the stepped up stock basis, you should be able to do this with minimal capital gains, especially if you hold onto them for a year.

[Heroes821]

My only advice is to read the MMM post on Hedonic Adaptation every month and I definitely agree with people above. I think reinvesting the dividends and forgetting about it for a few years is probably a great idea.

Also I'll probably get some shit from others for this, but if you find a nice lady and want to get married and have kids, use a pre-nup.

[Sibley]

Well, I can't see the pictures you posted, so only broad strokes here.

In your shoes, I'd sell all of it and invest in low cost index funds, reinvest dividends, get a job and support myself for 10+ years. 60/40 is pretty conservative, I'd go at least 70/30. Of course, I have a pretty high risk tolerance so am 90/10 right now (I think. I don't look at it very much). I also don't like complication so prefer index funds.

Make sure you check expenses and fees with any broker you choose, and compare them to lots of other brokers. Don't be fooled by "great customer service" - you'll likely pay through the nose for that, and any half way decent call center can tell you how to use the system. The key is knowing what you want to do. Educate yourself on how the markets work, etc, put some thought into what types of investments and allocations you're comfortable with.

Re capital gains - they would be offset by capital losses if you have any of those. Sounds like everything would be long term, which is good. You could spread the conversion out over a couple of years to keep your tax bracket from jumping too high, or just bite the bullet and do it all this year. Find a good accountant to help you do the math either way, unless you happen to have the tax knowledge yourself.

Another option is to put all the cash and future dividends into index funds, and leave the rest alone. Maybe sell the small holdings and buy index funds but leave the big holdings as is.

[MayDay]

I'm confused why everyone is saying to get a job and ignore it.

He's 🔥 now.

[Exflyboy]

Whatever you do don't move to Oregon and then start incurring capital gains as there will be another 9% tacked on top of your federal taxes just for the privilege of living here. Move to State that does not tax capital gains (maybe that is Fla?). Note in Oregon there are no breaks for qualified dividends.. its a straight tax as if it were real income. Other laces might be the same.

Then hire a CPA for a coupe of hundred bucks.. very cheap insurance of making a very expensive tax mistake.

Basically anything you sell (and yes I love the idea of rolling it all into a stock index fund.. With LOW fees of course.. and by low we're talking about 0.05% in like Vanguard VTSAX or a Fidelity index fund.. one of those is about 0.015% believe it or not).

You will want to stay in the 15% tax bracket such that any qualified dividends are taxed at zero%.

There are a lot of ins and outs so a TAX CPA is dirt cheap insurance.

[checkedoutat39]

I don't really have any advice, I was just curious: why all the 1 and 2 share holdings?

Usually these are the result of mergers* and spinoffs. For example, the ASIX was apparently spun out of HON last year. You should get cash for fractional shares or if mergers* had a cash component.

*"Mergers" of putative equals technically don't exist anymore under US GAAP. Everything has to be accounted for as an acquisition, but people still use the word.

[Catbert]

I would second the notion of meeting with a tax CPA to ensure that you get no tax surprises when you sell.

I would probably spread out selling the stocks over at least two tax years (doesn't the Obamacare surtax kick in at 200K for singles?).  But there is no real way to avoid paying capital gains tax.  The 0% capital gains tax for staying in the 15%  bracket won't really work for you.  Top of the single 15% bracket is under 40K so it would take many years to liquidate even if you aren't employed.  he longer you wait, the more the cap gains will be.

 If you plan to donate money to charities, set up a donor advised fund so that you can donate appreciated stock and avoid paying capital gains. 

If Florida wouldn't tax the sale, then do it before considering a moving.  If Florida would hit you hard (like California would) then maybe establish residence somewhere else sooner rather than later and sell then.

Whatever you do, don't let anyone convince you to buy a house for the tax savings.  That's the tail wagging the dog.  Be unencumbered.

In my portfolio, the stock allocate is all in mutual funds while the bonds are all individual zero coupons.  I don't like bond funds because if interest rates rise, the value of the fund goes down.  With my individual bonds I'll get the expected amount if I hold to maturity.

[Hotstreak]

I would second the notion of meeting with a tax CPA to ensure that you get no tax surprises when you sell.

I would probably spread out selling the stocks over at least two tax years (doesn't the Obamacare surtax kick in at 200K for singles?).  But there is no real way to avoid paying capital gains tax.  The 0% capital gains tax for staying in the 15%  bracket won't really work for you.  Top of the single 15% bracket is under 40K so it would take many years to liquidate even if you aren't employed.  he longer you wait, the more the cap gains will be.

For 2017 the 15% tax bracket for an individual tops out at $37,950, plus standard deduction of $6,350 plus personal exemption of $4,050 = $48,350/year of Income.  Based on $225M in capital gains on the current portfolio, OP would need about 5 years to convert it all.  Individual stocks are not as desirable as index funds for most people so there is a sense of urgency in selling, but 5 years seems reasonable, especially considering there's over 200k cash in the account that can be used for living expenses at 30k per year. 

OP I think this year you should sell all the stocks which are worth less than their basis, so that you can also sell as many winners as possible this year and stay in the 15% bracket.  Invest those proceeds in index funds and convert the rest of the portfolio over the next 4+ years while avoiding all federal income tax on the gains.

If you truly will only spend $30k per year then you don't need to work for money anymore.  You can go do whatever you want for fun.  Some people will say you should do some hard work and they won't respect you and call you a trust fund baby.  As long as you're the one on the beach with a margarita let them talk all they want, you already won the game.

[ulrichw]

For 2017 the 15% tax bracket for an individual tops out at $37,950, plus standard deduction of $6,350 plus personal exemption of $4,050 = $48,350/year of Income.  Based on $225M in capital gains on the current portfolio, OP would need about 5 years to convert it all.  Individual stocks are not as desirable as index funds for most people so there is a sense of urgency in selling, but 5 years seems reasonable, especially considering there's over 200k cash in the account that can be used for living expenses at 30k per year. 

OP I think this year you should sell all the stocks which are worth less than their basis, so that you can also sell as many winners as possible this year and stay in the 15% bracket.  Invest those proceeds in index funds and convert the rest of the portfolio over the next 4+ years while avoiding all federal income tax on the gains.

I agree with this analysis.
To free up the most capital possible, sell all losers and then sell the remaining holdings in order of least percentage gains. For example, Chevron at $65,000 and only $2,000 in gains would be a great candidate.

Get yourself up to the 15% bracket limit and you basically get your money out tax free.

As far as the stock that's left over - it may eventually be worth just biting the bullet and paying the taxes - but you can potentially wait until next year (or a couple of years down the road) to limit your tax liability as much as possible.

If you truly will only spend $30k per year then you don't need to work for money anymore.  You can go do whatever you want for fun.  Some people will say you should do some hard work and they won't respect you and call you a trust fund baby.  As long as you're the one on the beach with a margarita let them talk all they want, you already won the game.

While this statement's true on the surface, I'd advise you to at least start on the career path and consider this inheritance your early retirement nest-egg. $30K may seem like a reasonable budget right now, but you may find that you have a passion for some more expensive hobbies. Keep your options open by increasing the value of your human capital (i.e., invest in a career).
There's plenty of time to decide to retire - but waiting for a few years without touching this nest-egg will greatly increase the amount available to you in retirement, as compounding kicks in.

[Heroes821]

I'm confused why everyone is saying to get a job and ignore it.

He's 🔥 now.

I personally suggested it because part of the MMM fire is to still do things you love that can generate income.  As a recent college grad with zero work experience it could be a very bad day if he slips out of frugality and 10 years from burned through the entire inheritance and ended up having to find a job. If tearing tickets at a movie theater is the OP's dream gig of 10 hours a week and all the free movies he could watch then FIRE away, but I assume with a college degree one would actually want to use it for a little bit.  And to have the FU money at the start of a career when you can walk away at anytime when a boss treats you like crap, or a company starts laying people off...that makes the work force even more exciting.

[Hotstreak]

OP does say they dabble in a few income methods that are currently bringing in a few thousand dollars a year.  Things like a "job" or "career" aren't necessary, money can be made in whatever way makes sense for a person.  I agree there can be some benefit to working hard and earning your way in terms of being a better more well rounded person, but that's separate from the financial issue.

[StetsTerhune]

For 2017 the 15% tax bracket for an individual tops out at $37,950, plus standard deduction of $6,350 plus personal exemption of $4,050 = $48,350/year of Income.  Based on $225M in capital gains on the current portfolio, OP would need about 5 years to convert it all.  Individual stocks are not as desirable as index funds for most people so there is a sense of urgency in selling, but 5 years seems reasonable, especially considering there's over 200k cash in the account that can be used for living expenses at 30k per year. 

OP I think this year you should sell all the stocks which are worth less than their basis, so that you can also sell as many winners as possible this year and stay in the 15% bracket.  Invest those proceeds in index funds and convert the rest of the portfolio over the next 4+ years while avoiding all federal income tax on the gains.

I second, or third, this advice. Assuming OP has minimal income now and for the foreseeable future, this definitely makes the most sense to me. The advantage of  index funds over a reasonable basket of this number of stocks is pretty small (possibly non-existent -- the fees on your current position are 0.00%, the expected return is exactly the same and the portfolio variance is likely very, very similar) . My philosophy is that it essentially never makes sense to move between any two equity positions unless it saves you money on taxes or saves you money on fees.

 Even if you have some income in the near future, you just need to stay on top of it and harvest gains and losses annually as it's tax-advantageous.

That said, if you're thinking you'll have income for the near future, and feel like you'll move to a state with income tax, it may be worthwhile to just sell most everything now to avoid any future state income tax. 15% tax on it now, is a lot better than 20-25% you might get depending on the state.