Author Topic: NEED HELP: Mom received huge inheritance - helping her to FIRE  (Read 2403 times)

oompaloompa0606

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Hello - long time lurker here. Finally registered so I could post this question:

TL;DR: need help with tax implications of transferring inheritance from Edward Jones to Vanguard (VTSMX) and using it to buy a new house/land outright. And selling a commercial business. And selling a home.

BACKGROUND: My grandmother passed away in March and left a huge inheritance to her 4 children, my mother being one of them. Husband and I are mustachians but FIRE and the 'Mustache Way' are very new to my mom. She came to us wondering what to do with all this money and we immediately started crunching numbers and helping her to FIRE. The problem I'm having is that we are still in the very early stages of FIRE and haven't had to deal with reality of it (including taxes). My mother is trusting us and I don't want to let her down so I thought I'd ask for some help here.

BREAKDOWN OF INHERITANCE/INCOME: My grandmother had all of her investments with Edward Jones. For tax reasons, it had to be divided and dispersed to the 4 siblings a month or so ago and she currently has about $562,600 in an Edward Jones (EJ) account. It's broken down as such:
Cash & Money Market                                          21.9%
Bonds & CDs - Fixed Income                               17.6%
Mutual Funds - @ EJ                                            51%
Exchanged-Traded & Closed End Funds               9.6%

My grandmother also had a home on 6.5 acres, a 195 acre farm, and some land near a gas station which they are working on selling. After it is sold and split four ways, my mother should receive this based on a conservative, educated guess:
House                                                                   $53,750
Farm                                                                    $195,000
Land Near Gas Station                                          $22,500

My mom also owns a business that she has been running for 10 years but has been wanting to sell for many months as her heart is no longer in it. It is currently closed and we are looking for a commercial broker so that we can then get it appraised but a conservative, educated guess (after some research and comparisons) would be about $50,000-$100,000.

My mother also wants to sell her suburban home and move to a few acres with tiny house on a trailer. After talking with the realtor about selling her house and looking at her unpaid principal, she'll like net $50,100 from the sale of her home. There is a friend's property she is interested in that is about $190,000. We haven't even looked at it yet and the friend's husband isn't even sure if he wants to sell it. If he doesn't or if it's not what she wants, then she'll buy some land and then buy a tiny house for it. That'll run her about $150,000 (not including permits, water, electric setup if needed).

Other items of note: These numbers do not include anything from the estate sale or auction for the items within my grandmother's home (and there are some nice things in there). My mom also has an IRA from her teaching days that has about $60,000 in it. Also, she has enough money to live on without touching any of these investments, etc until January 2018.

EJ                                                                         $562,600
House                                                                   $53,750
Farm                                                                    $195,000
Land Near Gas Station                                          $22,500
Business                                                               $100,000
Sale of Home                                                        $50,100
New House/Land                                               - $190,000
TOTAL                                                                   $793,900

THE PLAN: My mother's FIRE number (without a mortgage) is $680,500 so she's good IF everything happens the way we think it will. The plan is to transfer everything from Edward Jones into Vanguard Total Stock Market Index Fund. Any inheritance or gains from sales she gets will also go into the Vanguard. Depending on when she finds a new house/land, she will be taking approximately $150,000-$190,000 out of the Vanguard to pay for the new house/land. She will be buying and moving to the new house/land before trying to sell her home (it is not feasible for her to sell her home while still in it).

THE QUESTIONS:
-Will we be able to transfer all the stuff from EJ to Vanguard without being taxed a large sum? and without a big headache?
-Will she have to pay crazy taxes on the income from selling her business?
-After research, I know she doesn't have to pay an inheritance tax on any of this stuff, but she will have to pay tax on any dividends/gains. I'm also assuming she'll have to pay a large tax amount for taking $150,000-$160,000 out of her Vanguard. Is that right? Is there something I'm missing that will lessen her tax burden?
-Should she leave her IRA alone or try to transfer that to VTSMX as well? I'm unsure where it is currently being held.

I'm assuming that this might just be a crazy year for her in terms of taxes but it'll be worth it because she'll be in a dream home/land and be FIRE. Any help or guidance or advice would be greatly appreciated!!! My mom is really trusting us to help her with this (she's never really been good with finances) and I really don't want to screw this up for her.

Thanks!

Vindicated

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #1 on: June 16, 2017, 02:27:58 PM »
I'm not qualified to answer any of your questions, but I'm posted to see responses from those who are.

Sorry to hear about your Grandma.
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terran

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #2 on: June 16, 2017, 06:17:33 PM »
The assets received a stepped up basis to the value they held on the date of your grandmother's. Your mother will owe capital gains taxes (0-20% depending on the total and your mother's other income) on any increase in value since that date. The investments with edward jones should be easy to value on the date of death. I would probably sell those soon and move them to vanguard unless there have been unusually large gains since your grandmother's death and your mother has a high income that will be much lower next year. I'm not sure how the stepped up basis should be established on the other assets, but that should result in a minimal taxable gain on those too.

Your grandmothers estate should be well under the $5.49 Million federal estate tax limit (potentially twice that if she was married, but I think there might be some extra requirements for that), so that shouldn't be a concern. Some states have a lower limit, so that could be an issue.

MarciaB

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #3 on: June 16, 2017, 06:57:42 PM »
A note on selling the business - sellers always think it's worth more than buyers. It may or may not be worth $50,000 to $100,000, especially as it's closed.

Take a look at www.bizbuysell.com (an online marketplace for buying and selling businesses) to see what similar businesses go for, and also what those businesses go for in your market area.

Finding a broker is a good idea...so long as the business has enough "there there" to make it worthwhile for the broker.

Good luck!

oompaloompa0606

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #4 on: June 17, 2017, 03:47:29 PM »
Thank you for your responses.

In regards to the business, I got the $50,000-$100,000 sale number after looking at similar businesses for sale in the U.S. at $150,000-$170,000. I couldn't find any for sale in our local market as it's a very unique business so the U.S. was the best I could do.

In regards to my mom's income, it is not very high. As she closed her business last month, she won't have any more income for the rest of the year and it was only around $20,000 for the first half of the year. She'll be living off of savings until January of 2018. Next year, if all goes well, she'll be living off of dividends and maybe a small side hustle if she wants to, so again, her income will not be very high. In addition, there have not been unusually large gains since my grandmother's passing and, yes, the estate will be much less than the estate tax limit.

I spoke with someone today who is a few years away from retirement and was able to mostly confirm my research. He said that the 21.9% "Cash & Money Market" value in the Edward Jones account is just cash, therefore, just inheritance money and she won't be taxed on it at all. We'll likely use that specific money to help with the purchase of her new home/land. He also suggested keeping the bonds as bonds instead of transferring to an index fund. The current EJ bonds are only doing about 4% so I'm not sure we want to do that. He also said that if she doesn't put the $50,100 she gets from the sale of her suburban home into the new house/land that it might be considered capital gains/income and she may be taxed on that, but he wasn't sure.

My mother has an accountant who I've only been able to speak with over the phone but I think I'll set up a meeting with her to ask these specific questions. Her monosyllabic answers weren't much help over the phone but she was under the weather at the time so perhaps we need a face-to-face with the numbers laid out. I will call Vanguard as well to see what they have to say.

I'll post any updated information here.

jwright

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #5 on: June 19, 2017, 11:06:13 AM »
As to the house sale, if your mother has lived in the suburban home as her principal residence for two of the past five years, she will qualify for a gain exclusion.  I assume she is single so she would be able to exclude $250,000 of gain on that sale.  It sounds like she will not have a tax obligation for that sale.

The requirement to put the proceeds towards a new home to avoid gain no longer exists as of the early 2000s.

fattest_foot

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #6 on: June 19, 2017, 11:37:42 AM »
Also consider how far your mother is from Social Security age, and what her lifetime earnings may be.

That can put a massive dent in the amount of required stash she needs.

mxt0133

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #7 on: June 19, 2017, 12:47:02 PM »
Sorry for your loss.  Your grandmother seems like she had her financial house in order.

It seems like the main inheritance has been disbursed and is in a taxable account.  Consider hiring a CFP to create a plan for your mother based on her goals and what she is most concerned about.  Don't make any assumptions on what those might be as your financial goals and risk tolerance levels are probably different from hers.


I'm assuming that this might just be a crazy year for her in terms of taxes but it'll be worth it because she'll be in a dream home/land and be FIRE. Any help or guidance or advice would be greatly appreciated!!! My mom is really trusting us to help her with this (she's never really been good with finances) and I really don't want to screw this up for her.



Repeat after me, "I will not be screwing anything up because it is not my money and I will not be making the decisions". Again make that crystal clear to your mother.

It's great that you willing to help you mother, but remember the old saying 'no good deed goes unpunished'.  Be up front that you are there to help her evaluate her options but in the end it is her decision on what to do with her money.  So if something happens down the line you are not blamed for what happens.  Don't let this ruin your relationship with you mother.  Money, especially large amounts of it can significantly change family dynamics and how people react.


MDM

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #8 on: June 19, 2017, 06:26:46 PM »
THE QUESTIONS:
-Will we be able to transfer all the stuff from EJ to Vanguard without being taxed a large sum? and without a big headache? Yes and probably.  Have her call Vanguard and ask the costs to transfer the specific funds, sell at Vanguard, and buy the desired Vanguard funds.  Compare that with selling all funds within EJ, transferring cash to Vanguard and buying the desired Vanguard funds.
Whichever path you choose, have Vanguard do the "pull" from EJ, rather than having EJ "push" or having her do the transfer.  Vanguard does this all the time and it should be straightforward.


-Will she have to pay crazy taxes on the income from selling her business? Define "crazy". ;) 
The best way to estimate this is by running her expected 2017 tax return now, using full (i.e., don't bother with TaxCaster or other shortcut software) 2016 tax software.  The difference between 2016 and 2017 results will probably be within ~$100.


-After research, I know she doesn't have to pay an inheritance tax on any of this stuff, but she will have to pay tax on any dividends/gains. I'm also assuming she'll have to pay a large tax amount for taking $150,000-$160,000 out of her Vanguard. Is that right? See previous answer.
Is there something I'm missing that will lessen her tax burden? If she has earned income, contributing as much as possible to tax-advantaged (e.g., 401k, IRA) accounts?

-Should she leave her IRA alone or try to transfer that to VTSMX as well? I'm unsure where it is currently being held. Going to a low cost fund provider such as Vanguard (or Fidelity, Schwab, etc.) seems fine.  Going to 100% equities for someone your mother's age is less clear.  See Asset allocation - Bogleheads.

Condolences for your grandmother, and good luck dealing with all this.  See also Managing a windfall - Bogleheads.

Catbert

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #9 on: June 20, 2017, 03:06:01 PM »
If the bonds are individual bonds rather than a fund, I'd consider keeping them at least for awhile.  Transfer to Vanguard if it's not too much of a hassle.    Nice, safe 4% bond payouts will can provide you mother income and maybe sooth her panic as the stock market goes up and down.

Sounds like she will owe very little tax if she makes the sales/changes relatively soon.  Selling her primary residence will be tax free (assuming she's lived there 2 of last 5 years and the gain is less than 250K).  As others have noted, she'll owe capital gains that have happen since your grandmother's passing.  Easy to do on the Edward Jones assets.  Personally, if the house, farm and business are for sale now I would assume that the  value now is the same as the value in March (this year, right?) so no capital gains there.

oompaloompa0606

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #10 on: June 21, 2017, 01:58:20 PM »
Thank you all so much for your responses!

Yes, the house she will be selling is her personal residence that she's lived in for over 10 years. Glad to know there won't be any tax there and that the other rule no longer exists.

Also, totally forgot about Social Security! Thanks for that fattest_foot.

mxt1003, thank you for your advice and concern. After my original post, I had a heart-to-heart with my mom to make clear that I was advising her, not telling her what to do. We are very much on the same page there and know that I would not be blamed if anything were to happen.

After speaking with Vanguard, we have a clearer picture of what to do. We'll be transferring everything in-kind to Vanguard and having them sell it and then place it in VTSAX (changed from VTSMX). We've also decided to do what mary w suggested and keep the bonds as they are all at 4% or a little above. They are tax-exempt bonds that she'll just hold at Vanguard until they mature. We'll initiate the transfer tomorrow.

Thanks again for all your help! And for your condolences. My grandmother was an amazing woman.

Laura Ingalls

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #11 on: June 21, 2017, 09:24:31 PM »
Don't take this the wrong way but 800k USD is not huge.  It is enough to make your mom FI which is huge to her.

I was expecting a thread about trusts and estate taxes and high 7 figures.

BlueHouse

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #12 on: June 24, 2017, 02:50:18 PM »
Don't take this the wrong way but 800k USD is not huge.  It is enough to make your mom FI which is huge to her.

I was expecting a thread about trusts and estate taxes and high 7 figures.
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pbkmaine

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NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #13 on: June 24, 2017, 03:40:37 PM »
If the bonds are individual bonds rather than a fund, I'd consider keeping them at least for awhile.  Transfer to Vanguard if it's not too much of a hassle.    Nice, safe 4% bond payouts will can provide you mother income and maybe sooth her panic as the stock market goes up and down.

Sounds like she will owe very little tax if she makes the sales/changes relatively soon.  Selling her primary residence will be tax free (assuming she's lived there 2 of last 5 years and the gain is less than 250K).  As others have noted, she'll owe capital gains that have happen since your grandmother's passing.  Easy to do on the Edward Jones assets.  Personally, if the house, farm and business are for sale now I would assume that the  value now is the same as the value in March (this year, right?) so no capital gains there.

Very good advice. Do not put her entirely into stocks. Have a good % in bonds. She is older than you and does not have the ability to wait years for a market recovery. In addition, make sure she has enough liquidity for at least one year, preferably two, of expenses. This will eliminate panic over plunging markets.
« Last Edit: June 25, 2017, 08:53:07 PM by pbkmaine »

PapaBear

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #14 on: June 25, 2017, 07:54:00 PM »
We'll be transferring everything in-kind to Vanguard and having them sell it and then place it in VTSAX (changed from VTSMX). We've also decided to do what mary w suggested and keep the bonds as they are all at 4% or a little above. They are tax-exempt bonds that she'll just hold at Vanguard until they mature. We'll initiate the transfer tomorrow.

As pbkmaine and MDM have already stated, one should never underestimate the importance of the asset allocation and stock/bond split.
Only ~12% bonds (the share of the EJ bonds of the total investable assets of 794,000) might be a bit too risky for your mother.

The Bogleheads coin it very well:
Quote
John Bogle recommends "roughly your age in bonds"; for instance, at age 45, about 45% of the portfolio should be allocated to high-quality bonds. Bogle also suggests that, during the retirement distribution phase, investors include as a bond-like component of wealth and asset allocation the value of any future pension and Social Security payment expected to be received.
Investors choosing to use less conservative guidelines should understand why they feel they have the need, ability, and willingness to take on the greater inherent risk as explained in the next section.
https://www.bogleheads.org/wiki/Asset_allocation#Strategic_asset_allocation

One can argue about the mentioned rule of thumb, but any asset allocation should consider the investors age, other available assets as well as potential future cost that might arise (e.g., medical, long term care etc.). With a certain age, a more conservative asset allocation could be worthwhile, especially given that you mentioned that your mother never has been good with her finances.

Thus, the first step would be to determine your mothers risk appetite and the associated asset allocation incl. stock/bond split (factoring in all assets, not only the Vanguard account). You can look at the asset allocation of target funds as an initial indication of what financial planners consider as appropriate (see e.g. here https://investor.vanguard.com/mutual-funds/target-retirement/#/). The subsequent choice of funds and accounts are only a secondary step after the asset allocation is fixed.

If you think it  helps, you can set up a written Investment policy statement together with your mother - stating objectives, time horizons, risk tolerance, asset allocation and investment strategies (see https://www.bogleheads.org/wiki/Investment_policy_statement). This does not have to be super fancy and can easily fit on 1-2 pages. If markets go sour, sometimes it helps to be able to pull out a piece of paper with a written strategy on it to stay the course and avoid panic selling.

In the long term financial plan, I would also factor in potential future changes in the housing situation. I don't know how old your mother is, but in case of medical difficulties some years down the road, a tiny house on a trailer might not be the dream home anymore. Then, the need to move to something more senior-friendly with better accessibility and close to medical facilities might arise.
« Last Edit: June 28, 2017, 01:40:07 PM by PapaBear »

Bicycle_B

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #15 on: June 28, 2017, 11:29:33 AM »
Oompaloompa0606, you're getting great advice on this thread.

Re Social Security, there's a great book on correctly handling Social Security called "Get What's Yours:  The Secrets to Maxing Out Your Social Security."  It's available cheap in many formats and at most libraries.  At some point, read an up to date copy for the chapters relevant to mom, and have her follow the instructions.  In the meantime, have her use the Social Security System's website to get an estimate of your mom's benefits, or keep/find the annual estimate that they send her by postal mail.

Re stocks vs bonds:
1) Over time you can help her ensure relatively safe results by "annual rebalancing."  Whatever balance of stocks vs bonds she (or you on her behalf) decides upon, such as 50/50 or the "buy your age in bonds" one, each year on a chosen date just compare the value of her stock investments and her bond investments.  Then buy/sell as needed to bring the balance to the desired percentage.  Automatically you will end up buying good investments at a cheap price, selling at a high price, doing very little that is unnecessary, and yet you will always make sure she has some of everything.

2) One strategy for arguably minimizing risk is to have, in the stock portion, a balance between US and international.  Vanguard has an international fund that buys just a little of everything, similar to how VTSAX buys all the large US stocks.   Something like 75% US and 25% international seems not-crazy to me.  I am close this in my own portfolio.

3) There is an argument that bonds are riskier than usual right now because interest rates are low.  One strategy to overcome this is to have a significant portion of bonds be very short term.  You could put half the bond portion in a general or intermediate-term bond fund, and half in a short term bond fund. 

4) 2 and 3 above are refinements.  The basic thing is to have some stock and some non-stock bonds or cash, which her Edward Jones already does, and rebalance.  Vanguard will ensure that the fees are lower than Edward Jones, so good move there.
« Last Edit: June 28, 2017, 11:35:07 AM by Bicycle_B »

TomTX

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Re: NEED HELP: Mom received huge inheritance - helping her to FIRE
« Reply #16 on: July 23, 2017, 10:13:44 AM »

I spoke with someone today who is a few years away from retirement and was able to mostly confirm my research. He said that the 21.9% "Cash & Money Market" value in the Edward Jones account is just cash, therefore, just inheritance money and she won't be taxed on it at all. We'll likely use that specific money to help with the purchase of her new home/land. He also suggested keeping the bonds as bonds instead of transferring to an index fund. The current EJ bonds are only doing about 4% so I'm not sure we want to do that. He also said that if she doesn't put the $50,100 she gets from the sale of her suburban home into the new house/land that it might be considered capital gains/income and she may be taxed on that, but he wasn't sure.

That fellow is a font of misinformation and bad advice.
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