Author Topic: What to do with inheritance?  (Read 2535 times)

Pookie

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What to do with inheritance?
« on: December 26, 2017, 07:23:36 PM »
Advice needed....

What would you do if you inherited enough stocks and bonds to pay off all of your real estate related loans (pmts @ $2k/month) and you were already 2 years into FI with enough income to cover all of your expenses and live?

What would you do? Pay off your loans? Keep money invested in stocks/bonds?  Cash out? Call a financial adviser?

Thanks in advance.

Blackeagle

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Re: What to do with inheritance?
« Reply #1 on: December 26, 2017, 08:08:22 PM »
What would you do if you inherited enough stocks and bonds to pay off all of your real estate related loans (pmts @ $2k/month)

Interest rates on the loans?

SwordGuy

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Re: What to do with inheritance?
« Reply #2 on: December 26, 2017, 08:16:20 PM »
What would you do if you inherited enough stocks and bonds to pay off all of your real estate related loans (pmts @ $2k/month)

Interest rates on the loans?

Assuming you already have good safety margins on your FI numbers, it's really a matter of interest rates.

If you're paying a fixed 3.5% on the mortgage, but the stock market averages 10% a year, that's 6.5% of compounding growth you're missing out on when you pay off the mortgage early.

But I sure understand the attraction to just paying the mortgage off.

Pookie

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Re: What to do with inheritance?
« Reply #3 on: December 26, 2017, 08:39:41 PM »
Swordguy - great point - agree, not having the mortgages hanging over my head would feel great.
Just want to do what is best and not blow it!

4.24% ($96K)
5.23% ($40K)
3.99% ($50K)
6% ($98K)



Frankies Girl

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Re: What to do with inheritance?
« Reply #4 on: December 26, 2017, 09:18:57 PM »
Been there, done that. Inherited a life changing amount, knew nothing about investing (great saver, frugal, planning on a possible early-ish retirement in my 50s before this happened). I am now completely confident in what I'm doing and feel fantastic about it. And I barely spend an hour or two a month even thinking about all of this stuff - other than for pure entertainment. :)


First thing: I am so sorry for your family's loss. If you've received an inheritance, it means someone close to you is gone. Take some time to mourn. Do not do anything in haste or without sufficient time and research. Which means it is perfectly okay to just get things switched over into your name, and leave them to sit for a few months to work through your grief, and figure out what moves you'd like to make and educate yourself on how to go about it.

All stocks/bonds should be subject to "stepped up cost" meaning that no matter how long your dearly departed held the funds, the capital gains are now wiped clean and set to zero once you take possession. Under normal circumstances, you'd have to worry about cap gains, but it likely won't be much (if any since it could drop in value - but likely not enough to worry over) for a few months as you figure out what to do (sell them off most likely and then buy the funds that fit your own AA).

In the case of something like an IRA/401k or the like, you have two options and it is important to get this right within the next year. You can either take the full amount out within the next 5 years. This is usually not a good idea since you'll pay taxes on the amount and if the account(s) are large, it will likely force you into a very high tax bracket since it counts towards your yearly reported income, and if you're working on top of that, it could be a mess not even counting the large amounts you'd lose to taxes. If you don't set up your RMD (see below) you will be forced into this option, so this is the one thing that needs prompt attention before year end of the following year.

The other (best IMO) option is to turn it into a "stretch" IRA, which means they will need to open a new account for you with it titled something like "for the beneficiary of deceased name" or similar - it should be something that the rep is familiar with. They will assess the full amount at the end of the year, then based off your own life expectancy, calculate a required minimum distribution (RMD) based on the number of years you have left (morbid, but logical). It will be recalulated each year based off of how much is left in the account, and can usually be set up to automatically sell off funds to generate the cash needed for the RMD and whatever date you'd like it done by. You can also designate federal and state withholding of taxes usually. You can take more than the RMD without penalty at any time, but keep in mind that money withdrawn is always going to count towards your generated income and is reportable for your yearly taxes. Please do confirm with your reps, but my understanding is that the first required withdrawal after you receive the account must be made by Dec. 31 of the year after the original owner's death.


For the rest of it, take some time and deal with the emotional stuff and paperwork and such. I personally took about 3 months before I could really deal with looking at what to do going forward, and then it took me about 3 months to learn how the stock market works, how to invest, index investing, what I wanted to do and how to do it.

I found this place and lots of help from many much smarter folks than myself.

I read Jim Collins' stock series and it was like night and day - I literally went from scared and ignorant to excited and confident. Check out his site or get his book (based on the site). It is absolutely one of the best, easy to understand guides I've ever read.
http://jlcollinsnh.com/stock-series/

Check out Bogleheads site, but the following are the steps I took:

1. Wrote up an investment policy statement to figure out my goals and plans. This is my blueprint for what goes where, why I do A or B if this or that happens, where I want to go in the future, and how I'm going to get there.
https://www.bogleheads.org/wiki/Investment_policy_statement

2. Figured out my asset allocation (AA). This is based off of how much risk/volatility I felt comfortable with and set up my portfolio to reflect my AA (which would also include any real estate).
https://www.bogleheads.org/wiki/Asset_allocation

3. I then took a look at what I held where, sold off everything that didn't match up with my goals in my IPS (I decided I was going to be an index investor holding only 2-4 total mutual funds across my entire portfolio, and was not interested in holding actual physical real estate but that's easy to include in your own IPS and AA). I built a lazy portfolio and I am quite pleased with the ease and elegance of it all. https://www.bogleheads.org/wiki/How_to_build_a_lazy_portfolio



In your situation, you need to figure out 1-3 first, and then figure out whether holding RE debt is better for you - which would mean you'd need to weigh how much your RE loans are costing you versus investing the inherited money (which is why the interest rates and amounts you currently owe are vital to even giving any advice).

Say you owed $500K but the rate was 3% or so and you have at least that much to pay off all of the loans. You'd still likely earn WAY more than 3% investing in a basic index portfolio, so holding that debt makes sense and just continue to pay the minimums would be a decent choice. The argument for not paying them off is once the properties were paid off, that money is locked into a non-liquid asset that would require you to take out another loan or sell in order to get the money back out. If you are running a rental enterprise, that is slightly different as they should always provide enough money to support the debts owed and hopefully a nice chunk of change to make repairs and still line your pockets well. But in general it isn't the best move to pay off low interest rate loans when you can invest for better returns.

Again, my personal experience: I received enough money to make paying off my mortgage a small drop in the bucket. But my interest rate is 3.5% on a traditional 30 year loan, and I owe less than 50K total. It made no logical sense to pay that off other than for psychological reasons of not owing anything on my house, but as I still have to pay property taxes and insurance, there will always be a house payment as far as I'm concerned so the psychological comfort of knowing I paid off my house is meaningless to me. I can make way more keeping that money invested and just paying the monthly payments as structured.

If you have other debts that are over 5%, then likely I would say pay them off. But my personal opinion is that debt below 5% should be paid as scheduled and any extra money invested.

And for the rest of that: cash out? NO. Sitting on a big pile of money is money that isn't working for you, and inflation will eat away at the value of that money over time. Keep it in the market, based off of your IPS/AA and get that cash working hard for you for the rest of your life.

Call a financial adviser? NO. Read the links I mentioned above, do some other research and ask questions here if you run into anything you need help with. You are completely capable of managing your own money and investments. You are going to care WAY more than anyone else about it, and most FAs out there are not going to have your best interests at heart. Self managing really is easy to do (index investing anyway) and it is worth the month or two getting up to speed. Fear and uncertainty and wanting to have the "experts" handle things for you are all based on lack of knowledge - educate yourself and you'll be confident and clear on the what and why and how.

Definitely consider discussing your real estate holdings on this forum as well, so you know whether they are a good fit for your portfolio and making you a decent return. I personally don't like physical real estate myself but it definitely can be a great asset in your holdings.
« Last Edit: December 26, 2017, 09:38:08 PM by Frankies Girl »

Pookie

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Re: What to do with inheritance?
« Reply #5 on: December 27, 2017, 07:50:57 AM »
Frankies Girl - Wow! Never expected such a detailed, thoughtful response. Your advice is exactly what I needed. HUGE THANK YOU!!

Yes, I lost a wonderful grandmother. She has changed my life and my only regret is not being able to thank her! I had no idea!

I am going to print your response and digest it word for word. Thank you for the boost confidence by just saying that I can do this. You are right, I can!

I believe she only had stocks/bonds - no IRA's/401k. I will know in the next week or so.

I will get started today - your steps 1,2, 3.

THANK YOU!!! I can take a breath now! ;)




Frankies Girl

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Re: What to do with inheritance?
« Reply #6 on: December 27, 2017, 08:54:34 AM »
Frankies Girl - Wow! Never expected such a detailed, thoughtful response. Your advice is exactly what I needed. HUGE THANK YOU!!

Yes, I lost a wonderful grandmother. She has changed my life and my only regret is not being able to thank her! I had no idea!

I am going to print your response and digest it word for word. Thank you for the boost confidence by just saying that I can do this. You are right, I can!

I believe she only had stocks/bonds - no IRA's/401k. I will know in the next week or so.

I will get started today - your steps 1,2, 3.

THANK YOU!!! I can take a breath now! ;)


Just to make sure: an IRA means "individual retirement account" which can be a traditional IRA (also could be labeled as a "rollover") or a Roth IRA. These are the types of accounts that hold stocks, bonds, mutual funds... consider them the same type of "bucket" as your savings or checking accounts. A 401k or 403b or other designations are also types of retirement accounts that hold stocks/bonds/etc... but usually are set up when a person is working (the 403b is usually for a teacher/admin type or even government worker, a 401k is for a general white/blue collar worker). All of these except the Roth IRA are pre-tax (also called tax deferred) accounts, meaning that they have no taxes withheld and the investments they hold (like stocks and bonds) grow without being taxed until they are sold and the money removed.

The Roth IRA is a slightly different account, in that it is funded using money that was already taxed, so therefore when you sell off any holdings and take the money out, you usually don't pay taxes on it since you paid them with the money you put in already.

There is also the possibility that there is a taxable or brokerage account, which is an after tax account used to invest money someone has that they for some reason didn't put into a account like an IRA or 401k.

So just to make sure: stocks and bonds are the things you put inside the accounts like an IRA or 401k or a taxable/brokerage account. The company/rep can tell you what types of accounts you inherited, and advise you what needs to be done soonest regarding any required minimum distributions that might be necessary.

Oh! And you don't have to leave the accounts with the company your grandmother had them with. If you like them, great, but it's just a matter of some fussy paperwork and a few weeks wait to get things moved to someplace like Vanguard or Fidelity if you want them there. Again, not vital to do this right this minute, just get them transferred properly into your name, make sure any IRA/retirement accounts are labeled as inherited IRAs (and any RMD necessary set up before the end of 2018) and have them leave you alone while you get up to speed.

Good luck and do ask if you run into anything confusing or have any questions - there are so many fabulous folks here that can walk you through this.
« Last Edit: December 27, 2017, 09:04:00 AM by Frankies Girl »

Pookie

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Re: What to do with inheritance?
« Reply #7 on: January 04, 2018, 06:13:47 PM »
You ROCK, Frankies Girl! Thank you!

davisgang90

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Re: What to do with inheritance?
« Reply #8 on: January 05, 2018, 06:12:55 AM »
Frankie's Girl.

Really well done.  Thanks for such a detailed thoughtful post.