Looking for advice...my partner is set to receive windfall from a trust

[Pug Lover]

Greetings, all!

I have been following the "Mustachian Ways" myself as best as I can for probably close to 15 years at this point but this question is for my partner.

SOME BACKSTORY:
Our finances are not tied together and we do file taxes separately, so this question is primarily for her. She is a teacher's assistant so does not have much income (approx $30k per year) and has a middle-school-aged son who we support financially together (the child's father does not provide anything significant in the financial area).

She has no debt, but also has no retirement account, personal savings, or any kind of IRA set up. I have been trying to get her to set up a simple Roth IRA through Vanguard (invested in index funds, like VTSAX) so she could at least get started with some kind of long-term savings plan but that has yet to come to fruition.

THE SITUATION:
Her mother just passed away and her father (who passed away several years ago) had set up a trust for all the children. My partner is set to receive 1/5 of this trust which would put her portion at about $250k. The trust is held at a company called Truist.

My partner's sister sent documents from Truist and told her to choose the "cash distribution" option but I wanted to make sure she understood all the options she has available and puts together a plan before moving forward. I am concerned what a lump windfall of $250k will do for her tax burden. I have no experience with receiving such a large windfall of money so am a bit out of my league here. Truist has also sent her a W-9 to fill out.

OPTIONS:
The document from Truist has two options: 1) Cash distribution or 2) In-Kind Distribution.
From what I gather, the "In-Kind Distribution" would put the money into some kind of investment account at Truist, although it does have an option to specify an "Outside Broker", so I think we could also have it roll into an account at another brokerage.

Having no experience with Truist, my initial thoughts would be to open up an account at Vanguard for her (would appreciate any advice on what KIND of account to open), choose the "In-Kind Distribution", and have the money go straight into that account (invested in some percentage of stock index funds bond index funds). Would that option be better tax-wise for her than receiving all that money in cash? She had been planning to put a chunk of that money (maybe $10k-20k) into a savings account at a local bank  for short-term emergencies/savings or home repairs. Would she be able to pull that smaller amount from the Vanguard account after the transfer from Truist?

Again, I feel out of my league and would appreciate any advice, corrections to my statements, or further explanations about what her options would entail.

Thank you, kindly!

[reeshau]

Trust proceeds on the death of a parent are subject to estate taxes (with a current $13M exemption) not income taxes of the recipient.  Unless you know what funds are in the Truist account, or you don't trust her to not spend the money, keep it simple: take the cash, and open a Vanguard account with it.

This is a distribution, so the income *from* those investments will become her income, and can be taxed.  But at 1.35% yield, even $250k won't be much.  There will also be capital gains to consider from the fund's turnover.

[seattlecyclone]

Right, when you inherit $250k you don't get taxed on $250k of income. It's just the income that comes from those investments going forward from this point that will be taxed. I think the cash distribution sounds like the best option so she can have better control over where the money goes.

This seems like a good opportunity to max out some retirement accounts. A new Roth IRA seems like a good thing to start and contribute to immediately. A 529 account for her kid's education could also be a good place for a large chunk of the money. If she has a workplace retirement account available (401(k)/403(b)/etc.) she can't just move money directly from the trust into that retirement account, but what she can do is start putting most/all of her paycheck into that account and pulling from the trust account to pay living expenses.

[Dee18]

The most important thing is for her to get the money invested.  Given her income level using some to fund a Roth each year is a good idea, or as Seattlecyclone suggests to now contribute more to her employer's 403(b) or 401(k) if those are options.  The key really is that this is her retirement nest egg.  Setting aside a small portion for her child is nice, but securing her financial future is far more important. Her child will be eligible for financial aid; she will not be for her retirement.

Easiest to just take the cash distribution and set up an appropriate account at Fidelity or Vanguard with most of the money invested for long term growth.  If she takes an in kind distribution she would have to evaluate the current investments; it's easier to begin with a clean slate at a low cost site.

[Catbert]

Another vote for moving it out as cash.  I personally like Fidelity rather than Vanguard, but whatever.  Fidelity has a brick and mortar service center in my city.  While most things are done online or via phone, it has occasionally been helpful to have a physical place to visit.

Easy start is an IRA (probably a Roth).  Then consider workplace plans and 529s a long with a brokerage account and mutual funds.

[Dicey]

Another vote for moving it out as cash.  I personally like Fidelity rather than Vanguard, but whatever.  Fidelity has a brick and mortar service center in my city.  While most things are done online or via phone, it has occasionally been helpful to have a physical place to visit.

Easy start is an IRA (probably a Roth).  Then consider workplace plans and 529s a long with a brokerage account and mutual funds.

I second the vote for Fidelity. For someone who is not financially sophisticated, there's a lot of comfort in having access to a brick and mortar if needed. I have an inherited 401k and a Donor Advised Fund there, and they have been super easy to work with.

[Pug Lover]

Thank you all for your recommendations and clarifications. I now feel like I at least know what questions to ask of Truist. I really appreciate all the help! Thank you!