Non-mustache Mother getting inheritance - how can we stop her from blowing it?

[MsRichLife]

Hi all,

I need a little advice about a situation my family finds itself in.

My Grandfather passed away last year and left about $900K to his 2nd wife of 40 years. Three of his children, including my mother, contested the will. The eldest child Aunt J, wanted nothing to do with the whole affair. The three other siblings seem to have reached agreement with their step-mother to get $160K each now, rather than waiting until she passes away. It all hinges on Aunt J agreeing, but she has concerns (rightly so) that the youngest daughter Aunt L will then start hitting her siblings up for a 'loan' of their share. From all accounts Aunt L is in quite the financial pickle and has been asking everybody in our family for loans for years. We think we can get Aunt J to agree to the settlement as long as she knows Aunt L won't get access to my Mother's share of the money. 

My Mother has just retired and is scraping by on the aged pension. She and her partner have a few side gigs bring in a little more. She owes $50K on her mortgage. I'm planning to do some work with her to try and reduce unnecessary expenses in her budget. This is her only option to get herself set up for a reasonable retirement and it's in our best interests to help her.

My sister and I are trying to think how we can get her to 'lock away' the money so she can't just hand it over to Aunt L. Mother is not the best with money and we are also concerned that she'll just blow it on house renovations or other 'stuff'.  Our initial thoughts are:

1. Set up some sort of annuity that provides Mother with a fixed income for the rest of her life.
2. Pay off the mortgage and put the rest in term deposits with varying lengths of terms.
3. Pay off the mortgage and loan $100K to my sister for 5 years to sit against her mortgage. My sister pays a higher interest rate than the term deposits, but less than she's paying to the banks so it helps both parties. This would essentially lock away a chunk of the money for 5 years until Mother has had time to digest what's going on and can make some better decisions in the meantime. She would get an 'income' from my sister that is equivalent to interest earned.

If you've read this far, thankyou. Please pick this to pieces and make suggestions as you see fit. We are a bit close to the 'drama' of all this so would appreciate other opinions.

Thanks

MRL

[Goldielocks]

Your mother may be a candidate for a traditional simple Annuity (not the life insurance / variable kind).

The returns tend to be low-ish, but having a guaranteed stream of income, for life, may be exactly what she needs.   Once bought, there are no more decisions about how to invest the money, and the ability to reverse a simple annuity should be hard to do, so she keeps the benefit of it.
It may give peace of mind too.  It is sort of like investing in yourself by buying your own pension.

Then, with her slightly larger monthly income, she can decide when to give her sister an extra $20 or $100, when she can.

[Primm]

Short answer - you can't. You can drop hints and even give her specific advice, but if she blows it all there's nothing you can do about it. Sorry about your mothers poor financial habits. Hope it all goes well.

Mention number 3 and your mother may very well feel you and your sister are conspiring against her and not really looking out for her best interests, but instead trying to make sure the money is there for you when she dies. "Here mum, let's put the money in sister's mortgage and we'll give it back to you later". Hmmm...

[Alabaster]

Your mother may be a candidate for a traditional simple Annuity (not the life insurance / variable kind).

This is what my grandmother ended up doing when her second husband died and she suddenly had unilateral authority over a few hundred thousand they had. Its a good thing too since she was gifting it away a bit faster then she probably should have (I don't really care, its not my money. It would have been heart breaking, however, if she had run out before EOL). Putting the money into an annuity helps her see the income on a month to month basis. She is much better at budgeting that. If she chooses to spend everything she earns in a month, she'll still have that little boost next month.

Heck, if my parents had any money, I'd be happy with them putting it in an (good/well vetted) annuity. My mother (who I love to death) refuses to save much at all and my father is terrified at the prospect of losing money. I know annuities are often touted as horrible investments. However, if you refuse to manage your money, you can certainly do worse!

I'd stay clear of mixing money and family. So many things can go so wrong. Paying off the house might not be a bad idea. Especially if she would really like to live in a payed for home. I know that for my parents, a payed off home would be a huge emotional relief.

[marty998]

Your mother may be a candidate for a traditional simple Annuity (not the life insurance / variable kind).

The returns tend to be low-ish, but having a guaranteed stream of income, for life, may be exactly what she needs.   Once bought, there are no more decisions about how to invest the money, and the ability to reverse a simple annuity should be hard to do, so she keeps the benefit of it.
It may give peace of mind too.  It is sort of like investing in yourself by buying your own pension.

Then, with her slightly larger monthly income, she can decide when to give her sister an extra $20 or $100, when she can.

Challenger and Comminsure are the 2 main annuity providers. Go direct by calling/emailing them, you probably already know not to go through a financial planner.

cheers

[Sunnymo]

As your mother is in receipt of an aged pension you should also be considering the impacts on her pension amount of:
1) receiving the inheritance and
2) each of the actions you are considering along with any others you come up with.

Centrelink may consider option 3 as a form of gifting which can impact her pension amount for up to five years.

If may be worth sitting down with an advisor who can model each of these out for you.

I also second Alabaster's comment about mixing family and money. Make sure you approach it out of love and concern for her well- being and play down about preventing your Aunt from accessing your Mum's portion.

Sunnymo

[Zamboni]

First, please accept my condolences on the death of your grandfather.

I like option 1 the best and option 2 second best.  I'm going to agree with Primm that option 3 is probably a bad idea and I wouldn't even present it to her in any way, shape, or form.  You could also suggest paying off her house and putting the rest in an annuity as a combination of options 1 and 2.

It's difficult to stop someone from giving their money away (or blowing their money away), and it's much more touchy if it involves family. 

[Catbert]

I'd play with two scenarios:

-buying an annuity
-paying off the house and buying an annuity with the remainder

This is probably a time that fee-only planner could help you walk through the various types of annuities and whether she needs an inflation rider.

I think this is exactly the situation that annuities are perfect for.

[Cassie]

pay off house & buy annuity with remainder.

[mozar]

My mother just received 250k inheritance along with her three brothers (each). You really can't tell people what to do with their money.

I convinced my mom to let me talk her through all of the scenarios with her, or run the numbers as I put it. She wanted to buy a bigger house, and spend a bunch of fun money. I showed her how much it would cost to buy a house, how much money she would have if she invested it for ten years, then retired and then taking out 4% a year. She seemed distracted and annoyed the whole conversation and it was really hard to pin her down, so we ended up having the convo a day after the funeral of her mother.

I left it at that. A couple months later my mom said "hey I ran the numbers and I decided to put off buying for now." I was flabergasted, but I didn't say anything. She seems more willing to look at her money realistically these days.
She still accidentally cashed out about 16k and will have a tax hit. Her oldest brother decided to cash everything out and blow all the money on his girlfriend and her children. Her other two brothers accidentally cashed out about 100k and will have huge tax hits next year.

But you know what I say? Nonemybiznass!

[Ybserp]

Good on you for trying. And even better for letting her take the credit. :)

[bigchrisb]

Families and money eh?

I'm inclined to agree with the other posters and avoid the sister's mortgage payoff.  It may be a rational thing to do, but I suspect rational isn't going to get your mother across the line.

I'd get he to pay off the mortgage first.  A) because its a guaranteed safe return that will drop her ongoing cost of living, b) because it won't impact her pension etc, and perhaps most importantly, it should be really easy to "sell" to your mum.  It also nicely locks part of the cash away.

I'd then try the annuity argument.  As they have just retired, do they have a super fund that is already in pension mode?  If its a recent retirement, is topping that up with the remaining $110k an option?

Lastly, is there something that has been on their "to-do" list for a long time that they could make happen with say $10k of it?  While it doesn't lead to an on-paper optimization, better that they blow a fixed amount and lock away the rest, than get frustrated with cold turkey and blow the lot?

At the end of the day, its her money, and she is the one that needs to sleep at night over what's done with it.

Best of luck!

[missj]

I vote for pay off the mortgage and put the rest in an annuity.  UNLESS....she has a very very low rate on her mortgage.

and I'll just add that if she WANTS to blow her money, it is her money.  And if she wants to give it to her other sister, that is between them, and it's not really your problem.   You may or may not be worried that she'll end up coming to you for help once she runs out of money, and depending on your relationship with her, you can have a conversation about that.

Her other two brothers accidentally cashed out about 100k and will have huge tax hits next year.

just curious, but how do you "accidentally" cash out $100k? Does that mean they neglected to roll it into some kind of tax shelter?

[mozar]

right. they thought that they could take it out, then roll it into an ira within 60 days. It turns out you can't do that with an inherited ira. Once you take it out it's done.

[Zamboni]

^Whoops!

Most of you are forgetting that a mortgage is nearly all principle at the end as they take most of the interest of front.  So, she won't be making some a decent percentage at all by paying off the remaining $50K mortgage, but she will gain simplicity and peace of mind in having somewhere to live that is really hers.

One book I read long ago had a 40/40/20 rule for windfalls:
40% to mortgage
40% to savings
20% for fun

Without doing any sort of returns analysis on paper, this seems like a good mental guideline to me for windfalls up to $100K (anything more than that and I would probably dial the fun money percentage down.)  I really think some amount of money should be used to buy something very nice and personal to remember him by.  For example, I have a really nice leather briefcase that I bought with windfall money; I don't use it very often anymore (used to use it daily for work), but every time I carry it I remember where the funds came from, and it makes me smile with good memories.

[chasesfish]

If she's willing to do it, have her payoff the mortgage and then put the balance in a single pay, life annuity. Then the money isn't accessible for family member loans.

I wish you luck though, neither my mother or my in-laws will take financial advice.   My former step-dad seems to be the only one interested in listening and he's done some very responsible things with his inheritance

[mak1277]

Has she asked for your advice?

[Jacana]

I agree that n. 3 should not even being mentioned to her. It's a nice idea under other circumstances but she may interpret it as an attempt to get her money and then she may not listen to any other advice. Paying off the mortgage seems like a good idea, since it would increase her monthly budget by that much immediately. An annuity with the remainder may be the best idea, but she may not like the idea of exchanging a big chunk of money for a small monthly payout. Vanguard has something called a managed payout fund, maybe that is something she would prefer since the principal is theoretically accessible for big expenses. But it's not a guaranteed forever income stream and she could still access it to lend to her sister or spend on splurges.

What are the tax implications where you live? Or other legal issues? I know my grandmother has a very small amount of money left from my grandfather's estate (much of it was spent frivolously); my parents put her house in a 51% trust so that medicare or whoever can't take her house if she becomes seriously ill and cannot pay her medical bills. I don't really know how all that works, but something to look into? In that case, an annuity might be safest (if it is legally protected).

[MsRichLife]

Thanks to everyone for the thoughts and suggestions.  I'm actually visiting Mum at the moment but we haven't had the chance to speak. She did say she wanted my help with it all, so I don't feel like I'm sticking my nose in unwanted.

Unfortunately my silly sister couldn't just hold off, and mentioned option 3 to my mother. She didn't go about it particularly well and it kinda blew up in her face. So that's definitely off the table now which is probably for the best.

I have also found out that retirement has been put on hold for Mum because she's doing some work for her old employer.

At the moment I'm thinking along the lines of suggesting:

Paying off the mortgage
Setting aside a predetermined amount of fun money (great idea)
Looking at super as an option/ otherwise an annuity

Thanks again for all the great suggestions.

I knew the mustachios would come through!

[Jacana]

Are annuities in Australia insured or guaranteed by the government? As in, if the company goes down or declares bankruptcy, does your mum still get her money? Is she in front on her mortgage?

I was thinking that if she's already ahead on her mortgage and annuities were guaranteed, maybe it would be better to do the annuity with the larger amount instead of paying off the mortgage first, and she could then use the higher payments to continue to stay well ahead of the mortgage. That way she gets the larger monthly amount for life, and if something happened she could back off on the mortgage for a while to deal with the cash emergency. Does that make sense?

[beltim]

^Whoops!

Most of you are forgetting that a mortgage is nearly all principle at the end as they take most of the interest of front.  So, she won't be making some a decent percentage at all by paying off the remaining $50K mortgage, but she will gain simplicity and peace of mind in having somewhere to live that is really hers.

No. The interest rate is constant. The reason mortgage payments are mostly principal at the end is because the balance is lower.