Author Topic: Unforeseen gift of $250k  (Read 8704 times)

G. Thomas

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Unforeseen gift of $250k
« on: November 19, 2014, 05:59:23 PM »
A unique inheritance was just given to my siblings and I, an account with $250k in the form of an LLC and the loose instructions of "this money is for you all to continue to learn about making money with money.  This is not to buy toys or pay off individual mortgages.  We would prefer if you don't use a financial adviser. Monies cannot be divided out until retirement age." 

What would you do with it?  What pitfalls do you see? What ways can we use tax advantages?

My initial thoughts include:
-Taxable Vanguard account
-Investment property(s) in next 5-10 years
---We all live in Denver and properties are going quick. Would like to wait for the next dip (but is this like market timing stocks?).

This is for 3 siblings all around 30 y/o.  Currently not entrepreneurial.  All employed and savings rates vary.  One sibling has a few rental properties. 

As this was a shock to us all we have not done anything with the money and are looking into intelligent next steps.

surfhb

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Re: Unforeseen gift of $250k
« Reply #1 on: November 19, 2014, 06:07:50 PM »
Whom ever this person was they're very smart and did you a great services.   

60/40 VTSMX/VBTLX if it were me for 30 years.     Its too bad you cant distribute till then but i understand why this person did it that way. 

GGNoob

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Re: Unforeseen gift of $250k
« Reply #2 on: November 19, 2014, 06:08:57 PM »
So you just have to invest it all now and then split the money once you are at least 60 or so?

How is this money taxed? Lending Club could be a fun way to invest it, but in a taxable account, that'd be a lot of taxable interest. Then once you are all of retirement age, you could just start withdrawing interest/payments each month instead of re-investing (or even treat it like a pension and only withdraw interest, splitting 3 ways). Otherwise I'd just toss it in a Vanguard brokerage account and invest it with whatever asset allocation you can all agree on. Even a simple Target Date or LifeStrategy fund would do. Could invest it and not look at it for another 30 years.
« Last Edit: November 19, 2014, 06:14:32 PM by Logan T »

G. Thomas

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Re: Unforeseen gift of $250k
« Reply #3 on: November 19, 2014, 06:32:57 PM »
So you just have to invest it all now and then split the money once you are at least 60 or so?

How is this money taxed? Lending Club could be a fun way to invest it, but in a taxable account, that'd be a lot of taxable interest. Then once you are all of retirement age, you could just start withdrawing interest/payments each month instead of re-investing (or even treat it like a pension and only withdraw interest, splitting 3 ways). Otherwise I'd just toss it in a Vanguard brokerage account and invest it with whatever asset allocation you can all agree on. Even a simple Target Date or LifeStrategy fund would do. Could invest it and not look at it for another 30 years.

Great question, I have no idea and will look into and report how it is taxed.

Goldielocks

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Re: Unforeseen gift of $250k
« Reply #4 on: November 19, 2014, 06:46:00 PM »
Look for a way to split the $$'s into three separate amounts, even if just subdivided in the common  LLC is the only way. 

Then the arguments and resentment later will be a lot less. 

Two siblings could choose to invest in the same property or business, but I recommend a standard retirement portfolio (e.g., couch potato) for now, while you research individual stocks or investments, per the instructions.

UnleashHell

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Re: Unforeseen gift of $250k
« Reply #5 on: November 19, 2014, 06:51:35 PM »
all retire now :D

KC1983

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Re: Unforeseen gift of $250k
« Reply #6 on: November 19, 2014, 07:07:30 PM »
I think goldielocks has a great suggestion, if that's possible. This kind of pooled gift can easily create schisms where none would otherwise exist. Money, especially family money, makes some people get crazy.

I think while this a cool gift, the requirement that you not touch it until 'retirement age' is kind of silly. It actually encourages you all to spend money now and live it up, knowing you have a substantial chunk of money that should be quietly growing and taking care of retirement needs. I think trying to lock family into your wishes is kind of condescending, and often not actually that helpful. That is, it might actually discourage aggressive savings and taking charge of your own life.

I've looked into investment properties -- as has been said by many people before, managing investment properties is often a full-time job by itself. If you have to leave this money essentially along for the next 30+ years, I recommend about an 80/20 split between VTSAX and VBTLX. In 10 years, shift it to 70/30, and so on, so that by the time you all start reaching retirement age you're at 50/50. Of course, my guess is you'll all have to pay some taxes on this during that time, but maybe you can draw some of the money off so that it's not making you poorer in the short run. A service like Betterment might be something that is worth looking into, to help manage the tax consequences.

Mighty-Dollar

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Re: Unforeseen gift of $250k
« Reply #7 on: November 20, 2014, 01:54:46 AM »
I recommend VOO and AGG. That's an S&P 500 index and the total bond market.
What percent in one versus the other? Try this site for help...
https://gps.ricedelman.com/
Also...
https://personal.vanguard.com/us/funds/tools/recommendation?reset=true

GizmoTX

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Re: Unforeseen gift of $250k
« Reply #8 on: November 20, 2014, 06:20:49 AM »
Since it's already in an LLC, I assume you all have been made shareholders of what is essentially a small company to manage its assets. Usually the tax impact is passed through to those shareholders, so you probably want to consult a CPA about the best way to manage this. Initially I'd put the money into Vanguard using a 3 or 4 index fund autopilot allocation. Then decide if you all want to operate the LLC as one investment entity that you later split, or into separate portions that you each direct. If separated, each portion should sink or grow on its own merits -- no co-mingling later.

I'd stay away from anything like real estate that requires active management, & then only you've divided the LLC into separate allocations. However, anything active exposes the rest of the LLC to liability risk or creditors.

Does the LLC define survivorship issues? If not, you'll want to address this. A lot can happen in 30 years. If any of you are in a community property state, this presents issues in the event of divorce; you'll need some legal advice now about keeping the LLC separate property.

I view the directive about no financial advisor to pertain to the investing exercise, i.e. not consuming the capital in high fees for loaded funds or churning stocks. Some initial advice concerning taxes & individual impact will be essential to avoid unfortunate mistakes. On the other hand, 250k split 3 ways or more is hardly the lottery. The requirement that it be allowed to grow is genius.

FLBiker

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Re: Unforeseen gift of $250k
« Reply #9 on: November 20, 2014, 08:29:16 AM »
I'd do VSTAX, VTIAX, VBTLX and VTIBX.  Personally, I'd probably do 90/10 stocks to bonds, and something like 60/40 US to INT, but everybody is different.  As I just posted on another thread -- I'd rather be aggressive and risk pushing my retirement date back (which possibly moving it up) than be conservative and guarantee that I'm pushing it back.

If it's taxable, and you have bonds elsewhere, I *think* it's more efficient to hold your bonds in a tax advantaged account, so you might have 100% stock in this account.  I'm not an expert on tax efficiency, though.

Another Reader

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Re: Unforeseen gift of $250k
« Reply #10 on: November 20, 2014, 09:06:48 AM »
My guess is your parents or grandparents are trying to teach you how to cooperate as a family entity to build wealth.  If they are investors and/or business owners/entrepreneurs that have done well by investing, they may planting the investing and entrepreneurial seeds to expand your knowledge beyond the standard retirement account investing related to employment.

In your shoes, a family meeting with the parents or grandparents to discuss investment ideas and to draw up a plan would be my suggestion.

G. Thomas

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Re: Unforeseen gift of $250k
« Reply #11 on: November 20, 2014, 09:31:23 AM »
Thank you all for the advice.

Plans moving forward include:
-Getting together to get on the same page, go over the articles of incorporation
-Meet with a CPA and the potentially the drafting lawyer
---Firm understanding of tax implications and ways to limit exposure
-Put out on the table the high degree of schisms that can arise and ways to avoid
---3 separate accounts
---no co-mingling
-Plans of how fees will be paid
-Look into survivor-ship issues within llc
-Discuss active vs passive accounts within llc

Once we have met with the concerned parties and actual progress has been made I'll report.  Until then more reading and research on my end.  Thank you for the recommendations.

GizmoTX

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Re: Unforeseen gift of $250k
« Reply #12 on: November 20, 2014, 12:34:50 PM »
The tax implications will be critical for how you invest the assets. The IRS treats LLCs as a partnership & all earnings for each year are passed to each shareholder to individually pay the tax, not the LLC. Each shareholder could be paying a different amount, depending on each individual's return. You'll probably want to consider investments that are highly tax efficient & appreciation oriented rather than generating short-term income that must be retained. Buy & hold stocks, for example, generate no income until they are sold, & then they are eligible for capital gains rates, which are lower.

http://www.nolo.com/legal-encyclopedia/how-llcs-are-taxed-29675.html

Villanelle

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Re: Unforeseen gift of $250k
« Reply #13 on: November 20, 2014, 12:54:01 PM »
To me, the most important thing would be to get the money split, and make it very clear that each sibling got only the proceeds from his own choices.  Having to agree on each investment, when to sell or reallocate, and issues like that, would be a nightmare.

I'd also ask the lawyer what "retirement age" means, and if there's any legal definition of that.  It might be that you could consider 45 your retirement age, if that's when you quit working. 

Given that any investment has the goal of "using money to make money", I'd treat my 1/3 of this just as just another part of my regular investment strategy.  Of course you'll want to figure out which assets are most tax advantageous to have in the LLC vs your other accounts.  But beyond that, I'd look at it as just more money in my overall plan.  If you would take increased salary and put in in an index fund, do that.  If you'd put in in Lending Club or buy a rental property, do that.

Personally, I would be a bit annoyed at the relative who did this, and think they were pretty controlling and selfish.  These are ridiculous strings.  I'm not a fan of money with strings, not even inheritances though. 

FarmerPete

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Re: Unforeseen gift of $250k
« Reply #14 on: November 25, 2014, 08:26:08 AM »
I think that keeping the funds together is a bad idea.  Even if you decide to separate them, I'd make sure that it was legally binding.  Even if you all invested the money in separate brokerages/funds, there is nothing to say that at retirement age people couldn't argue/fight/lawyer-up about it.  If person A has $500k, person B has $850k, and person C has $100k, I can imagine person C fighting to get it split into 3 equal parts. 

If you cannot get it split in a legally binding way, I would recommend not splitting it.  Actually talk to your siblings and come up with a plan.  Maybe have some kind of a tiered approach.  Give each sibling 5k to invest in whatever they want, while the rest is invested in a low fee Vanguard fund.  Then, every X years, transfer more money into the control of the individuals.  The goal would be to eventually end with $0 in the communal pot while the rest is being invested by you guys.  I'd still split it into thirds at retirement.  The reason for this is because most people don't know squat about investing.  If you hand them an account with more money then they've ever seen before, they typically are going to be afraid of it or will squander it.  The purpose of this account was to teach you how to invest and make money with money.  To get you out of the rat race and into the world of FI.  Granted, $83k isn't FI, but it's a good start.

One thing that I would get clarification on is the "Retirement Age" clause.  I ask, because if you take this at face value saying that you'll keep it in one big pot and invest it, how will you handle it when people retire?  I'm assuming you will all retire at different times.  Do you just split of the appropriate % to cover the retiree?  If Bob retires, give him 33.33%.  Then when Sally goes to retire, give her 50% of the remainder.  Then when Joe retires, he gets 100% of the LLC.  Or does the LLC wait until you are all of retirement age before putting out 1 dime?

waltworks

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Re: Unforeseen gift of $250k
« Reply #15 on: November 25, 2014, 08:41:04 AM »
If the time horizon is pretty long, VTSAX and forget all about it and go live your lives. Divide pot by 3 once the appointed time comes. Easy peasy, no complicated crap to deal with, nothing to argue about.

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NWOutlier

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Re: Unforeseen gift of $250k
« Reply #16 on: November 25, 2014, 09:39:58 AM »
Take all these posts into consideration, read, learn, pick and choose what is right for you. 

If this happened to me, it is easy, based on my situation, how my money is setup, my debt, my work, 401k, IRA's, taxable accounts, etc - I would put the entire amount into my taxable Vanguard account buying 100% VTSAX.  (thats' me based on my situation).

since the acccount was for learning, and I don't know your situation or picture - here is another suggestion to throw onto the pile; the money was for learning how to make money with money... honor that ...

break your part of the money into chucks, put some in vanguard with a 100% or 60/40 or 75/25 split on funds that you're familiar with and like... take another portion and consider lending tree... take another portion and <blank>...  and so on...  but don't distribute blindly..

 if you don't have a plan or process that you personally follow for yourself now, it would be good to keep the cash in a money market while you develop your strategy... I built up just under 60 grand in cash (Cap One 360 account 0.75%) while reading this blog along with jlcollins and a few others... I took a little piece of information that I agreed with from each author (but never only one authors strategies), applied it to my situation (and created lots of spreadsheets) until I was so comfortable with the ideas and concepts -

From there, I not only invested the all the cash into Vangauard funds and replenished a small amount of cash back to cap one 360 account for emergencies) - I moved a number of my accounts from a different financial broker (an additional 140k) to Vanguard and it's been nothing but FREAKIN AWESOME since!  (but this is what worked for me)... now you get to go through the learning process...  it's a freakin blast!

the bottom line is; unless you already had a plan, it is a difficult problem to solve quickly... my plan developed over time.. I've always had the savings idea in my head, and understood simple compound interest(age 19), but didn't know how to do it right, consistently and ride out the waves. (now I'm 46 and I just now "get it")... For me, the lesson I learned was...Having a taxable account was the last piece of the puzzle for me.  Before that, I saved, I fully funded my IRA, 401k, spent the rest or saved a little cash, then spent it... I never felt comfortable, always worried if I lost my job "we" the family would be ruined! and have to tap into the retirement accounts.... but having that taxable account made all the difference for my comfort level and accelerates my early retirement!  Makes you ask the question; why did I know to invest in all retirement accounts, but not a taxable acccount? who knows.... never found the right influences and eduction, never saught it out... but I did now... The people on this blog really have it nailed, simplicity and badassity, but you need to build your mustache first...

for me now, the taxable account is the early retirement account... and the value of that account is calculated in "time" not dollars ....  How much time will this money give me....

Steve - NWOutlier




superannuationfreak

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Re: Unforeseen gift of $250k
« Reply #17 on: November 25, 2014, 02:04:42 PM »
You seem to be on the right track but also read this: http://www.bogleheads.org/wiki/Managing_a_windfall

arebelspy

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Re: Unforeseen gift of $250k
« Reply #18 on: December 03, 2014, 12:36:59 PM »
Lots of good suggestions here.

Personally my vote is that since you're all around the same age, I'd just pick a target retirement date fund for when the money can be distributed and then forget about it.
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G. Thomas

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Re: Unforeseen gift of $250k
« Reply #19 on: March 13, 2015, 05:28:06 PM »
Holy smokes this was a process.  We finally have the money in a bank account, ~$300k.  I like the idea of a target date fund but I think we would pursue the idea by putting together the fund and adjusting the allocation annually.  Does the below make sense? 

Year /equity/debt
2015-2025 / 90%/10%
2026-2035 / 80%/20%
2036-2045 / 70%/30%
(we may want to go with a more linear route, adjusting ~1% annually)

Below are the breakdowns of equity and Debt based on Vanguards target retirement accounts.  The percentages are linked to the above breakdown, for example in 2036 we would be 70/30 stock to bond, of which 64% of the stock would be US and 36% would be international...
Equities: US vs International (total market)
2015-2025 / 72%/28%
2026-2035 / 70%/30%
2036-2045 / 64%/36%

Debt: US vs International (total market)
2015-2025 / 80%/20%
2026-2035 / 75%/15%
2036-2045 / 77%/23%

Moving forward, I want to have a plan.  I want to be able to understand why we would go with (in this example) a growing international presence.

I don't have access to Monte-carlo simulations but would love to see some.  For simplicity sake it seems like keeping a US to international ratio in both stock/bond (say 80/20) and adjusting stock/bond levels like in the table above is a fine choice as well.   

Thoughts?

GGNoob

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Re: Unforeseen gift of $250k
« Reply #20 on: March 13, 2015, 05:50:26 PM »
I don't have access to Monte-carlo simulations but would love to see some.

Here you go: https://www.portfoliovisualizer.com/

For simplicity sake it seems like keeping a US to international ratio in both stock/bond (say 80/20) and adjusting stock/bond levels like in the table above is a fine choice as well.

Most would suggest sticking to only US bonds. That is totally up to you though. Vanguards Target Retirement Date funds and Lifestrategy funds are moving to the following allocation:

Stocks: 60/40 US/International
Bonds: 70/30 US/International

G. Thomas

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Re: Unforeseen gift of $250k
« Reply #21 on: March 13, 2015, 06:04:59 PM »
Thank you Logan. 

Is there data backing up a 60/40 US/International?

GGNoob

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Re: Unforeseen gift of $250k
« Reply #22 on: March 13, 2015, 06:16:05 PM »
Thank you Logan. 

Is there data backing up a 60/40 US/International?

This is my favorite article to refer to. It recommends a 70/30 US/International, although 60/40 is very similar.
http://www.rickferri.com/blog/investments/foreign-stocks-for-the-long-run/

However, Rick recently wrote this post saying he will be increasing international allocation in 2015.
http://www.rickferri.com/blog/investments/my-expected-investment-changes-in-2015/