Handling a lump sum settlment from car accident

[FLBiker]

Hi folks,

My friend's daughter-in-law and her bf were in a car accident a couple of years ago and the bf had some pretty severe brain trauma.  Their settlement was recently decided, and they'll be getting 1.5 million in about 60 days.  They are in their early 20s.

I don't know much about them, but my friend told me that they'd like to live off this money, because he can't really work and she primarily takes care of him.  I'm not sure how much money they'd like to live on, but (based on the 4% rule) they should be good up to $60K, right?

First of all, what (if anything) should they do in order to maximize the tax efficiency of the settlement payout?  My understanding is that this money will not be taxed (unless they deducted the medical expenses).

Second, my recommendation was going to be that they do a three-fund / lazy portfolio.  Does that make sense or is that too risky?  I was thinking something like 30% us stocks, 20% int stocks, 50% bonds.  Or would an annuity make more sense for them?  I don't think they are particularly financially savvy nor interested in learning a lot.  I might be wrong, though.

Thanks for any tips!  I'm pretty good at reducing income tax while earning, and at investing for growth, but I have no lump sum experience.

[terran]

If he is receiving government disability benefits it would probably be worthwhile looking into establishing a self settled special needs trust. If they just take the money it's likely that it will stop any benefits (including health insurance through medicaid) until the money is spent down, which could be pretty fast if he has extensive medical needs due to his disability.

[Financial.Velociraptor]

I'm glad they are getting the money; they clearly need it.

If it was me, I'd be looking at dividend paying stocks, especially div/growth, and municipal bonds.  These two appear to need a permanent 'set and forget' solution.  A "good" dividend growth etf is VIG (paying about 2% and growing annually); I believe the commission free Vanguard version of this is VDADX.  For municipal bonds, I like and hold NIO, and also like but do not hold IIM.  Equal thirds would yield a very conservative portfolio that would automagically spit out greater than 4% distributions in the form of cash, with most of the distribution being tax exempt.  They could live off that 60k (or so) indefinitely without ever touching their capital.  The VIG portion is composed entirely of the S&P 500 "Dividend Achievers" (companies that have increased their dividends annually for at least 10 consecutive years) and can be expected to keep the distribution and capital ahead of inflation.  They would get a small raise every year without lifting a finger.

I'd be more concerned about medical expenses for someone with a serious injury.  ACA might not survive a republican president in '16.   

[seattlecyclone]

A three-fund portfolio should generally do the trick as long as they're willing to learn a little about investing. They don't need to know a lot, just enough to know what their asset allocation is, and be aware that they should stick with their asset allocation through good times and bad in order to maximize their chances of success. Many people on here think a 4% SWR is a bit optimistic for such a long period, so they should perhaps consider setting their spending target a little bit lower than $60k, at least to start.

I don't know too much about annuities, but have doubts that a couple in their 20s could get anywhere near a $60k annual lifetime payout.

Medical expenses are definitely worth considering. With the ACA's subsidies based on income alone they would be in good shape, but the law is still too new for me to trust that it will still exist in a similar form for the next several decades.

Will he be eligible for social security disability payouts? That could provide a nice bit of extra income if he had enough of a work history to qualify before his accident.

As for tax efficiency, I don't know of too many tricks here. The assets will all start out in a taxable account by default and there isn't much opportunity to change that if neither of them plans to work for pay. The good news is that the first ~$20k of interest income and ~75k of dividend/capital gain income is tax free under current law, so I wouldn't expect their tax bill to be very significant most years.

[FLBiker]

Good questions about disability / social security.  I'll let my friend know about that.

And the dividend approach is an interesting idea, too.  I'm an index funder myself, but that could work.

As far as medical care, I *think* they're OK.  My sense is that (at this point) it's social / functional stuff that's the issue.  I think he's physically doing pretty well.  Again, though, I've never met them.

Thanks for the tips!

[neil]

I would imagine the details are complicated and it may be worth a one-time visit to a fee-only CFP.   I know that is generally a no-no but as long as you aren't giving the assets directly to the CFP to manage, it is a one-time cost.  They might have some unusual considerations.  With very little backup plan for future earnings, they will need to be careful that the sum is invested properly from the beginning and in a way they are comfortable with going forward. 

Anyone who goes from $0 in the stock market to a decent sum is going to find market fluctuations dizzying and they will need to really figure out what would be comfortable without taking a lot of interest rate risk by being ultraconservative.

[Dodge]

Hi folks,

My friend's daughter-in-law and her bf were in a car accident a couple of years ago and the bf had some pretty severe brain trauma.  Their settlement was recently decided, and they'll be getting 1.5 million in about 60 days.  They are in their early 20s.

I don't know much about them, but my friend told me that they'd like to live off this money, because he can't really work and she primarily takes care of him.  I'm not sure how much money they'd like to live on, but (based on the 4% rule) they should be good up to $60K, right?

First of all, what (if anything) should they do in order to maximize the tax efficiency of the settlement payout?  My understanding is that this money will not be taxed (unless they deducted the medical expenses).

Second, my recommendation was going to be that they do a three-fund / lazy portfolio.  Does that make sense or is that too risky?  I was thinking something like 30% us stocks, 20% int stocks, 50% bonds.  Or would an annuity make more sense for them?  I don't think they are particularly financially savvy nor interested in learning a lot.  I might be wrong, though.

Thanks for any tips!  I'm pretty good at reducing income tax while earning, and at investing for growth, but I have no lump sum experience.

The 3 fund portfolio sounds perfect.  If you think they might mess this up, point them towards a LifeStrategy fund, and tell them Vanguard will take care of everything for them.

https://investor.vanguard.com/mutual-funds/lifestrategy/#/

You can schedule automatic withdrawals, so money would deposit into their checking account like a paycheck.  They won't have to think about anything.

[hodedofome]

I don't always agree with Dodge on this board but here he's spot on. 3 fund portfolio or life strategy type fund will probably benefit them more in the long term than any fixed payment contract. They just have to understand there will be bad periods as well as good, and they just have to see it through. 50/50 stocks and bonds is what Harry Markowitz uses personally, FWIW.

Tell them to live as simply as possible the first 5-10 years, try to go for a 3% SWR for a while if they can.

[surfhb]

They should be seeing a tax lawyer and learning the ins and outs of investing IMMEDIATELY!

[FLBiker]

The 3 fund portfolio sounds perfect.  If you think they might mess this up, point them towards a LifeStrategy fund, and tell them Vanguard will take care of everything for them.

https://investor.vanguard.com/mutual-funds/lifestrategy/#/

You can schedule automatic withdrawals, so money would deposit into their checking account like a paycheck.  They won't have to think about anything.

Thanks for this!  I like both the LifeStrategy fund idea, and the automatic withdrawal idea.

[Gone Fishing]

If he is receiving government disability benefits it would probably be worthwhile looking into establishing a self settled special needs trust. If they just take the money it's likely that it will stop any benefits (including health insurance through medicaid) until the money is spent down, which could be pretty fast if he has extensive medical needs due to his disability.

+1

My first conversation would be with a lawyer that specializes in things like this.

[FLBiker]

Ok, here's what I suggested --

Talk to a lawyer who can answer benefit / tax questions.
Assuming the lawyer doesn't have another idea (like a trust), transfer the money to a vanguard money market, and talk to a CFP through their Flagship program.

Of course, the advice of the lawyer and CFP might change the ultimate investment plan, but I'm going to suggest a three-fund / lifestrategy with automatic withdrawals ~40-50K per year (or less, if they're game).

Thanks again!

[Terrestrial]

You already got a bunch of good advice so i wont repeat. 

I had more of a curiosity question.  How does one get a daughter in law who has a boyfriend.  By default doesn't 'daughter in law' mean she is married to one's child? 

It's not like sister in law where it's possible to get an unmarried one with a boyfriend (sister of your spouse).

Severely off topic but I was intrigued.

[johnny847]

You already got a bunch of good advice so i wont repeat. 

I had more of a curiosity question.  How does one get a daughter in law who has a boyfriend.  By default doesn't 'daughter in law' mean she is married to one's child? 

It's not like sister in law where it's possible to get an unmarried one with a boyfriend (sister of your spouse).

Severely off topic but I was intrigued.

Perhaps "her bf" is the friend's bf, not the daughter in law's bf?

[FLBiker]

I had more of a curiosity question.  How does one get a daughter in law who has a boyfriend.  By default doesn't 'daughter in law' mean she is married to one's child? 

Ha.  I referred to her as my friend's daughter in law because she's the daughter of my friend's partner.  To be honest, though, my friend and his partner aren't married, but saying the boyfriend of the daughter of my friend's girlfriend seemed a little convoluted. :)