Author Topic: Mom inherited a windfall (bonus gift tax Q!)  (Read 2609 times)

mustachioso

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Mom inherited a windfall (bonus gift tax Q!)
« on: January 10, 2014, 11:52:31 AM »
The good news is my mom (62y/o) will soon be in possession of a few hundred thousand dollars - ~400k
The bad news is she has lived her life very poor and has no idea what to do with that kind of money.
She plans to meet with a financial advisor her sister met at church who promises to "take good care of her".

That deal seems pretty shady so I'm hoping to come up with an asset allocation through Vanguard that will allow her to grow her money. She plans on slowly giving it away to my sister and I but I'd like to see her live life to the fullest without worrying about money for once in her retirement years.

Her social security essentially pays for all of her expenses, so she has a rather large tolerance for short term risk.

My current plan is to follow the "cour four 80/20" portfolio from http://www.bogleheads.org/wiki/Lazy_portfolios through Vanguard funds.


As a side note: She has already given my sister 50k to buy a house in 2013. I can't seem to wrap my mind around the "Unified Credit" tax system that might keep her from having to pay the gift tax on the excess above 14k from this site: http://www.bankrate.com/finance/taxes/estate-tax-and-gift-tax-amounts.aspx

Any help is greatly appreciated!

seattlecyclone

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Re: Mom inherited a windfall (bonus gift tax Q!)
« Reply #1 on: January 10, 2014, 12:23:18 PM »
As a side note: She has already given my sister 50k to buy a house in 2013. I can't seem to wrap my mind around the "Unified Credit" tax system that might keep her from having to pay the gift tax on the excess above 14k from this site: http://www.bankrate.com/finance/taxes/estate-tax-and-gift-tax-amounts.aspx

Short answer: don't worry about gift taxes. Unless your mom comes into a much bigger windfall down the road, she will not owe any federal estate or gift taxes. She will probably have to file a form to declare the gift, but no tax should be due.

Longer answer: you can give gifts of $14k each year to any person without worrying about gift taxes at all. Any amount above that is theoretically subject to gift tax, but there's a large lifetime exclusion amount (currently $5.25 million, and I think it's indexed to inflation). Any gifts you make above the $14k limit reduce this lifetime exclusion amount. Any remaining exclusion amount is subtracted from the value of your estate when you die to determine how much (if any) estate tax you owe.

In your example, your mom gave $50k to your sister. That's $36k higher than the annual exclusion amount, so her lifetime "unified credit" estate/gift tax exclusion is reduced from $5.25 million to $5.214 million. When she dies, her estate will have to pay tax on any value of the estate that exceeds $5.214 million. Based on the information you gave, your mom is unlikely to ever have this much money. Don't worry about it.

Another Reader

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Re: Mom inherited a windfall (bonus gift tax Q!)
« Reply #2 on: January 10, 2014, 12:40:36 PM »
Once the vultures find out your mom has this money, she will find herself surrounded by all kinds of potential "financial advisors."  If you can talk her into it, have her set up a revocable trust with you and/or your sister as trustees.  That way she can gracefully decline all the "help" she will be offered.  She can tell these folks her kids handle the money for her and they would need to talk to you.  This will also avoid probate when she passes, and the money will come directly to the heirs without the cost or delay of probate.

If she is na´ve about money, someone needs to run interference for her.  Otherwise, she will be sold every high commission insurance policy and annuity out there, and even shadier folks will try to get her to invest in their schemes.  Sadly, churches are common places for these parasites to meet their victims.  In your shoes, I would sit her down and get this settled before anyone else gets to her.

daverobev

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Re: Mom inherited a windfall (bonus gift tax Q!)
« Reply #3 on: January 10, 2014, 03:02:20 PM »
The good news is my mom (62y/o) will soon be in possession of a few hundred thousand dollars - ~400k
The bad news is she has lived her life very poor and has no idea what to do with that kind of money.
She plans to meet with a financial advisor her sister met at church who promises to "take good care of her".

That deal seems pretty shady so I'm hoping to come up with an asset allocation through Vanguard that will allow her to grow her money. She plans on slowly giving it away to my sister and I but I'd like to see her live life to the fullest without worrying about money for once in her retirement years.

Her social security essentially pays for all of her expenses, so she has a rather large tolerance for short term risk.

My current plan is to follow the "cour four 80/20" portfolio from http://www.bogleheads.org/wiki/Lazy_portfolios through Vanguard funds.


As a side note: She has already given my sister 50k to buy a house in 2013. I can't seem to wrap my mind around the "Unified Credit" tax system that might keep her from having to pay the gift tax on the excess above 14k from this site: http://www.bankrate.com/finance/taxes/estate-tax-and-gift-tax-amounts.aspx

Any help is greatly appreciated!

Absolutely keep her away from any feeless advisor, and if she does go make SURE she doesn't sign anything there and then. If she has the literature you can show her the load fees, the redemption fees, the MER, etc - vs what would happen in Vanguard.

You might want to increase your bond allocation. She's 62. Age-as-percentage is a good rule of thumb for bonds, perhaps too cautious, but either way - IMO - 20% is too low.