Dear Quentin,
My great-grandmother recently passed, and while she did not have much, her home just sold for about $ 700,000. The property has about $ 200,000 due in back taxes and fees, so my grandmother and great-aunt will likely each walk away with around $ 250,000.
My grandmother does not have much, and I am concerned she is going to spend every nickel of her inheritance. She lives off of assistance programs and has a small nest egg of roughly $ 20,000. However, the money she will get from the sale of her mother’s house is likely more money than she has ever seen in her life, and she has already started verbally committing to pay for XYZ for all of the family members.
I need to figure out the best way to invest the money to make it last as long as possible. She is in her 70s and very likely has 20 years left. I have always been wary of financial planners and tend to take care of my own investments directly. I’ve done quite well for myself with retirement accounts and investment portfolios, but that’s all in the context of someone in their 20s, not someone in their 70s.
This payout is a miracle, and I’m not sure there would ever be another.
Cautiously Pessimistic
Dear Cautious,
She should be paying off debts, all right, but they should be her own debts.
You’re right to be concerned about your grandmother’s windfall, and your fears that she could fritter it away on family members and even bad investments are not unfounded. It’s hard for some people to say no, especially when there’s an emotional story behind a problem that could be made to disappear with the right number of dollars. The more family members she helps out, the more people will ask her for money.
I’m a big fan of pens and paper. Draw $ 20,000 in one column and $ 250,000 in another column. Then write under each one the expenses she needs to fulfill in the months and years ahead, making note of her need for emergency savings, and money for long-term care should she have health problems. We are all “temporarily abled,” and we should all be planning for the time when our bodies slow down, and enjoying our good health while we have it.
In another column, write down her investment options. High-risk investments in your 70s are obviously a no-go. She would have little time to recover if something went wrong (and something inevitably goes wrong sooner or later). So how does your grandmother say no? Tell her to inform her family members that the money is now invested and out of her hands. As Larry Pon, a financial planner based in Redwood City, Calif., says, “Blame it on the accountant.”
“I do not suggest any expensive, complicated or aggressive strategies,” Pon told me. “I suggest keeping it simple. A good place to consider would be the low-cost discount brokers. Take advantage of their automated portfolios. I would also suggest using a conservative portfolio. It is not going to make her a lot of money, but they are lower risk, so she will not freak out when the market goes down.” (Note that he said “when” and not “if.”)
Given your grandmother’s age, any retirement and investment plan should not be put on autopilot for the next 10 or 20 years and simply forgotten about, said Dwight Nakata, a CPA based in Artesia, Calif. It should be monitored closely, given your grandmother’s age, and have three main goals: 1) a lifetime income that is not only consistent but durable, 2) establishing her investment risk, and 3) accounting for inflation, which is now at a 40-year high.
Taxable gain
There may not be a taxable gain on the sale of your great grandmother’s home, says Timothy Speiss, partner at Eisner Advisory Group. “Determine the cost of improvements post acquisition,” he says. “Improvements include structural, and even landscaping and driveway and sidewalk improvements.” Check the applicable municipality records, and seek to obtain her purchase settlement sheet; a local construction professional may also help identify upgrades, he adds.
As your great grandmother’s property was inherited by your grandmother and great aunt, the cost basis of the property should be “stepped up” or increased, Speiss says. Rather than using the home’s value from when it was originally purchased to calculate the capital gains tax, you use its market value at the time of your great-grandmother’s death.
Speiss also recommends creating an estate plan, will, or advance health-care directive as soon as possible, by estate counsel. “Testamentary trusts — created under the will — for family members should be considered as well,” he says. “An independent investment plan and spending budget for your grandmother should be designed and implemented.”
MarketWatch retirement reporter Alessandra Malito wrote that while your 70s is not the time to have any financial setbacks, it is the time to safeguard accumulated wealth and to plan for increased health costs. Typically, investment advisers say subtract your age from 100 to see how much of your investments you should have invested in equities. In this case, that would be 30%.
Good luck in taking care of your grandmother — and her investment plan.
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