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Author: Dano41 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76078  
Subject: Retirement, trust, and keeping money. Date: 3/8/2004 3:10 PM
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Greetings Everyone,

I am new to MF and investing, but am learning at a fast rate. I did, however, get a problem laid in my lap that I don't know where to look for the answer.

The problem is that my mother wants to retire and is asking me for help in setting up her retirement income. She has a bit over $100k in a pension plan, that will pay her $700/month for 10yrs, but since she isn't married the company is the benificary if something happens to her.
She also has a 401k worth about 14K. One other fact is that she is only 60 so this would be an early retirement.

I know that I can roll the pension plan and the 401k out to an IRA and not suffer any tax liabilities. What I am trying to figure out is how to set it up to pay her a set amount every month while still earning her a decent interest.

Another problem/idea is that she does not want to leave the money in her name but put it in my or my sisters name. She is affraid that if something happens to her, like being hospitalize, that they will take her money if she can't pay the bills. Can this be done legally, and can it be done where she can still draw out of it for living expenses?

I was thinking of a trust with part of the money in money market account, part in bonds, and part in stocks. This would give her an income from the money market account and the bonds, and allow her to grow part with the stocks and hopefully stretch out the 100k for a longer period. I don't know much about trust so I don't really know if this is a good idea or not.

Thanks in advance!
Dano
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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39748 of 76078
Subject: Re: Retirement, trust, and keeping money. Date: 3/8/2004 4:10 PM
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Hi Dano. Welcome. Glad you could join us.

First, on the pension plan. I would suggest you call her employer, set up a meeting with their HR/pension person and go talk to them with your mother. Most pension plans offer multiple options. Most will pay for her life. But for a reduced payment, many can be set up to pay for a minimum number of years listing someone else as the alternate payee. Some will pay only for a fixed number of years in return for a larger payment. Some but not all can be taken as a lump sum and rolled over to an IRA account. A pension that pays for only 10 years is unusual but not impossible.

If you decide to go with an IRA, yes her 401K can go to an IRA. Assuming her pension also can, this would give her a balance of $114K. That can be invested a variety of ways. However, to make those funds last for her lifetime, Fools would suggest she take distributions of no more than 4% of the value of the account per year. The small amount means that she probably should continue working at least until she is able to collect Social Security.

Because she is over age 59-1/2, she can begin immediate distributions from the IRA without paying penalties, although payments will be taxable at ordinary rates. But she needs to workout a payment schedule that makes her funds last while meeting her requirements.

Your IRA can be set up to name a beneficiary or multiple beneficiaries in the event of her death. Protection from law suits is conferred on some accounts but I hesitate to advise on that aspect. Giving away assets is the usual way to qualify for medicaid, but the laws vary from state to state. You should consult an elder attorney for details in your state. Usually in the case of a nursing home, a three year look back period is involved. So assets given away are still considered for three years after the gift in considering qualification for medicaid.

You mention money markets as a possible investment. They are safe and reliable, but their yields are very low right now. Fools would suggest investing as much as she can in stocks so her money will grow and provide some protection from inflation. An S&P 500 index fund is the best choice for that. Because she is close to retirement, that should perhaps be no more than 50% of her funds. The rest should go into a fixed income vehicle. Bond fund is a bad idea just before interest rates rise. Owning bonds themselves in a laddered maturity bond portfolio is a better choice. Or for the amounts she has in mind, CDs could be the best choice. Again you want them laddered. Set them up to mature at fixed intervals. For more on this, check out the Bond board. Enter bond in the board box below and press find.

Rather than explain all of the ramifications of your question, perhaps you should follow-up with specific questions on various aspects. But try reading Fool School from the Fool.com home page. Then check out the Foolish information on Retirement Planning.

Best of luck to you.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39749 of 76078
Subject: Re: Retirement, trust, and keeping money. Date: 3/8/2004 6:13 PM
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Another problem/idea is that she does not want to leave the money in her name but put it in my or my sisters name.

In addition to possible gift tax problems, transferring assets to her kids has a lot of pitfalls including;

1) The child gets sued.
2) The child gets divorced.
3) The child or their spouse flaks out and spends the money or declares bankruptcy.
4) Any earning on the money will be taxed at the child's tax rate, which is likely higher.
5) If the child should die before the parent then the money will go to the child's estate.
6) It will make it harder for any grandkids to qualify for any need based scholarships.
7) Stocks that are in an estate are passed on at a “stepped up basis” without paying capital gains(as I understand it)

Get professional advice if you try to do this. I am not an expert but when I have heard this mentioned before it was usually about people trying to qualify for a subsidized nursing home. The problem with this is that the quality of indigent care in hospitals and nursing homes is often horrible and most people would only use them as a last resort.

... she is only 60...

So unless she is in failing health then she needs to plan on living another 30+ years on what she has saved? Unless she has significant assists that you didn't mention then she may want to rethink retiring early. Has she even priced what it will cost for health insurance until Medicare kicks in? Assuming that she will be eligible for Medicare at 65 then working until she is 63.5 years old would allow her to use the 18 months of COBRA to get to 65.

... pension plan...
I agree with the prior post that the details of the pension plan need to be checked on. The situation sounds very unusual. Could it be that the ten-year period is really a guaranteed payout period and if she lives longer than ten years it will still continue but just not pass anything on to her estate after ten years? Guaranteed payout periods are sometimes used to cover the situation where someone elects the monthly sum instead of a lump sum then dies shortley thereafter without have received much value from the pension.

Greg


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Author: gogreengo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39754 of 76078
Subject: Re: Retirement, trust, and keeping money. Date: 3/9/2004 11:56 AM
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Another problem/idea is that she does not want to leave the money in her name but put it in my or my sisters name. She is affraid that if something happens to her, like being hospitalize, that they will take her money if she can't pay the bills. Can this be done legally, and can it be done where she can still draw out of it for living expenses?

You might want to look into a "revocable living trust." She creates a trust and designates herself as executor (is that the right word?) and then names backup executors (like you or your sister) to take control if she becomes incapacitated. A trust of this type also helps you avoid probate taxes when her estate transfers to you and your sister (or whoever). To set up the trust, usually done with an estate-planning-type lawyer, she just changes ownership of her accounts from herself to her trust, and then the lawyer funds the trust by actually transferring what's in the accounts.

That's a layperson's explanation. I think it's worth doing some research and checking into lawyers and costs.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39755 of 76078
Subject: Re: Retirement, trust, and keeping money. Date: 3/9/2004 12:17 PM
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gogreengo:

<<<<Another problem/idea is that she does not want to leave the money in her name but put it in my or my sisters name. She is affraid that if something happens to her, like being hospitalize, that they will take her money if she can't pay the bills. Can this be done legally, and can it be done where she can still draw out of it for living expenses?>>>>

"You might want to look into a "revocable living trust." She creates a trust and designates herself as executor (is that the right word?) and then names backup executors (like you or your sister) to take control if she becomes incapacitated."

It would be trustee (nto executor), and it likely would not address the concern about hospital or other medical supplier accessing the funds for payment.

"A trust of this type also helps you avoid probate taxes when her estate transfers to you and your sister (or whoever)."

A revocable living trust may help avoid probate, but it does nothing to avoid federal estate taxes.

"To set up the trust, usually done with an estate-planning-type lawyer, she just changes ownership of her accounts from herself to her trust, and then the lawyer funds the trust by actually transferring what's in the accounts.

That's a layperson's explanation. I think it's worth doing some research and checking into lawyers and costs."


You need a lawyer versed in estate planning and elder care. Several of the federal statutes have loo-back periods for reclaiming gifts. And to have any hope of a gift placing assets beyond the reach of creditors, it would need to be immediate and irrevocable. If Mother can revoke or otherwise retains rights, then the assets are probably still reachable by a medical creditor.

Regards, JAFO

Disclaimer

Yes, I am a lawyer, BUT THIS IS NOT LEGAL ADVICE; it is only general information. NO CLIENT RELATIONSHIP IS INTENDED TO BE CREATED, NOR IS ANY SUCH RELATIONSHIP SO CREATED. FOR SPECIFIC LEGAL ADVICE YOU SHOULD TALK TO A LAWYER IN YOUR AREA.






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Author: Dano41 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39805 of 76078
Subject: Re: Retirement, trust, and keeping money. Date: 3/12/2004 4:07 PM
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Thanks to all who replied!
You have given me a lot to think about and a lot to learn about.

Thanks again!
Dano.

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