Forget Inheritance and Plan for Mother’s Future Financial Needs
Question: My mother, who is 62, lives on disability. She is selling her house and probably will receive about $290,000 after commissions and expenses. My question--and it’s a big question because this is all the savings she will have until the end of her days--is what should she put her money into? Certificates of deposit, annuities, bonds? A corollary to this question is: What would be the most intelligent arrangement for her to be able to leave something for me and my children when she passes away?
Answer: You have a lot on your plate right now when it comes to helping your mother. So let’s make some more room by removing one issue you probably don’t need to worry about: your potential inheritance.
That money may seem like a lot to you and your mom, but it’s really not a lot to live on when you consider that your mother is relatively young and that she may live 30 more years. A few years in a nursing home could wipe out her whole kitty.
The AARP, formerly the American Assn. of Retired Persons, recently conducted a survey that showed many people vastly underestimate how much long-term care costs, and vastly overestimate the amount of government aid available. The reality is that nursing homes cost $40,000 to $70,000 a year or more, and the government pays for such care only for the indigent.
Your mom probably will net less from her home sale than you think. Each taxpayer is allowed to exclude up to $250,000 in home sale profits from income taxes, so your mom might have to pay capital gains taxes on any profit exceeding that cap.
Your mom is in a difficult position. She’ll need some growth to be able to maintain her purchasing power as she grows older. But because this is all the money she has, she also needs safety. Her best bet may be a diversified portfolio of mutual funds that’s heavier on the bond and cash investments than on stocks, or a few stock mutual funds along with a portfolio of CDs with differing maturities.
Tread carefully if you’re considering annuities. One type of annuity--an immediate annuity--can offer your mom a guaranteed stream of income for life, which might be a good thing. In exchange for giving an insurance company a lump sum, she would receive monthly checks for the rest of her life. But she typically would lose the ability to tap her funds in an emergency. Also, the payments might not keep up with inflation, and the income ends when she dies.
The other type of annuity--a deferred annuity--could be even more problematic. Instead of getting a a check every month, her money would be invested tax-deferred for the future. But chances are her income is too low for her to get much from the tax benefits of a deferred annuity, and she probably would face surrender penalties that could make it difficult for her to access her money in an emergency. For more information on annuities, visit www.help4srs.org.
You and your mom should talk with a qualified financial planner who can review her situation in depth and offer specific suggestions, including the pros and cons of various investments. You can find information on finding a financial planner at www.la times.com/money.
If your mom is able to leave you anything, she can do so fairly easily by making you the “pay-on-death” beneficiary on her accounts. Assets left through a pay-on-death designation avoid probate, the court process otherwise used to settle estates. You should have no trouble getting a pay-on-death designation form from a bank, and many brokerage firms and mutual funds also provide the forms. In California and Missouri, she could leave you her car using a pay-on-death form.
For more information on probate and estate planning, read “Plan Your Estate” by Denis Clifford and Cora Jordan.
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Assess Need Before Buying Insurance
Q: My wife and I purchased whole life insurance policies in July. Our combined annual premium is $651. The death benefit on me is $8,900. My wife’s death benefit is $10,647. Are these good policies for us or would term insurance be better? I am 46 and my wife is 45.
A: If you really need life insurance, it’s hard to imagine that those amounts would be sufficient.
Your first task is to determine whether you actually need insurance. Do you have minor children or elderly parents who rely on your income? Would your spouse be able to pay the mortgage and other bills without your income--and vice versa? Are you likely to face a big estate tax bill?
If your answer to those questions is no, then you may not need life insurance.
If your answer to any of those questions is yes, then you should determine how much insurance you need. Visit www.la times.com/money and click on Insurance 101 for a guide.
You may find that you need more insurance than you can afford if you stick with your whole-life policy. In that case, you should explore term insurance, which provides coverage without the investment component that’s built into the cash-value policies you have.
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IRS Not Generous With Gift Deduction
Q: We have seven married children and 18 grandchildren. Gift buying is overwhelming, so we send cash for birthdays, Christmas and special days such as baptisms. This easily runs $4,500 a year. Can this be used as tax-deductible gifts on our income tax?
A: Oh, wouldn’t that be lovely? But no, gifts to your family are not considered to be tax-deductible charitable contributions, no matter how needy the recipients.
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Liz Pulliam Weston is a personal finance writer for The Times. Questions can be sent to her at moneytalk@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. . For past Money Talk questions and answers, visit The Times’ Web site at www.latimes.com/moneytalk.
